Annual Financial Report - Part 6

RNS Number : 4604C
HSBC Holdings PLC
22 February 2022
 

 

Corporate governance report

The corporate governance report gives details of our Board of Directors, senior management, and Board committees. It outlines key aspects of our approach to corporate governance, including internal control.

 

It also includes the Directors' remuneration report, which explains our policies on remuneration.

 

Page

Group Chairman's governance statement

218

The Board

220

Senior management

224

How we are governed

227

Board activities during 2021

232

Board and committee effectiveness, performance and accountability

234 

Board committees

237

Directors' remuneration report

254

Share capital and other related disclosures

287

Internal control

291

Employees

293

Statement of compliance

295

Directors' responsibility statement

296

 

 

 

 

We have a comprehensive range of policies and systems in place designed to help ensure that the Group is well managed, with effective oversight and control.

 

 

 

 

 

Group Chairman's governance statement

The Board and its committees continued to operate well in a challenging environment, and focused on enhancing governance practices.

 

 

 

"Following the launch of the Group's refreshed purpose, strategy and values in March, we introduced a 'culture moment' at the beginning of each Board meeting."

Dear Shareholder

The global health crisis continued into 2021 as a result of the Covid-19 pandemic. Despite promising developments in relation to the efficacy of vaccines in combating the virus, there remained significant restrictions across our markets. It was therefore important that our governance framework and practices remained flexible to ensure that the Board could effectively discharge its duties.

While the Board and its committees have operated well in a virtual environment, it was unfortunate that we were again unable to come together physically as a Board. It has been two years since the full Board was last together in person for a Board meeting, with five new Directors appointed in that time. I hope to hold in-person meetings as soon as it is safe to do so, particularly in our largest markets of Hong Kong and the UK.

We continued our focus on enhancing our governance practices throughout the year, with key decisions and areas of focus set out in further detail below.

Board changes

A key aspect of my role as Group Chairman is ensuring that collectively the Board has the skills, knowledge and experience it requires. The Nomination & Corporate Governance Committee retained a keen focus on succession planning during the year. For further details on its work, see page 237. We are currently in the process of completing a search for new non-executive Directors to join our Board, with knowledge and experience of banking and Asia a priority. The Committee is actively progressing this search and will provide an update in due course.

There were a number of changes to the Board during 2021, with Laura Cha, Heidi Miller and Henri de Castries retiring following our 2021 Annual General Meeting ('AGM') in May, and Rachel Duan and Dame Carolyn Fairbairn appointed with effect from 1 September.

We also recently announced that, in line with our succession planning and having each served on the Board for six years, Irene Lee and Pauline van der Meer Mohr would step down from the Board at the conclusion of our 2022 AGM in April. Irene's existing roles on our subsidiary boards in Asia are not impacted by her retirement from the Holdings Board. On behalf of the Board, I wish to thank Irene and Pauline for their outstanding dedication and the enormous contributions they have made to the success of HSBC during their time on the Board. We wish them both well in their future endeavours.

 

Purpose, strategy and values

Following the launch of the Group's refreshed purpose, strategy and values in March, we introduced a 'culture moment' at the beginning of each Board meeting. These discussions have allowed Board members to share their insights on the culture of the Group, and have raised awareness of employee and stakeholder perspectives in the Boardroom. This has supported the Board in helping to create greater alignment between culture and strategy, and in driving a tone from the top focused on the Group's purpose of opening up a world of opportunity.

Technology governance

Digitise at scale is one of our four strategic pillars and reflects the increasingly important role that technology plays in delivering for our customers. It is therefore critical that our governance helps enable the Board to effectively shape and oversee progress against our technology strategy. As such, we took the decision to establish the Technology Governance Working Group at the beginning of 2021 to determine the most effective approach for the Board to discharge its responsibilities in relation to technology strategy and oversight.

The Co-Chairs of the Technology Governance Working Group presented to the Board in January 2022 on their work during 2021. In light of the significant role that technology will continue to play in the Group's strategy, it was recommended that the Technology Governance Working Group continues to meet throughout 2022. The Board agreed to continue with the Technology Governance Working Group in its current format through 2022, but with the scope extended to include a focus on business execution of the technology strategy. This will allow for a better understanding of the progress, challenges involved in implementing the strategy and the impact on key stakeholders.

Environmental, social and governance

The Board recognises the growing importance of ESG and oversees the ESG agenda. It was a significant year for the Group in its efforts to support the transition to net zero - a key pillar of our overall Group strategy - with the passing of our climate resolution at our 2021 AGM and the publication of our thermal coal phase-out policy, being two of the most notable achievements. Given its significance, the Board has decided to retain responsibility for development and oversight of our ESG strategy directly, rather than establishing a specific Board-level committee and we will include a dedicated item on our agenda for ESG matters. Within their existing responsibilities, the Group Risk Committee, Group Audit Committee and Group Remuneration Committee will also continue to have specific roles to play in overseeing and supporting the delivery of our ESG objectives.

At the management level, we have asked our team to further enhance ESG governance, with the introduction of an ESG Committee, co-chaired by our Group Chief Sustainability Officer, Celine Herweijer, and our Group Company Secretary and Chief Governance Officer, Aileen Taylor. This committee will regularly report to the Board on progress against our ESG ambitions, climate strategy and related commitments. In February 2022, the Board also approved the proposal to develop and implement a sustainability target operating model for the Group. The new operating model will help ensure that our businesses have the technical expertise, specialist resources and training to equip and support them in assisting our clients in their transition to net zero.

For further information on our climate ambition and progress against our transition to net zero strategic pillar, see page 45.

Board evaluation

We again conducted a review of the effectiveness of the Board and Board committees, which helps to support the continuous improvement of the operation of our key governance practices. Following two successive externally facilitated evaluations, we took the decision that the 2021 evaluations should be facilitated internally. The process was led by our Group Company Secretary and Chief Governance Officer and involved the completion of online surveys tailored for each Board and committee, complemented by individual interviews with Directors and attendees.

Further details on the progress made against the 2020 findings, as well as the findings and recommendations from the 2021 review, can be found on page 235 and in each of the respective committee reports on pages 237 to 267.

Subsidiary governance

Subsidiary governance remained a key priority, as it has been since my appointment as Group Chairman, and we continued to build strong connectivity with our principal subsidiaries. In 2021, we sought to enhance the standard and consistency of governance across the Group, with the launch of our refreshed subsidiary accountability framework. The refreshed framework makes clear the Group's expectations of subsidiaries in relation to their governance approach and board practices through overarching principles and detailed provisions.

A key aspect of the framework is focused on the composition of our subsidiary boards, with our most significant subsidiaries required to submit their succession plans to the Nomination & Corporate Governance Committee through the course of the year. This provided clarity on plans to refresh and enhance the calibre and diversity of boards across the Group. Further details are set out in the Nomination & Corporate Governance Committee report on page 237.

