Strategies of HSBC Holdings Plc and Deutsche Bank AG - Case Study Example

Corporate Governance Comparison - Strategies of HSBC Holdings Plc and Deutsche Bank AG Today, the term Multinational Corporation or MNC has almost acquired the status of a regime in itself. With more and more companies adopting professional ideas and approaches to run the show on day-to-day basis. Even the governments in those nations where MNCs operate, are not taking them just as 'business entities'. Bracken (2) underlines that it was since early 1990s when the term 'Globalization' became a catch phrase as it started entering into all walks of life. Broadly speaking 'corporate governance' can be defined as the way in which the 'corporate businesses' are managed and governed. This includes, managing funds, investments, and stakeholders. The businesses operate within a complex system of interests and influences. Bebchuk et al. (1) contend that corporate governance arrangements can substantially affect shareholders. While identifying the stakeholders, the corporate are supposed to look beyond the formal structure of the organization. Therefore it is required to have a look at informal and indirect relationships as well. With growing influence of media and politics managing the corporate houses have become more challenging task. Political parties require campaign funds, while corporate houses want sympathizers in the government. In this paper an attempt has been made to study the corporate governance principles of two of the leading banks viz. HSBC and Deutsche Bank AG. Both these banks have been serving its customers over a wide range of segments and markets in different countries, while competing with each other in some of the markets. Corporate governance structures and styles vary in the environment they operate. This variation may result in the form of different countries, types of market forces, prevailing economic conditions, types of customers/ consumers available, internal as well as external environment of the country, competitors available in the market etc. Gillan (3) draws a Corporate Governance and the Balance Sheet Model of the Firm as shown below; The left hand side of the diagram depicts the elements of internal governance system, while the right hand side shows the elements of external governance with pulls and pressures from debt-holders and other stakeholders. A composite system of corporate governance takes into account both the internal as well as external factors. Therefore comparing HSBC and Deutsche bank we find that both these banks have been offering a range of services, including asset management; cash management; securities issuance and trading; and conventional banking. Both the banks serve individual as well as corporate clients. But there is lot of difference in the way these banks have formulated strategies for serving the corporate needs. At the Deutsche the corporate banking & securities division is divided into five business units namely; Global markets; Global Equities, Global Corporate Finance, Loan exposure management group (LEMG) and Global banking division. On the other hand the corporate, investment banking and markets division in HSBC is organized into three units, namely; Global markets; Corporate and investment banking; and Group investment businesses. This shows that while Deutsche prefers to place specialist workforce for special needs, HSBC prefers to have wants its managers to specialize in more than one field. One apparent reason for this difference in strategies is because of the area of operation of both these banks. While HSBC has to its footprints over a large area in around 80 countries in five regions, Deutsche bank operates in around 75 countries, but Deutsche bank primarily operates in Germany, the rest of Europe, North America and certain parts of Asia-Pacific. Therefore the area of operation is comparatively larger for HSBC. Asia-Pacific, where HSBC has more presence is quite complex region as there are wide variations in market requirements, consumer behavior, forms of government etc. Liberalization regime that has come along with globalization of economy is helping to some extent in standardizing the corporate culture and governance around the globe. The extent of control that the governments exercise on business operations also determines the style of corporate governance in that country. During the long journey since its inception, Deutsche bank has seen many ups and downs, having lost its originality many a times. It was founded by Adelbert Delbruck in 1870, in Germany, then in 1914, it was merged with Bergisch Merkische Bank. In the next decade the bank saw couple of more mergers. The bank was disincorporated by the Allies after World War II into ten institutions, and then again in 1952 into three, with Rheinisch-Westfalische Bank being set up in Dsseldorf; Suddeutsche Bank in Frankfurt and Munich; and Norddeutsche Bank in Hamburg. The three merged to form Deutsche Bank once again in 1957. HSBC on the other hand has seen a steady growth since its inception in 1865, when it was established for financing the growing trade between China and Europe. During the fiscal year ended December 2005, the Deutsche group recorded revenues of 25,640 million, with an impressive increase of 17% over 2004, while HSBC group recorded revenues worth $61,704 million with an increase of 10.2%. For Deutsche bank rest of Europe is the largest geographical market accounting for 35.4% of the total revenues with Germany chipping in 28.7%. For HSBC, North America is the largest geographic market bringing its 35.8% revenues. While Deutsche bank has a nominal presence in South American region which brought in just 1% of its revenues, but HSBC has a comparatively higher presence in this region with 6.1% of the total revenues coming from this sector. The top