Knight Vinke fires latest salvo at HSBC

The disgruntled investor targets executive compensation at HSBC, suggesting that in 2005 shareholders were misled into approving a generous share plan.
On November 22, institutional investor Knight Vinke fired its latest accusation in its battle with HSBC. Knight Vinke suggests that the bank's 2005 Share Plan was misleading because the information given to shareholders ôgave the impression that the performance targets were significantly more demanding than they are in realityö. The Share Plan forms part of senior executive compensation at the bank and determines how shares are issued as part of annual remuneration.

ôHSBC's most senior executives stand to receive substantial performance-related pay in March 2008, despite more than $20 billion of provisions for credit and trading-related losses over the past two years," says Knight Vinke in its written statement.

Knight VinkeÆs latest assault was timed to precede a scheduled HSBC strategy meeting with shareholders held on November 23. At the meeting, HSBC is reported to have clarified that it consulted 50 of its top shareholders before it submitted the HSBC 2005 Share Plan for approval.

This disclosure provided more ammunition for Knight Vinke which issued a written statement on November 23, after the meeting, saying: ôHaving recently met with many of HSBCÆs largest shareholders, specifically to discuss the (Share) Plan and other matters, it is absolutely clear to us that many of HSBCÆs largest shareholders were not made aware of the full details of the scheme which permits substantial performance-related payments to be made for no performance at all.ö

Knight Vinke went on to comment in the statement: ôOnce again, this raises important issues about governance at HSBC.ö

Knight Vinke has now asked HSBC to publish documents used as a basis for discussion with the institutional shareholders HSBC has said it consulted, and various other documents related to the Share Plan.

Since it embarked on its battle against HSBC in September, the activist shareholder has cited: ôPerennial stockmarket under-performance compared to peers, pursuit of geographic diversification instead of comparative advantage, lack of scale in key markets û UK, USA and France, good franchise in Hong Kong but risk due to lack of credible China strategy, lack of credible CIBM (corporate, investment banking and markets) strategy and poor board structureö as the key areas in which it perceives the bank is not delivering.

Knight Vinke describes itself as a ôvalue-oriented activist fund for institutional investorsö. It was started in mid-2003 and CaliforniaÆs state pension fund, Calpers is one of its main investors. The firm has two offices in the US and one in Monaco. Eric Vinke, CEO and CIO, worked for 20 years with Merrill Lynch and Group Pargesa before starting Knight Vinke.

Knight Vinke has earlier been associated with activism-related change at: Belgian power utility, Electrabel; French power utility, Suez; Dutch media group, VNU; and Royal Dutch Shell.

Knight VinkeÆs assault on HSBC has received a mixed reception. Some investors have expressed a concern that Knight Vinke does not have alternative recommendations to offer HSBC which will resolve the issues that it has raised. Knight VinkeÆs response has been that, at the right time, it will share its plans which include a detailed strategy. Other investors have questioned the timing of the attack, saying HSBC could finally be poised to get its Asia strategy right. In 2007, HSBC has announced strategic acquisitions in Vietnam and Korea, as it seeks to fill in gaps in its coverage network.

Banks have increasingly become a target of investors who feel management is not delivering results. The sale of ABN AMRO to RBS is, in part, a result of questions raised by The Children's Investment Fund. Citi shareholders have also been vocal and CEO, Charles (Chuck) Prince, stepped down in early November as he took responsibility for the US bank's subprime related losses.

It is still early days to predict how things at HSBC will unfold, but Knight Vinke seems set on forcing some change upon the bank.
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