Given the continued uncertainty externally, we looked to strengthen the connectivity between the Group and principal subsidiaries during the year through virtual forums held between the Board and committee chairs and our counterparts at subsidiary level. We further supplemented this connectivity with the introduction of a virtual Non-Executive Director Summit, which saw all subsidiary non-executive directors invited to come together to discuss areas of common interest. This was a valuable opportunity to share and discuss material topics, including strategy, risk, data, culture, diversity, climate and technology. Following the success of the summit, we have taken the decision to make these sessions a part of our annual governance calendar.

Workforce engagement

Various opportunities for members of the Board to engage with employees have been provided during 2021, including through partnerships with our employee resource groups and sessions with members of our global graduate programme. The Board greatly values the opportunity to engage with employees from across the business and markets, and of different backgrounds and seniority. We will continue to prioritise this, along with interaction with all our key stakeholders, during 2022.

For further details on the arrangements we have in place to facilitate workforce engagement, see page 233.

2021 Annual General Meeting

The pandemic has continued to pose many challenges for the Group, as it does for many of our stakeholders. However, the Group has benefited significantly from the speed at which digital tools have been adopted since the beginning of the pandemic.

This has also been true of our AGM, where I was delighted to host our first hybrid AGM, which enabled shareholders globally to attend virtually, or in person. The use of technology enabled a broader range of shareholders to attend and participate than had been the case pre-pandemic.

Further details of our plans for the 2022 AGM, which will be a hybrid meeting again, will be provided when our Notice of AGM is published on 25 March 2022.

Looking ahead

Despite the concerns of the Covid-19 pandemic, I am hopeful that the success of vaccine roll-out will allow us to safely resume in-person engagement with each other and all stakeholders in the near future.

On behalf of myself and the Board, many thanks for your continued commitment and support.

Mark E Tucker

Group Chairman

22 February 2022

 

The Board

 

The Board aims to promote the Group's long-term success, deliver sustainable value to shareholders and promote a culture of openness and debate.

Chairman and executive Directors

Mark E Tucker (64) 4C

Group Chairman

Appointed to the Board: September 2017

Group Chairman since: October 2017

 

Skills and experience: With over 35 years of experience in financial services in Asia, Africa, the US and the UK, including 25 years based in Hong Kong, Mark has a deep understanding of the industry and markets in which we operate.

Career: Mark was most recently Group Chief Executive and President of AIA Group Limited ('AIA'), having joined in July 2010. Prior to AIA he was Group Chief Executive of Prudential plc. He served on Prudential's Board for nearly 10 years.

Mark previously served as non-executive Director of the Court of the Bank of England and as an independent non-executive Director of Goldman Sachs Group.

 

Other appointments:

• Chair of TheCityUK

• Non-executive Chairman of Discovery Limited

• Supporting Chair of Chapter Zero

• Member of the UK Investment Council

• Co-Chair of the B20 Finance and Infrastructure Task Force (Indonesia 2022)

• Director, Peterson Institute for International Economics

• Director, Institute of International Finance

• International Adviser to the Hong Kong Academy of Finance

• Asia Society Board of Trustees

Noel Quinn (60)

Group Chief Executive

Appointed to the Board: August 2019

Group Chief Executive since: March 2020

Skills and experience : Having qualified as an accountant in 1987, Noel has more than 30 years of banking and financial services experience, both in the UK and Asia.

Career: Noel was formally named Group Chief Executive in March 2020, having held the role on an interim basis since August 2019. He has held various roles across HSBC, or its constituent companies, since 1987.

Prior to becoming Group Chief Executive, Noel was most recently CEO, Global Commercial Banking. He has also served as Regional Head of Commercial Banking for Asia-Pacific; Head of Commercial Banking UK; Head of Commercial Finance Europe; and Group Director of Strategy and Development at HSBC Insurance Services North America.

 

Other appointments:

• Chair of the Financial Services Task Force of HRH The Prince of Wales' Sustainable Market Initiative

• Member of the Principals Group of the Glasgow Financial Alliance for Net Zero

• Member of the World Economic Forum's International Business Council

 

Ewen Stevenson (55)

Group Chief Financial Officer

Appointed to the Board: January 2019

Skills and experience: Ewen has over 25 years of experience in the banking industry as an adviser and executive to major banks and large financial institutions. In addition to his existing leadership responsibilities for Group Finance, Ewen assumed responsibility for the oversight of the Group's transformation programme in February 2021 and the Group's corporate development activities in April 2021.

Career: Ewen was Chief Financial Officer at the Royal Bank of Scotland Group plc from 2014 to 2018. Before this, Ewen spent 25 years with Credit Suisse, where his last role was co-Head of the EMEA Investment Banking Division and co-Head of the Global Financial Institutions Group.

 

Other appointments:

• Director of The Hongkong and Shanghai Banking Corporation Limited

 

 

Board committee membership key

 

 C. Committee Chair

1.  Group Audit Committee

2.  Group Risk Committee

3.  Group Remuneration Committee

4.  Nomination & Corporate Governance Committee

 

For full biographical details of our Board members, see
www.hsbc.com/who-we-are/leadership-and-governance.

 

Independent non-executive Directors

 

Rachel Duan (51) 3,4

Independent non-executive Director

Appointed to the Board: September 2021

Skills and experience: Rachel is a business leader with exceptional international experience in the US, Japan, mainland China and Hong Kong.

Career: Rachel spent 24 years at General Electric ('GE'), most recently as Senior Vice President of GE, and President and Chief Executive Officer of GE's Global Markets, where she was responsible for driving GE's growth in Asia-Pacific, the Middle East, Africa, Latin America, and Russia and the Commonwealth of Independent States. She has also previously served as President and Chief Executive Officer of GE Advanced Materials China and then of the Asia-Pacific, President and CEO of GE Healthcare China, and President and CEO of GE China.

 

Other appointments:

• Independent Director of Sanofi S.A.

• Independent Director of AXA S.A.

• Independent Director of the Adecco Group

 

Dame Carolyn Fairbairn (61) 2,3,4

Independent non-executive Director

Appointed to the Board: September 2021

Skills and experience: Carolyn has significant experience across the media, government and finance sectors.

Career: An economist by training, Carolyn has served as a Partner at McKinsey & Company, Director-General of the Confederation of British Industry, and Group Development and Strategy Director at ITV plc. She has extensive board experience, having previously served as non-executive Director of Lloyds Banking Group plc, the Vitec Group plc and Capita plc. She has also served as a non-executive Director of the UK Competition and Markets Authority and the Financial Services Authority.

 

Other appointments:

• Non-executive Director of BAE Systems plc

James Forese (58) 1,3,4

Independent non-executive Director

Appointed to the Board: May 2020

Skills and experience: James has over 30 years of international business and management experience in the finance industry.

