CLSA and the state of independence

Will brokerage CLSA be able to maintain its famed independence when it is bought by Citic Securities, asks Peter Guy

PUBLISHED : Monday, 10 September, 2012, 12:00am
UPDATED : Monday, 10 September, 2012, 3:50am

Hong Kong's stock market investors know CLSA. The brokerage's distinctive yellow and blue reports are colourful and clearly written. While the firm only deals with institutions, everyone active in this market has at some point placed their hands on the brokerage's ubiquitous research, which frequently moves the market in Hong Kong and the region.

International acquisitions by mainland firms are almost commonplace these days, but Citic Securities' recent announcement of its US$1.25 billion purchase of CLSA drew considerable attention.

As one of the last of the big, independently managed Hong Kong stock brokerages, CLSA has enjoyed an enormous degree of local autonomy through the years.

Its first majority shareholder, Credit Lyonnais, owned 65 per cent, so local management held an unusually large 35 per cent stake.

The set-up gave CLSA a strong local voice. The management was responsive to conditions on the ground in Asia. They were not waiting for directions from Paris, New York or London.

While CLSA operates a sideline in investment banking, the brokerage is the bigger part of the beast. This means the brokerage does not have to mince words to keep corporate clients of the investment bank happy. Its research is more independent than other houses.

The firm routinely takes big Asian conglomerates to task over perceived weak corporate governance - something that other banks would not dare to do, because it would jeopardise too much fee-paying business with a big client.

For example, a 2008 CLSA report on Hutchison Whampoa led provocatively with: "Hutchison has been the proverbial pig … as it wallowed in its self-made 3G mess post the halcyon internet-fuelled days of 1998-2000". It would not have been lost on the brokerage that comparisons to a pig are considered highly insulting among Cantonese speakers. Here, CLSA seemed not just to be having a go at Hong Kong's most powerful company, but to be revelling in its freedom to do so.

But as the brokerage nears its formal tie-up with Citic, it's fair to ask if the firm can retain its independent voice, particularly as it will be owned by a firm with strong ties to corporate Asia, and which is ultimately controlled by Beijing.

Credit Agricole, which merged in 2003 with Credit Lyonnais, is now CLSA's major shareholder. The French bank has always held CLSA on a long leash, and CLSA has long identified itself as a local firm.

CLSA's independent streak goes back to its founding by two former Post business reporters, Gary Coull and Jim Walker, who in 1986 co-founded the brokerage Winfull Laing & Cruickshank. Credit Lyonnais later bought out the brokerage, creating what would become CLSA.

The pair's journalistic sensibilities lay at the core of the operation, which had a mission "to tell the Asian story", as Coull put it.

The firm's hallmark has been colourfully illustrated stock reports, written in simple English, with a clear buy or sell narrative. It aims to present the information as a story like a trained journalist would do, as well as writing about a firm with an analyst's level of expertise and company access.

Jonathan Slone, a CLSA veteran who became the firm's chairman and chief executive in 2009, says CLSA's mission will not change with the Citic acquisition. "Asia is complicated and diverse and our job is to explain the nuances."

Slone says the firms are a good match. "There is little overlap between our businesses, which makes it a sensible team-up. CLSA is active in 14 markets outside of China, while Citic predominantly operates in China. So each of us offers a different orientation on how and where we do business," he says.

What motivated CLSA to link up with a state-controlled firm with an operating style that is miles away from CLSA's autonomous culture? First of all, according to Slone, Credit Agricole "no longer shared the same ambitions with CLSA, so it was time to find a new partner".

Unsurprisingly, perhaps, Slone also emphasises the likeability of his new boss: "The personal rapport I quickly shared with Wang Dongming, the chairman of Citic Securities, encouraged us to team up with them."

Most acquisitions usually signal big changes to an organisation, but Slone says that will not happen to CLSA. "Nothing will change how CLSA is run, and our mission. Our management culture and team continue to be deeply rooted in Hong Kong. So our freedom is intact," he says.

Part of that continuity includes the preservation of management's 35 per cent shareholding, which represents an ongoing incentive for CLSA managers to invest in the firm.

Many firms offer shares to key employees in the form of stock options. CLSA's share scheme is unusual in that it requires employees to commit a substantial amount of money to buying shares from the firm.

While share incentives are critical for attracting talent at competitors, Slone doesn't emphasise it when recruiting candidates for his firm. "It's not the key reason why people should join us. We are one of the few firms where stock options and enriching your personal net worth is a relatively low priority," he says.

The company's senior management has remained stable years after the passing of its dominant and often overbearing founder, Gary Coull.

Slone says CLSA runs a more decentralised management style compared to the past. "Today, we are a culture of many personalities," he says diplomatically.

Nevertheless, CLSA stands by its journalistic traditions. "Our research department still holds the vibrant atmosphere of a big city newsroom," says Slone. That means that CLSA offers its analysts a high degree of freedom to pursue issues they believe are important to clients.

Analysts can issue critical research reports without worrying about interference from top management.

Slone says how the head of a listed company called him to complain about an analyst's negative report. "I told him to speak to the analyst. As long as the analyst is right and factual, I don't interfere with his or her call. Our research is not a propaganda machine for an investment banking business."

Moreover, Slone says CLSA's brokerage business jealously guards its reputation for independence. "We want [analysts] to take constructive risks and we don't shoot our risk takers."