Case Studies - Return to the Index

Mr. Henry Au joined the Hanson Bank in the 1950s, and by 1989 he had worked his way up to be Managing Director. Because he had vivid memories of the banking crisis in 1965, his loan policy was always ultraconservative, both when he served as chief loan officer and later when he became Managing Director. The Banking Ordinance at the time required:

1. a minimum paid-up capital of a licenced bank was HK$100 million while the net worth had to be not less than HK$200 million.

2. a minimum holding of specified liquid assets to be maintained by a bank in any calendar month had to be not less than 25 per cent of the deposit liabilities of the bank during that month.

Mr. Au imposed two requirements on lines of credit. The first was that a minimum of 50 percent of the loan (i.e., compensating balance) had to be on deposit in the borrower's fixed deposit account. The second was that the loans had to be cleared at least once a year. Some businessmen withdrew their deposits because he refused to grant them loans. Still, deposit growth was steady as the population grew and its inhabitants became more prosperous.

Mr. Au's investment policy was also conservative, but he displayed great skill in selecting investments that provided high yields, and his record compared very favorably with the records achieved by the professional staff of larger banks.

Mr. Au worked very hard at his job, coming to the office at 7 a.m. to open all the mail and seldom leaving before 7 p.m. He supervised every department personally, and very few decisions, even routine decisions, were made before he approved them. In some cases, he even overruled decisions made by department heads, and some of the latter complained that their employees had fallen into the habit of going directly to Mr. Au whenever they had a question.

Mr. Au was abrupt in dealing with the customers; so many of them preferred to deal with the General Manager. He also refused to set up new business development department although most of the other banks in the area had done so. His attitude was that if a customer walked through the door, we would glad to serve him, but we would definitely not go outside to try to get him in here. This despite the fact that one competitor had obtained $1 billion in new accounts that year through the efforts of its new business development department.

Still the bank's earnings did increase remarkably during Mr. Au's term of office, but he refused to raise dividends, although he did approve a stock dividend of $1.50, and the bank was able to pay the same dividend on the new shares that it had been paying on the old. Thus, shareholders' return increased by 50 percent.

Mr. Au had an announced policy of promotion from within, but he had no training programmes for the younger executives, and because the number of personnel was kept to a minimum no one had any chance to learn any but his own job. When better jobs became vacant, it was almost always necessary to hire someone from outside.

Mr. Au retired early due to illness in 1996, and the Board of Directors is forced to hire a new managing director from the outside because there is no one on the staff who is familiar with the work of all the departments.

Suggested solution:

1. The style of leadership Mr. Au displayed in this case was the authoritarian style. In this kind of style, the focus of power is with the manager, and all interactions within the group move towards the manager. The leader alone exercises decision making and authority for determining policy, procedures for achieving goals, work tasks and relationships, control of rewards or punishments.

2. Centralization means minimum delegation of authority and responsibility, with most decisions made at the top level of management. Individual circumstances will determine the degree of centralization that will give the best over-all yield.

   The evidence of centralization in this case:

   "He supervised every department personally, and very few decisions, even routine decisions, were made before he approved them. In some cases, he even overruled decisions made by department heads."

3. It is suggested that the kind of a managing director who is a democratic leader and a delegator. It is based on the following grounds:
   1. The democratic style is where the focus is more with the group as a whole and there is greater interaction within the group. The leadership functions are shared with members of the group. The group members have a great say in decision making, determination of policy, implementation of systems and procedures.
   2. A delegator is an individual manager who is willing to transfer part of his legitimate authority to a subordinate but without passing on the ultimate responsibility which has been entrusted to him by his own superior. The reasons for delegation are:
      1. Senior managers can be relieved of trivial responsibilities in order to concentrate on more strategic duties.
      2. Delegation enables decisions to be taken nearer to the point of operating without delays caused by reference upwards.
      3. Delegation gives managers the opportunity to experience decision making and to live with the consequences of it.
      4. Delegation enables organization to meet changing conditions more flexibility at the boundaries of their system.

      A failure in effective delegation occurred in this case did not necessarily mean that Mr. Au lacked an understanding of the principles of delegation . But it was probably because of unwillingness to apply them in practice. Much of the reasons for this was the Mr. Au's personal attitudes towards delegation: a desire to retain personal control over work and a fear of losing his own job to a brilliant subordinate.

      It is a simple truism that without authority the execution of responsibility is difficult if not impossible to achieve. Many managers in this case complained that they had responsibility but not the authority that went with it. As a minimum, therefore, the new managing director should be a democratic leader and a delegator.

4. In general, promotion from within is a wise policy. There is nothing more discouraging to those currently on the job than to see a new man brought in to fill a higher position for which they have the experience and training. Nearly all companies have such a policy, or at least state that they do; but some follow it more closely than others. Some even appear to hope that eventually they will be able to grow executives within the system, so to speak: hiring fresh university graduates, training them, and promoting them as they become qualified, until eventually it will not be necessary ever to hire from outside except for the beginning jobs. Thus, in some organizations the ideal has been to have a backup man or men for each job of any importance, someone ready to step into the superior's position if latter should leave or be transferred or promoted. The tool used in keeping track of the backup men is termed as the management inventory.

5. When better jobs become vacant, it is almost always necessary to hire someone from outside because no one in the company has the required expertise and experience to match the jobs.