Career: James formerly served as President of Citigroup. He began his career in securities trading with Salomon Brothers, one of Citigroup's predecessor companies, in 1985. In addition to his most recent role as President, he was Chief Executive Officer of Citigroup's Institutional Clients Group. He has also been Chief Executive of its Securities and Banking division and head of its Global Markets business.

 

Other appointments:

• Chair of HSBC North America Holdings Inc

• Non-executive Chairman of Global Bamboo Technologies

• Trustee of Colby College

 

Steven Guggenheimer (56) 2,4

Independent non-executive Director

Appointed to the Board: May 2020

Skills and experience: Steven brings extensive insight into technologies ranging from artificial intelligence to Cloud computing, through his experience advising businesses on digital transformation.

Career: Steven has more than 25 years of experience at Microsoft, where he held a variety of senior leadership roles. These included: Corporate Vice President, Artificial Intelligence and Independent Software Vendor Engagement; Corporate Vice President, Chief Evangelist; and Corporate Vice President, Original Equipment Manufacturer.

 

Other appointments:

• Non-executive Director of Forrit Technologies Limited

• Independent Director of Software Acquisition Group

• Adviser to Tensility Venture Partners LLC

• Advisory Board Member of 5G Open Innovation Lab

 

Irene Lee (68) 4

Independent non-executive Director

Appointed to the Board: July 2015

Skills and experience: Irene has more than 40 years of experience in the finance industry, having worked in the UK, the US and Australia.

Career: Irene held senior investment banking and fund management roles at Citibank, the Commonwealth Bank of Australia and SealCorp Holdings Limited. She has served as a member of the Advisory Council for J.P. Morgan Australia, a member of the Australian Government Takeovers Panel and as a non-executive Director of QBE Insurance Group Limited, Keybridge Capital Limited, ING Bank (Australia) Limited, Noble Group Limited, CLP Holdings Limited and Cathay Pacific Airways Limited.

 

Other appointments:

• Chair of Hang Seng Bank Limited

• Non-executive Director of the Hongkong and Shanghai Banking Corporation Limited

• Executive Chair of Hysan Development Company Limited

• Member of the Exchange Fund Advisory Committee of the Hong Kong Monetary Authority

 

Dr José Antonio Meade Kuribreña (52) 2,3,4

Independent non-executive Director

Appointed to the Board: March 2019

Skills and experience: José has extensive experience in public administration, banking, financial policy and foreign affairs.

Career: José has held Cabinet-level positions in the federal government of Mexico, including as Secretary of Finance and Public Credit, Secretary of Social Development, Secretary of Foreign Affairs and Secretary of Energy. Prior to his appointment to the Cabinet, he served as Undersecretary and as Chief of Staff in the Ministry of Finance and Public Credit. José is also a former Director General of Banking and Savings at the Ministry of Finance and Public Credit, and served as Chief Executive Officer of the National Bank for Rural Credit.

 

Other appointments:

• Non-executive Director of Alfa S.A.B. de C.V.

• Non-executive Director of Grupo Comercial Chedraui, S.A.B. de C.V.

• Board member of The Global Center on Adaptation

• Member of the Independent Task Force on Creative Climate Action

• Member of the UNICEF Mexico Advisory Board

 

 

 

Eileen Murray (63) 2,4

Independent non-executive Director

Appointed to the Board: July 2020

Skills and experience: Eileen has extensive knowledge in financial technology and corporate strategy from a career spanning more than 40 years.

Career: Eileen most recently served as co-Chief Executive Officer of Bridgewater Associates, LP. Before this, she was Chief Executive Officer for Investment Risk Management LLC, and President and co-Chief Executive Officer of Duff Capital Advisors. Eileen started her professional career at Morgan Stanley, having held positions including Controller, Treasurer, and Global Head of Technology and Operations, as well as Chief Operating Officer for its Institutional Securities Group. At Credit Suisse, she was Head of Global Technology, Operations and Product Control.

 

Other appointments:

• Chair of the Financial Industry Regulatory Authority

• Non-executive Director of Guardian Life Insurance Company of America

• Adviser of Invisible Urban Charging

• Adviser of ConsenSys, Aquarion Company

 

David Nish (61) 1C,2,4

Independent non-executive Director

Appointed to the Board: May 2016

Senior Independent non-executive Director since: February 2020

Skills and experience: David has international experience in financial services, corporate governance, financial accounting, and strategic and operational transformation.

Career: David served as Group Chief Executive Officer of Standard Life plc between 2010 and 2015, having joined the company in 2006 as Group Finance Director. He is also a former Group Finance Director of Scottish Power plc and was a partner at Price Waterhouse. David has also previously served as a non-executive Director of HDFC Life (India), Northern Foods plc, London Stock Exchange Group plc, the UK Green Investment Bank plc and Zurich Insurance Group.

 

Other appointments:

• Non-executive Director of Vodafone Group plc

• Honorary Professor of Dundee University Business School

Jackson Tai (71) 1,2C,4

Independent non-executive Director

Appointed to the Board: September 2016

Skills and experience: Jackson has held senior operating and governance roles across Asia, North America and Europe.

Career: Jackson was Vice Chairman and Chief Executive Officer of DBS Group and DBS Bank Ltd., having served as Chief Financial Officer and then as President and Chief Operating Officer. He worked for 25 years with J.P. Morgan & Co. Incorporated, holding roles as Chairman of Asia-Pacific Management Committee and Head of Japan Capital Markets. Other former appointments included non-executive Director of Canada Pension Plan Investment Board, Royal Philips N.V., Bank of China Limited, Singapore Airlines, NYSE Euronext, ING Groep N.V., CapitaLand Ltd, SingTel Ltd. and Jones Lang LaSalle Inc. He also served as Vice Chairman of Islamic Bank of Asia.

 

Other appointments: 

• Non-executive Director of Eli Lilly and Company

• Non-executive Director of MasterCard Incorporated

 

Pauline van der Meer Mohr (62) 1,3C,4

Independent non-executive Director

Appointed to the Board: September 2015

Skills and experience: Pauline has extensive legal, corporate governance and human resources experience across a number of different sectors.

Career: Pauline served on the Supervisory Board of ASML Holding N.V. between 2009 and 2018. She was also Deputy Chair of the Supervisory Board of Royal DSM N.V. from 2018 to 2021, while also chairing its Sustainability Committee. Pauline was formerly President of Erasmus University Rotterdam, a member of the Dutch Banking Code Monitoring Commission, and a Senior Vice President and Head of Group Human Resources Director at ABN AMRO Bank N.V. and TNT N.V. She also held various executive roles at the Royal Dutch Shell Group. Pauline also chaired the Group's former Conduct and Values Committee.

