Jeremy Warner's Outlook: HSBC cocks a snook at Higgs in opting for management continuity instead of the rules

ONS; lies, damned lies and statistics
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The Independent Online

News that HSBC is breaking the combined code on corporate governance by making its chief executive, Stephen Green, the next chairman in succession to the outgoing incumbent, Sir John Bond, has reassuringly produced barely a murmur of Higgsian protest.

It always was the intention of the code that companies be allowed to comply or explain; with a record of value creation and strategic positioning in banking which is second to none, HSBC had the very best of explanations - in 140 years it has never appointed an outsider to either of these positions, so why should it start now?

The contrary argument could quite easily have been run. HSBC has become such a vast, unwieldy and complicated business that it perhaps needs a fresh pair of eyes to oversee things. Internal candidates, for both the chairman and chief executive's role, might reasonably be thought too close to the action to be able to see the fault lines. Yet it's hard to think of anyone who could successfully have played these roles. Banks are different from other industries; the chairman has to be someone who understands banking from back to front. Few from rival industries would stand a chance of ever getting to grips with its complexities and risks. Even experienced bankers find it progressively more difficult to properly understand the nature of the risks they are taking on. What hope for someone with a background in, say, pharmaceuticals or telecommunications?

What's more, no one of stature from a rival bank could convincingly occupy the position; they would be too overburdened with baggage and conflict of interest.

So on the principle of if it ain't broke, don't fix it, HSBC is absolutely right to be playing by its traditions rather than the rules. It's only a shame that more companies don't possess the confidence or command the support to be able to flout the code in the same way.

There's a wealth of research to show that family owned and run companies perform better across most criteria than their publicly quoted counterparts. This may say more about how poorly most publicly quoted companies are run than the absolute success of family controlled enterprises, yet this in itself is instructive.

Publicly quoted companies are based on a separation of ownership and management that frequently produces suspicion and mistrust. As a result, management progressively finds itself confined by a plethora of prescriptive rules and regulations which stifle entrepreneurial and long-term thinking alike.

Few publicly quoted companies these days escape this vicious circle of rule-based imprisonment, yet all the evidence is that it is as harmful to the owners as it is to the management. Top executive talent is driven more and more into private equity, where the demands are more easily understood and the rewards can be infinitely greater, leaving some of our biggest companies in the hands of un-selfconfident mediocrity, driven hither and thither by the often conflicting priorities of rule makers and differing investor groups.

How ridiculous it is that every new outside chief executive is required, almost by way of rights of passage, to produce an all-embracing strategy review within months of their arrival, and how refreshing it has been to see the new chief executive at Prudential, Mark Tucker, call the City's bluff by saying that he basically sees nothing wrong with the existing strategy. Most companies need long-term thinking, not short-term fixes.

All this is a round about way of congratulating the HSBC board on its decision to put continuity before the rules. Of course some companies plainly do need to be shaken up with the introduction of new blood, but to base generalised law on the experience of a few rotten apples always was a bad idea. The rule that prevents the chief executive from moving into the chairman's shoes because he's deemed insufficiently independent is one of the most silly and counterproductive of the lot.

Yet only an HSBC, Tesco or a BP would have the self-confidence to ignore it. In all three cases this is a confidence born of success. These are companies which have managed to get their corporate governance and their long-term strategies right without having to be told how to do so by investors, analysts and codes of conduct.

In HSBC's case, the lion's share of the credit has to go to Sir John Bond, man and boy a Hong Kong and Shanghai Banking Corporation stalwart and one of the most brilliant banking practitioners and strategists on the world stage today. Through a daring and at times controversial series of acquisitions, he's transformed HSBC from smallish roots in Hong Kong into the third largest bank on the planet. Arguably, he also leaves the bank better placed than any other to reap the benefits of rapid economic development in Asia.

By the time he retires next May, Sir John will have been with HSBC for 45 years. His successor, Mr Green, is a mere baby by comparison. He's been there only 23 years. Yet there's little if any sign of dynastic decay. To the contrary, longevity seems to bring its own reward. Surely there is a message in there somewhere for others on the merits of executive continuity?

ONS; lies, damned lies and statistics

There are lies, damned lies and statistics. Rarely in history has Benjamin Disraeli's famous observation applied as much as it does today, with the statistics seen as routinely abused for political gain. Whether the figures are in fact subject to interference scarcely seems to matter any longer. Rightly or wrongly, they are perceived as such. Even the Bank of England doesn't trust them any longer.

This has long been a matter of some national shame, as well as importance, for if policy is based on false statistics, then it is likely to be flawed. This lack of trust in the integrity of the figures has in no small measure been caused by the Government itself, and in particular by the Treasury.

Ministers are only too quick to cite misleading statistics that reflect them in a good light and attack those that don't. In the latter case, pressure is then put on the Office for National Statistics to change the way the figures are compiled until eventually they come up with the answer the Government wants.

Now even Gordon Brown, a master of manipulation and illusion when it comes to statistics, has seen the light and given way to pressure to have the ONS made wholly independent of the Treasury, rather in the manner of the Bank of England. This is a long overdue reform, which interestingly the Chancellor has been persuaded to back only because he thinks the statistics on economic growth are about to start showing him in a rather good light again. It would be most unfortunate if they were thought suspect.

However, the opposition goes too far in demanding that the golden rule too be made subject to independent adjudication. Illusions only work if you don't know how they are done. The laughable thing about the wheezes used by the Chancellor to ensure that the public finances fall within his own rules on fiscal discipline is that they are completely transparent. We know when he's shifting the goal posts, so it doesn't much matter.

It is for politicians, not unelected economists, to decide on tax and spend, and for the markets and the voters to punish them when the policy fails. As the European Stability and Growth Pact has demonstrated, inflexible rules drawn up by technocrats are all too likely to prove counterproductive and economically undesirable when things go wrong.

Take governance of the public finances away from the politicians, and there would no longer be any point in them. The golden rule was originally put in place to give the Chancellor credibility with financial markets, after the free spending ways of past Labour governments. Nobody needs a Fiscal Policy Committee to tell them the rule is being bent this way and that, still less to tell the Chancellor what he can or cannot do on tax and spend. That's for the voters to decide.

j.warner@independent.co.uk

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