management at Deutsche consists of a two-tier structure. The top level is known as Supervisory Board, which oversees and advises the Management Board in its management of the business. This board appoints the members of the Management Board, and arranges for long-term succession planning of the management board. The other level is called The Management Board, which is responsible for managing the company. Members of this board, together with the heads of Deutsche Bank's five core businesses and the Head of Regional Management, form the Group Executive Committee. HSBC's topmost body consists of a board headed by its chairman. This board in turn appoints a number of committees consisting of certain Directors, Group Managing Directors and, certain co-opted non-director members. These committees are assigned specific tasks. Principal committees in HSBC include: Group Management Board, Group Audit Committee, Remuneration Committee, Nomination Committee, and Corporate Social Responsibility (CSR) Committee. Deutsche bank used the International Accounting Standards (IAS) till 30th September 2001. When its share got listed on NYSE in October 2001, the group changed its accounting system to US GAAP (US Generally Accepted Accounting Principles). Deutsche bank is on the largest publicly held companies of Germany having about 412,000 shareholders. In recent years the proportion of its shares in German ownership has grown from 49% to 52%, while foreign ownership has declined from 51% to 48%. Deutsche bank pays out annual dividend on each ordinary share normally one business day after the annual general meeting. Over the last 10 years the bank has consistently increased the annual dividend. The board at HSBC has adopted a policy of paying dividends four times a year i.e. on quarterly basis. Under this policy a pattern has been developed for having three equal interim dividends with a variable fourth interim dividend at the year end. HSBC too has increased the percentage of dividend over the years. HSBC launched its strategic plan 'Managing for Growth' at the end of 2003, which presented a blueprint for growth and development during the period up-to 2008. The strategy is evolutionary, not revolutionary. It builds on HSBC's strengths and it addresses the areas where further improvement is considered both desirable and attainable. Philanthropy or social responsibilities have now a day become an integral part of the corporate governance. Managing social causes, not only helps in providing an opportunity to serve the society but it also helps in furthering the business prospects of the corporations. Therefore, corporate governance structures vary according to the societal patterns and its needs. Therefore both these banks have also underlined the need for corporate social responsibility (CSR). HSBC states that1 for it 'CSR', means "Managing our business responsibly and sensitively for long-term success. Our goal is not, and never has been, profit at any cost because we know that tomorrow's success depends on the trust we build today". With these objectives the company has undertaken couple of projects concerning environment, customer's needs, communities and education. Similarly, Dr. Josef Ackermann, Chairman of the Management Board and the Group Executive Committee at Deutsche bank states that2, "It is our firm conviction that there is no conflict between a company's international competitiveness and its capacity for fulfilling its social responsibilities. On the contrary; we believe that nobody can or should neglect such responsibilities..." Deutsche also takes initiatives for the society, customers, staff and its shareholders. Though both the bank groups have similar kind of services, yet the strong points of both differ quite a bit. The strong points for HSBC include; With $1,501.2 billion worth of assets HSBC Holdings is a leading banking group. The group has maintained steady net interest margin over the last few years. The group's net interest margin at the end of fiscal year 2005 was recorded at 3.14%, compared with 3.19% in 2004. HSBC group recorded good operational efficiencies over the years with high levels of profitability. The group sees acquisitions in emerging markets as an opportunity for its growth. On the other hand Deutsche bank on the other hand is Key player in global financial services industry and certainly the largest in Germany with an asset base of over about 992.5 billion. Deutsche bank has been able to record a consistent growth in its non-interest income. The group's non interest income reached 19,639 million for the fiscal year 2005, reflecting an increase of 17.3% over 2004. It sees Buoyant asset management market as one of the potential areas for registering growth. It is worthwhile here to mention that though the circumstances, policies, environment are similar for both the banks, but they have outlined their priority areas differently, depending upon a number of factors like, core competency, threat perception, profitability, market intelligence inputs etc. References: 1. Bebchuk, Lucian; Cohen, Alma and Ferrell, Allen (2005). What matters in corporate governance Harvard John M. Olin Discussion Paper Series, Harvard Law School Cambridge. 2. Bracken, Paul (2004), Yale SOM Working Paper No. OB-06, PM-05, OL-19, Yale School of Management, available online at http://papers.ssrn.com/sol3/papers.cfmabstract_id=514422#PaperDownload (March 18, 2007) 3. Deutsche Bank (2007). Available online at http://www.deutsche-bank.de/index_e.htm (March 20, 2007) 4. Gillan, Stuart L. (2005),Recent Developments in Corporate Governance: An Overview. Texas Tech University Lubbock , TX 79409. available online at http://papers.ssrn.com/sol3/papers.cfmabstract_id=855444 (March 18, 2007) 5. HSBC Bank (2007). Available online at http://www.hsbc.com (March 16, 2007) Read More