 

Other appointments:

• Chair of the Dutch Corporate Governance Code Monitoring Committee

• Chair of the Supervisory Board of EY Netherlands LLP

• Member of the Selection and Nomination Committee of the Supreme Court of the Netherlands

• Member of the Capital Markets Committee of the Dutch Authority for Financial Markets

• Non-executive Director of Viatris, Inc.

• Chair of the ASM International NV Supervisory Board

 

 

 

Aileen Taylor (49)

Group Company Secretary and Chief Governance Officer

Appointed: November 2019

Skills and experience: Aileen is a solicitor with significant governance and regulatory experience across various roles in the banking industry. She is a member of the European Corporate Governance Council, the GC100 and the Financial Conduct Authority's Listing Authority Advisory Panel.

Career: Prior to joining HSBC, Aileen spent 19 years at the Royal Bank of Scotland Group, holding various legal, risk and compliance roles. She was appointed Group Secretary in 2010 and subsequently Chief Governance Officer and Board Counsel.

 

Former Directors who served for part of the year

Heidi Miller

Heidi Miller retired from the Board on 28 May 2021.

Henri de Castries

Henri de Castries retired from the Board on 28 May 2021.

Laura Cha, GBM

Laura Cha, GBM retired from the Board on 28 May 2021.

 

For full biographical details of our Board members, see www.hsbc.com/who-we-are/leadership-and-governance.

 

 

 

 

 

 

Senior management

Senior management, which includes the Group Executive Committee, supports the Group Chief Executive in the day-to-day management of the business and the implementation of strategy.

 

Elaine joined HSBC as Group Chief Human Resources Officer in June 2017. Prior to joining HSBC, she was Group Human Resources Director at Royal Bank of Scotland Group for six years. She has held a number of human resources and employee relations roles in financial services, including Clydesdale Bank and Direct Line Group. Elaine is a member of the Chartered Institute of Personnel and Development, and a fellow of the Chartered Institute of Banking in Scotland.

 

Chira joined HSBC in May 2020 as Global Head of Strategy and was appointed to the Group Executive Committee in April 2021. Before joining HSBC, he was a partner at McKinsey & Company in its financial services practice and a managing director at Sanford C. Bernstein between 2011 and 2017. Earlier in his career, Chira held a number of strategy, management and operational roles at Standard Chartered and Citigroup in India.

 

Colin joined HSBC in July 2016 and was appointed Chief Executive Officer, HSBC Bank plc and HSBC Europe in February 2021. He previously held the role of Group Chief Compliance Officer. Before HSBC, Colin worked at UBS as Global Head of Compliance and Operational Risk Control. He served for 16 years in the British Army, having held a variety of command and staff positions, including within operational tours of Iraq and Northern Ireland, the Ministry of Defence and NATO.

 

 

 

Jonathan is a standing attendee of the Group Executive Committee, having joined HSBC as Group Head of Internal Audit in October 2019. He has 30 years of experience providing assurance, audit and advisory services to the banking and securities industries in the UK, the US and Europe. Jonathan's previous roles included leading KPMG UK's financial services internal audit services practice and PwC's UK internal audit services practice. He has also served as interim Group Head of Internal Audit at the Royal Bank of Scotland Group.

 

Georges joined HSBC in 2005 and was appointed co-Chief Executive Officer of Global Banking and Markets in March 2020. He is also head of the Markets and Securities Services division of the business, with responsibility for its strategic direction in more than 55 countries and territories. Georges previously served as Head of Global Markets; Chief Executive Officer for HSBC, Middle East, North Africa and Turkey; Head of Global Banking and Markets, MENA; and Regional Head of Global Markets, MENA. Georges will be on sabbatical leave between March and September 2022.

 

Greg joined HSBC in October 2018 as Head of Global Banking and became co-Chief Executive Officer of Global Banking and Markets in March 2020. Greg will assume sole responsibility of the business while Georges Elhedery is on sabbatical leave between March and September 2022. Before joining HSBC, he was President and Chief Operating Officer of East West Bank. Greg began his career as an investment banker at J.P. Morgan, where positions included: Chief Executive Officer for Greater China; Chief Executive Officer, Global Corporate Bank; Head of Investment Banking for Asia-Pacific; and Co-Head of Banking Asia-Pacific.

 

 

Celine joined HSBC as Group Chief Sustainability Officer in July 2021, and is responsible for the Group's sustainability agenda including its ambition to transition to net zero. She previously worked as a partner at PwC for over a decade, where she held global leadership roles including acting as its global innovation and sustainability leader. Before joining PwC, Celine worked as Director of Climate Change and Consulting for Risk Management Solutions. She is a World Economic Forum Young Global Leader, a co-chair of the We Mean Business Coalition, a PhD climate scientist and a NASA fellow by training.

 

John became Group Chief Operating Officer in February 2020, having joined HSBC in December 2019. He has an extensive background in transforming organisations across a range of industries. Most recently, John served as Executive Vice President of Hewlett Packard and Hewlett Packard Enterprise, where he managed technology and operations and was Chief Customer Officer. He also held senior roles at Boeing and Verizon and served on the Board of Directors of BNY Mellon, DocuSign and the US National Academy Foundation.

 

Bob joined HSBC as Group Chief Legal Officer in January 2021. He was most recently Group General Counsel at Barclays from 2013 to 2020. Prior to that he was General Counsel and Chief Regulatory Affairs Officer for The PNC Financial Services Group. Bob has served as General Counsel and senior policy adviser to the US Department of the Treasury under Secretary Paulson, and as Special Assistant and Associate Counsel to the White House under President George W. Bush.

 

 

 

 

Steve was appointed as Group Chief Communications Officer in December 2019 and appointed to the Group Executive Committee in April 2021. He has a wealth of senior communications, public policy and leadership experience acquired across a number of multinational and charitable organisations. Prior to joining HSBC, Steve was a partner and Global Director of Communications at McKinsey & Company from 2014 to 2019. He has also held roles with Bupa as Global Director of Communications and PepsiCo as Director of Corporate Affairs for their UK and Ireland franchises.

 

Pam was appointed Group Chief Risk and Compliance Officer in July 2021, having held the role of Group Risk Officer since January 2020. She joined HSBC in 2013 and was previously Group Head of Internal Audit, Head of Wholesale Market and Credit Risk, and Chair of the enterprise-wide non-financial risk forum. Pam has also held a variety of audit and compliance roles in the banking industry, including with Deutsche Bank, Royal Bank of Scotland Group, Lloyds TSB and Citigroup. She serves as a non-executive Director of Centrica plc.

 

 

David was appointed co-Chief Executive Officer of the Asia-Pacific region in June 2021. He is a Director of the Hongkong and Shanghai Banking Corporation Limited, Bank of Communications Co., Limited, Hang Seng Bank Limited and HSBC Global Asset Management Limited. David joined HSBC in 1997, with previous roles including: Head of Global Banking Coverage for Asia-Pacific; President and Chief Executive at HSBC China; Head of Global Banking and Markets at HSBC China; and Treasurer and Head of Global Markets at HSBC China.

