I RECEIVED several interesting responses to my column last week. I had written on the need to increase wages to boost the economy and I mentioned that there are studies showing that for every ringgit earned in Malaysia employees get 28 sen, the company 67 sen and the government 5 sen (through tax).
It spurred an interesting debate – how much shareholders’ returns is enough? Some readers said that investors must be suitably rewarded for taking risks and starting a business while another irate reader claimed that shareholders’ returns were higher than the interest rate charged by loan sharks!
While I can understand that returns from investing in startup businesses in new sectors have to be higher due to the much higher risk of failure, to demand the same returns for investing in established firms in mature industries such as banks (with its implied government support in bad times) is greedy, to say the least.
This brings me to the news that the group CEO of Standard Chartered Bank, Peter Sands, was pressured to resign after profits fell 20% to US$4.2bil.
The fall was caused by a 32% rise in bad debt charges, extra compliance costs, a US$300mil fine from the US authorities for breaches of money-laundering rules and continuing problems with its South Korean arm, negative sentiment towards emerging markets, a sharp drop in commodity prices, persistent low interest rates and surplus liquidity and regulatory challenges.
The emerging markets-focused bank issued its results after last week’s dramatic boardroom clear-out, which will also see the chairman, Sir John Peace, and four other directors leave.
Sands was credited for years with leading perhaps the world’s most successful bank. He navigated the bank through the financial crisis after being promoted from finance director to chief executive in 2006.
Despite the fall in profits, the bank held its dividend at last year’s level of 82 cents a share. Sands said: “We understand the importance of the dividend to our shareholders. Until 2012, Standard Chartered reported 10 consecutive years of rising revenue and profits.”
Ten consecutive years of double-digit profit growth was not enough to satisfy shareholders and compensate for two not-so-good years (remember the bank still made US$4.2bil – that is RM15bil).
CEOs come and go, but what prompted me to write about this is that Standard Chartered’s two largest shareholders, which collectively control 28% of the bank’s stock, were reported to have been pushing for new leadership.
I would venture to say that shareholders’ expectations (check that – greed) have contributed to incessant pressure for CEOs and management to deliver. This in turn places unrealistic and unsustainable demands on employees to perform until corners have been cut, so much so that the bank ran foul of regulators.
It is easy to blame the CEO and employees when something goes wrong, but what about shareholders themselves?
The irony is that the two major shareholders are the investment arm of the Singapore government and a fund manager for global pension funds. So it is government and workers who also contribute to pressuring CEOs and management to generate ever increasing and unsustainable profit growth. This often leaves management with no choice but to undertake massive cost cutting and restructuring that usually result in massive job losses. StanChart will axe 4,000 jobs as part of its turnaround plan.
Similarly HSBC, another global bank with operations in Malaysia, has run foul of regulators and was forced to apologise after its Swiss unit was implicated in facilitating tax evasion. As the bank reported a slump in 2014 profits, it embarked on the all-too-familiar cost cutting and job cuts.
The bosses of HSBC admitted they were shamed and humbled by the tax avoidance activities of the group’s Swiss banking arm.
CEO Stuart Gulliver offered his “sincerest apologies”.
“One of the largest impacts has been on morale inside HSBC. All of us are subject to scrutiny from our families, our friends and people we meet generally in our everyday lives. It makes people embarrassed at HSBC and concerned,” he added.
To appease shareholders, the bank embarked on the inevitable restructuring.
In Malaysia, the bank closed down its corporate banking division in Sarawak – making all employees redundant and threatening to retrench those who do not take up a voluntary separation scheme or to accept a transfer outside Sarawak.
For all this trouble, the CEO still received £7.6mil in pay and bonuses last year and 209 of its top staff were paid at least £1mil. The general secretary of the British Trades Union Congress, Frances O’Grady, said: “It is hard to see why HSBC is paying bonuses at a time when their role in tax evasion and avoidance has become so controversial.”
So who do we blame, CEOs, employees or shareholders who demand unrealistic returns?