 

 

 

Nuno joined HSBC in 2015 and was appointed Chief Executive Officer of Wealth and Personal Banking in February 2021. He is a Director of HSBC Global Asset Management Limited. He was previously the Chief Executive Officer of HSBC Bank plc and HSBC Europe, a role he held from March 2020. Nuno has also served as Chief Executive Officer of HSBC Mexico, and as regional head of Retail Banking and Wealth Management in Latin America. Before joining HSBC, he held senior positions at Santander Group.

 

Stephen was appointed Regional Chief Executive Officer for the Middle East, North Africa and Turkey in April 2021. He has held a series of roles since joining HSBC in 1992, including as Chief of Staff to the Group Chief Executive and overseeing the Group's mergers and acquisitions, and strategy and planning activities. Stephen is a Director of The Saudi British Bank, HSBC Bank Middle East Limited, HSBC Middle East Holdings B.V, HSBC Bank Egypt S.A.E and HSBC Saudi Arabia.

 

Barry joined HSBC in April 2017 and was appointed Chief Executive Officer of Global Commercial Banking in February 2020, having served in the role on an interim basis since August 2019. He was previously Chief Operating Officer for Global Commercial Banking. Before joining HSBC, Barry worked at GE Capital for 19 years in a number of senior leadership roles, including as Chief Executive Officer and Chief Operating Officer for GE Capital International.

 

 

 

Michael was appointed Chief Executive Officer for HSBC USA and the Americas with oversight responsibility for Canada and Latin America in April 2021. He joined HSBC in October 2019 and is a Director of HSBC Bank Canada; executive Director, President and Chief Executive Officer of HSBC North America Holdings Inc.; and Chairman of HSBC Bank USA, N.A. and HSBC USA Inc. Previously, Michael spent 33 years at Citigroup in a number of senior leadership roles, most recently as Global Head of Corporate Banking and Capital Management and Chief Lending Officer.

 

Surendra Rosha,53

Co-Chief Executive Officer, Asia-Pacific - The Hongkong and Shanghai Banking Corporation Limited

Surendra was appointed co-Chief Executive Officer of the Asia-Pacific region in June 2021. He is a Director of The Hongkong and Shanghai Banking Corporation Limited and HSBC Bank Australia Limited. Surendra joined HSBC in 1991 and has held several senior positions within Global Banking and Markets, including as Head of Global Markets in Indonesia and Head of Institutional Sales, Asia-Pacific. He was Chief Executive for HSBC India and Head of HSBC's financial institutions group for Asia-Pacific.

 

Ian has been Chief Executive Officer of HSBC UK Bank plc since April 2017 and has worked in financial services for over four decades. He joined HSBC as Head of Commercial Banking Europe in 2014, having previously led the corporate and business banking businesses at Barclays and NatWest. He started his career at Bank of Scotland. Ian is a business ambassador for Meningitis Now and a member of the Economic Crime Strategic Board.

 

 

 

Additional members of the Group Executive Committee

Noel Quinn

Ewen Stevenson

Aileen Taylor

 

 

Biographies are provided on pages 220 and 223.

 

 

 

How we are governed

We are committed to high standards of corporate governance. The Group has a comprehensive range of policies and procedures in place designed to help ensure that it is well managed, with effective oversight and controls. We comply with the UK Corporate Governance Code and the applicable requirements of the Hong Kong Corporate Governance Code.

Board's role, Directors' responsibilities and meeting attendance 

The Board, led by the Group Chairman, is responsible among other matters for:

• promoting the Group's long-term success and delivering sustainable value to shareholders;

• establishing and approving the Group's strategy and objectives, and monitoring the alignment of the Group's purpose, strategy and values with the desired culture;

• setting the Group's risk appetite and monitoring the Group's risk profile;

• approving and monitoring capital and operating plans for achieving strategic objectives;

• approving material transactions;

• approving the appointment of Directors, including Board roles; and

• reviewing the Group's overall corporate governance arrangements.

The Board's terms of reference are available on our website at www.hsbc.com/who-we-are/leadership-and-governance/board-responsibilities. The Board's powers are subject to relevant laws, regulations and HSBC's articles of association.

The role of the independent non-executive Directors is to support the development of proposals on strategy, hold management to account and ensure the executive Directors are discharging their responsibilities properly, while creating the right culture to encourage constructive challenge. Further details on the independence of the Board and the value independence brings can be found in the Nomination & Corporate Governance Committee report. Non-executive Directors also review the performance of management in meeting agreed goals and objectives. The Group Chairman meets with the non-executive Directors without the executive Directors in attendance after Board meetings and otherwise, as necessary.

The roles of Group Chairman and Group Chief Executive are separate. There is a clear division of responsibilities between the leadership of the Board by the Group Chairman, and the executive responsibility for day-to-day management of HSBC's business, which is undertaken by the Group Chief Executive.

The majority of Board members are independent non-executive Directors. At 31 December 2021, the Board comprised the Group Chairman, 10 non-executive Directors, and two executive Directors who are the Group Chief Executive and the Group Chief Financial Officer. Two non-executive Directors will not stand for re-election at the AGM in April 2022.

For further details of the Board's career background, skills, experience and external appointments, see pages 220 to 223.

Operation of the Board

The Board is ordinarily scheduled to meet at least seven times a year. In 2021, the Board held 12 meetings. For further details on attendance at those meetings, see page 228. The Board agenda is agreed by the Group Chairman, working with both the Group Chief Executive and the Group Company Secretary and Chief Governance Officer. For more information, see 'Board activities during 2021' on page 232.

The Group Company Secretary and Chief Governance Officer, the Group Chief Risk and Compliance Officer, the Group Chief Legal Officer and the non-executive Chairman of The Hongkong and Shanghai Banking Corporation Limited are all regular attendees at Board meetings. Other senior executives attend Board meetings as required.

In addition to formal Board meetings, the Board Oversight Sub-Group, established by the Group Chairman in 2020, meets in advance of each Board meeting. Such meetings are an informal mechanism for a smaller group of Board members and management to discuss emerging issues and upcoming Board matters. Standing attendees comprise the Group Chairman, the Chair of the Group Audit Committee (who is also the Senior Independent Director), the Chair of the Group Risk Committee, the Group Chief Executive, the Group Chief Financial Officer, the Group Chief Risk and Compliance Officer, and the Group Company Secretary and Chief Governance Officer. Other non-executive Directors and management are invited on a rotational basis, depending on the subject to be discussed. The forum is not decision making but provides regular opportunities for Board members to communicate with senior management to deepen their understanding of, and provide input into, key issues facing the Group. For further details on how the Board engages with the wider workforce, see page 233.

 

The Board continued many of the governance changes introduced in 2020 in response to the Covid-19 pandemic, including meeting online during 2021. The Board was kept informed of the continuing challenges and priorities of the management team as part of the formal executive reporting received at these meetings. The following practices continued:

• The Group Chairman prepared a weekly Board update note.

• The Group Chief Risk and Compliance Officer produced a weekly Board report on risk matters, including in relation to the Covid-19 pandemic, as well as market highlights, industry events and results.

• Immunologists and pandemic experts updated the Board on emerging issues.

• The Group Chairman's Forum was held monthly. It was attended by Board committee chairs, as well as chairs of principal subsidiaries.

 

 

A Technology Governance Working Group was established in 2021, initially for a period of 12 months, to provide recommendations to enhance the Board's oversight of technology strategy, governance and emerging risks, and to enhance connectivity with the principal subsidiaries. Given their industry expertise and experience, the working group is jointly chaired by Eileen Murray and Steven Guggenheimer. Its members include Group Risk Committee chair Jackson Tai and other non-executive Directors representing each of our US, UK, European and Asian principal subsidiaries. Key technology and business stakeholders have attended the working group to provide insights on technology and information security issues across the Group. The working group has met formally eight times since its inception, and has held additional ad hoc sessions on priority strategic topics including data and cybersecurity. The Technology Governance Working Group's recommendations were presented to the Board in January 2022 when it was decided that the working group will remain an informal committee of the Board. For further details on the future of the working group, see the Group Chairman's governance statement on page 218.

 

 

 

In 2021, the Group Chairman, Senior Independent Director and other non-executive Directors, often with the Group Company Secretary and Chief Governance Officer, engaged with a number of our large institutional investors in 15 meetings. The Group Chief Executive and the Group Chief Financial Officer attended over 30 meetings with investors in 2021. Key topics included our financial performance,  climate policies and progress in relation to the climate resolution passed at the 2021 AGM. Other topics discussed with investors included geopolitical tensions, primarily

 

relating to Hong Kong, mainland China, the US and the UK, as well as Board composition, changes to the Group Executive Committee, and the impact of the Covid-19 pandemic on the Group, its employees, customers and communities.

The Group Remuneration Committee Chair met with representatives from key investors and proxy advisory firms numerous times during the fourth quarter of 2021, in preparation for its discussion and decision making on the 2021 executive Directors' performance outcomes and the renewal of the 2022 Directors' remuneration policy.

 

 

Board roles, responsibilities and meeting attendance

 

The table below sets out the Board members' respective roles, responsibilities and attendance at Board meetings and the AGM in 2021. For a full description of responsibilities, see www.hsbc.com/who-we-are/leadership-and-governance/board-responsibilities.

Group Chairman

Mark E Tucker1,2

 

12/12

• Provides effective leadership of the Board and promotes the highest standards of corporate governance practices.

• Leads the Board in providing strong strategic oversight and setting the Board's agenda, culture and values.

• Leads the Board in challenging management's thinking and proposals, and fosters open and constructive debate among Directors.

• Maintains external relationships with key stakeholders and communicates investors' views to the Board.

• Organises periodic monitoring and evaluation, including externally facilitated evaluation, of the performance of the Board, its committees and individual Directors.

Executive Director

Group Chief Executive

Noel Quinn2

12/12

• Leads and directs the implementation of the Group's business strategy, embedding the organisation's culture and values.

• Leads the Group Executive Committee with responsibility for the day-to-day operations of the Group, under authority delegated to him from the Board.

• Maintains relationships with key internal and external stakeholders including the Group Chairman, the Board, regulators, governments and investors.

Executive Director

Chief Financial Officer

Ewen Stevenson2

12/12

• Supports the Group Chief Executive in developing and implementing the Group strategy and recommends the annual budget and long-term strategic and financial plan.

• Leads the Finance function and is responsible for effective financial reporting, including the effectiveness of the processes and controls, to ensure the financial control framework is robust and fit for purpose.

• Maintains relationships with key stakeholders including shareholders.

Non-executive Directors

Senior Independent Director

David Nish2,3

12/12

• Supports the Group Chairman, acting as intermediary for non-executive Directors when necessary.

• Leads the non-executive Directors in the oversight of the Group Chairman, supporting the clear division of responsibility between the Group Chairman and the Group Chief Executive.

• Listens to shareholders' views if they have concerns that cannot be resolved through the normal channels.

Laura Cha2,3,4

6/6

• Develop and approve the Group strategy.

• Challenge and oversee the performance of management.

• Approve the Group's risk appetite and review risk profile and performance.

Henri de Castries2,3,4,6

5/6

Rachel Duan3,5

4/4

Dame Carolyn Fairbairn3,5

4/4

James Forese2,3

12/12

Steven Guggenheimer2,3

12/12

Irene Lee2,3

12/12

Dr José Antonio Meade Kuribreña2,3

12/12

Heidi Miller2,3,4

6/6

Eileen Murray2,3.6

9/12

Jackson Tai2,3

12/12

Pauline van der Meer Mohr2,3

12/12

Group Company Secretary and Chief Governance Officer

Aileen Taylor

 

• Maintains strong and consistent governance practices at Board level and throughout the Group.

• Supports the Group Chairman in ensuring effective functioning of the Board and its committees, and transparent engagement between senior management and non-executive Directors.

• Facilitates induction and professional development of non-executive Directors.

• Advises and supports the Board and management in ensuring effective end-to-end governance and decision making across the Group.

1  The non-executive Group Chairman was considered to be independent on appointment.

2  Attended the AGM on 28 May 2021.

3  Independent non-executive Director. All of the non-executive Directors are considered to be independent of HSBC. There are no relationships or circumstances that are likely to affect any individual non-executive Director's judgement. All non-executive Directors have confirmed their independence during the year.

4  Heidi Miller, Laura Cha and Henri de Castries retired from the Board on 28 May 2021.

5  Rachel Duan and Dame Carolyn Fairbairn joined the Board effective 1 September 2021.

6  Henri de Castries was unable to attend one Board meeting due to a conflict of interest. Eileen Murray was unable to attend meetings in the last few months of 2021 due to personal health reasons, but was kept informed of Board and relevant committee matters. She was fully briefed ahead of her return to regular meeting attendance in January 2022. Eileen continues to have sufficient time to dedicate to her role with HSBC.

 

Board induction and training

The Group Company Secretary and Chief Governance Officer works with the Group Chairman to oversee appropriate induction and ongoing training programmes for the Board. On appointment, new Board members are provided with tailored and comprehensive induction programmes to fit with their individual experiences and needs, including the process for dealing with conflicts. 

The induction programme is delivered through formal briefings and introductory sessions with Board members, senior management, legal counsel, auditors, tax advisers and regulators, as appropriate. Topics covered include, but are not limited to: purpose and values; culture and leadership; governance and stakeholder management; Directors' legal and regulatory duties; recovery and resolution risk; anti-money laundering and anti-bribery; technical and business briefings; and strategy.

An early focus on induction allows a new Board member to contribute meaningfully from appointment. The structure of the induction supports good information flows within the Board and its committees, as well as between senior management and non-executive Directors, providing a clear understanding of our culture and way of operating.

During 2021 we welcomed two new non-executive Directors, Rachel Duan and Dame Carolyn Fairbairn, to our Board. We gave careful consideration to creating relevant and bespoke induction programmes for each of the new non-executive Directors, particularly given their differing geographical locations and the continuing Covid-19-related challenges for meetings in person. For illustrations of the typical induction modules, see the 'Directors' induction and ongoing development in 2021' table on the following page.

Non-executive Directors continued to engage with each other through virtual meetings amid continuing Covid-19-related travel restrictions. We continue to plan and look forward to opportunities to facilitate safe and comprehensive person-to-person engagement, both in and out of Board meetings. These opportunities provide invaluable insight and understanding of our business, customers, culture and people.

Directors undertook routine training during 2021. They also participated in 'deep dive' sessions into specific areas of the Group's strategic priorities, risk appetite and approach to managing certain risks. These training sessions included external consultants who provided insights into geopolitical matters, macroeconomics and investor sentiments. Other topics of focus included: operations and technology strategy; the resolvability assessment framework; and climate change and sustainability.

Non-executive Directors also discussed individual development areas with the Group Chairman during performance reviews and in conversations with the Group Company Secretary and Chief Governance Officer. The Group Company Secretary and Chief Governance Officer makes appropriate arrangements for any additional training needs identified using internal resources, or otherwise, at HSBC's expense.

Members of Board committees receive relevant training as appropriate. Directors may take independent professional advice at HSBC's expense.

Board Directors who serve on principal subsidiary boards also receive training relevant to those boards. Opportunities exist for the principal subsidiary and principal subsidiary committee chairs to share their understanding in specific areas with the Board Directors. During 2021, the Group Chairman hosted a Non-Executive Director Summit where 200 independent non-executive directors from the Group's subsidiaries attended a virtual session along with Board Directors. They received updates and training on Group-wide matters including climate change, technology, culture and the launch of the newly developed Non-Executive Director Handbook. Following its success, further Non-Executive Director Summits will take place during 2022.

 

 

 

 

Q&A with Rachel Duan

 

Q: What is your impression and experience of the onboarding process for HSBC?

From the very start of the process I was impressed at the level of attention given to my induction programme. Care was taken to tailor my meetings and the information provided so that it was relevant for me and thereby ensured a smooth, efficient and thoughtful process.

Q: How have you managed to get insight into the wider Group governance?

Before my joining date I was afforded many opportunities to meet colleagues, both virtually and physically. Shortly after joining, I visited our Hong Kong office to meet, among others, Peter Wong, non-executive chairman of The Hongkong and Shanghai Banking Corporation Limited. This gave me the chance to gain insight into governance matters in Asia. In July 2021, I was invited to attend the Non-Executive Director Summit, which was a great introduction into the Group's and its subsidiaries' governance matters. These engagements highlighted key areas of focus for HSBC and provided clear insight into the Group's way of working.

Q: How prepared did you feel for the first Board meeting in September?

My tailored engagements and bespoke briefings started shortly after the announcement of my intention to join the HSBC Board in March, all of which helped me get my arms around this complex organisation and made me feel included and ready to execute my role in the boardroom with ease.

 

 

Q&A with Dame Carolyn Fairbairn

 

Q: How have you got an understanding of the Board's focus on culture?

The culture at HSBC is thoughtful and inclusive. I could see from the carefully planned induction meetings which were arranged well ahead of my joining. I have been introduced to two  employee resource groups: Ability, the disability and mental health network, and Embrace, an ethnicity network, and value the opportunity to support them. Also, the Board opens every meeting with a 'culture moment', which really demonstrates how it connects closely with the corporate values, and openly expresses how these are observed.

Q: What has been your experience of preparing for membership of the Group Remuneration Committee and the Group Risk Committee?

Before I joined, I engaged closely with the committees' chairs, as well as senior management, to understand their priorities, including a new remuneration policy for the 2022 AGM and the climate agenda. I remain actively engaged with the members to ensure a smooth transition onto these committees.

Q: Did your attendance at the 2021 AGM give you a better understanding of the Group's business?

Attending the 2021 AGM, ahead of my official appointment to the Board, enabled me to witness HSBC's first hybrid meeting with shareholders. I was pleased to see that the company's planning enabled as many shareholders as possible to participate in this annual event, despite the persistent Covid-19 pandemic challenges, demonstrating HSBC's inclusive culture. The questions from shareholders were insightful and gave me a good sense of what was top of investors' minds and how the company was responding to such concerns, particularly on the climate agenda.

 

Directors' induction and ongoing development in 2021

Director

Induction1

Strategy and business briefings2

Risk and

control3

Corporate governance, ESG and other reporting matters4

Board and global mandatory training5

Chair and subsidiary non-executive Director forums6

Rachel Duan

l

l

l

l

l

l

Dame Carolyn Fairbairn

l

l

l

l

l

l

James Forese

ô

l

l

l

l

l

Steven Guggenheimer

ô

l

l

l

l

l

Irene Lee

ô

l

l

l

l

l

José Antonio Meade Kuribreña

ô

l

l

l

l

l

Eileen Murray

ô

l

l

l

l

l

David Nish

ô

l

l

l

l

l

Noel Quinn

ô

l

l

l

l

l

Ewen Stevenson

ô

l

l

l

l

l

Jackson Tai

ô

l

l

l

l

l

Mark Tucker

ô

l

l

l

l

l

Pauline van der Meer Mohr

ô

l

l

l

l

l

1  The induction programme was delivered through formal briefings and introductory sessions with Board members, senior management, legal counsel, auditors, tax advisers and regulators, as appropriate. Topics covered included, but were not limited to: purpose and values; culture and leadership; governance and stakeholder management; Directors' legal and regulatory duties; recovery and resolution risk; anti-money laundering and anti-bribery; technical and business briefings; and strategy.

2  Directors participated in business strategy, market development and business briefings, which are global, regional and/or market-specific. Examples of specific sessions held in 2021 included: 'US strategy: restructuring of the operating model' and 'Climate change: becoming net zero by 2050'.

3  Directors received risk and control training. Examples of specific sessions held in 2021 included: 'Stress testing' and 'ICAAP/ILAAP'.

4  All Directors received training on topics such as: 'Resolvability assessment framework', 'Climate and sustainable finance' and 'IFRS 17'.

5  Global mandatory training, issued to all Directors, mirrored training undertaken by all employees, including senior management. This included: management of risk under the enterprise risk management framework, with a focus on operational risk; cybersecurity risk; health, safety and well-being; data privacy and the protection of data of our customers and colleagues; combating financial crime, including understanding money laundering, sanctions, fraud and bribery and corruption risks; and our values and conduct, including workplace harassment and speaking up.

6  Chairman's Forum, Remuneration Committee Chairs' Forum and the Non-Executive Director Summit.

 

Board committees and working groups

The Board delegates oversight of certain audit, risk, remuneration, nomination and governance matters to its committees. Each standing Board committee is chaired by a non-executive Board member and has a remit to cover specific topics in accordance with their respective terms of reference. Only independent non-executive Directors are members of Board committees. Details of the work carried out by each of the Board committees can be found in the respective committee reports from page 237.

In addition to the Board committees, working groups are established to enhance Board governance. The Technology Governance Working Group was first convened in March 2021 to enhance the Board's oversight of technology strategy, governance and emerging risks, and to enhance connectivity with the principal subsidiaries. The working group will continue in 2022 but will remain a working group, not a formal committee of the Board. For further details, see page 227.

The Board Oversight Sub-Group is also part of the group operating rhythm ahead of Board meetings. As described on page 227, this group offers the Board and senior management an informal forum to discuss key matters before they are considered by the Board.

In addition, the Chairman's Committee is convened to provide flexibility for the Board to consider ad hoc Board and routine matters between scheduled Board meetings. All Board members are invited to attend all Chairman's Committees.

 

 

 

Relationship between Board and senior management  

The Board delegates day-to-day management of the business and implementation of strategy to the Group Chief Executive. The Group Chief Executive is supported in his management of the Group by recommendations and advice from the Group Executive Committee ('GEC'), an executive forum comprising members of senior management that include chief executive officers of the global businesses, regional chief executive officers and functional heads.

The Directors are encouraged to have contact with management at all levels, and have full access to all relevant information. Non-executive Directors are encouraged to visit local business operations and meet local management when they attend off-site Board meetings and when travelling for other reasons but only when it is safe to do so. While there were limited physical opportunities for Board members to meet in 2021, there were several virtual meetings with senior executives including induction meetings and subject matter 'deep dives', as well as regular working meetings.

Connectivity between management and the Board is further facilitated through informal discussion held as required on an ad hoc basis, and as part of the Board Oversight Sub-Group meetings.

 

The Group's executive governance is underpinned by the Group operating rhythm, which helps facilitate end-to-end governance between senior leadership and the Board, and sets out the Board and executive engagement schedule.

The Group operating rhythm is characterised by three pillars:

• The GEC normally meets every week to discuss current and emerging issues.

• On a monthly basis, the GEC reviews the performance of global businesses, principal geographical areas and legal entities. These performance reviews are supplemented by operating unit performance review meetings between the Group Chief Financial Officer and each of the chief executive officers of the global businesses, principal geographical areas and legal entities on an individual basis. The Group Chief Executive and Group Risk and Compliance Officer have standing invitations to these meetings.

• The GEC holds a strategy and governance meeting two weeks in advance of each Board meeting.

Separate committees have been established to provide specialist oversight for matters delegated to the Group Chief Executive and senior management, in keeping with their responsibilities under the Senior Managers and Certification Regime. Some of these committees are dedicated sub-committees of the GEC, including the new ESG Committee, the Transformation Oversight Executive Committee and the Acquisitions and Disposals Committee, and all committees together support and facilitate collective decision taking and individual accountabilities. These committees support the Group Chief Executive and GEC members in areas such as capital and liquidity, risk management, disclosure and financial reporting, restructuring and investment considerations, transformation programmes, ESG matters and talent and development.

In addition to our regional company secretaries supporting our principal subsidiaries, we have corporate governance officers supporting our global businesses and our larger global functions to assist in effective end-to-end governance, consistency and connectivity.

 

Subsidiary governance

Certain subsidiaries are formally designated as principal subsidiaries by approval of the Board. In addition to their obligations under their respective local laws and regulation, principal subsidiaries have an important role in supporting effective and high standards of governance across the Group.

 

The designated principal subsidiaries are:

 

 

The Hongkong and Shanghai Banking Corporation Limited

Asia-Pacific

HSBC Bank plc

Europe, Bermuda (excluding Switzerland and UK ring-fenced activities)

HSBC UK Bank plc

UK ring-fenced bank and its subsidiaries

HSBC Middle East Holdings BV

Middle East and North Africa

HSBC North America Holdings Inc.

US

HSBC Latin America Holdings (UK) Limited

Mexico and Latin America

HSBC Bank Canada

Canada

 

In general, principal subsidiaries are responsible for overseeing the implementation of the subsidiary accountability framework for Group companies in the region for which they are responsible. The subsidiary accountability framework, approved in 2020, and refreshed by the Board in 2021, set out to improve communications and connectivity between the Group and its subsidiaries. It is subject to regular review and is occasionally updated to improve how the respective roles of principal subsidiaries and other subsidiaries are articulated. This helps to provide the Group with a shared understanding and a consistent approach towards its strategic objectives, culture and values and furthers the efforts to streamline and align corporate governance.

The Group Chairman interacts regularly with the chairs of the principal subsidiaries, including through the Chairman's Forum, which brings together the chairs of the principal subsidiaries, the chairs of the Group's audit, risk and remuneration committees and the Group Chief Executive to discuss Group-wide and regional matters. The Group Chairman hosted 11 Chairman's Forums in 2021, which were also attended by relevant executive management, to cover sessions on strategy, financial performance and investor sentiment, geopolitics, culture, employee engagement, diversity and inclusion, technology and data, group recovery planning, corporate governance and implementation of the updated subsidiary accountability framework. The Non-Executive Director Summit, hosted by the Group Chairman, was also an effective subsidiary directors' engagement event. For further details, see page 229.

The chairs of the principal subsidiaries' committees are invited to attend the relevant forums to raise and discuss current and future global issues, including regulatory priorities in each of the regions. While the Audit and Risk Committee Chairs' Forums did not take place in 2021, the chairs of the Group Audit Committee and Group Risk Committee continued to have regular dialogue with the respective committees of the principal subsidiaries to ensure an awareness and coordinated approach to key issues. The annual Remuneration Committee Chairs' Forum took place in October, and provided the principal subsidiary chairs with an opportunity to discuss performance, key considerations and positioning in advance of the pay review process. A follow-up forum was held in early December to provide transparency around pay outcomes and allocation, with feedback from the discussion used to shape the final pay proposals, which were considered and approved by the Group Remuneration Committee.

Board members attend principal subsidiary meetings as guests from time to time. Similarly, principal subsidiary directors are invited to attend committee meetings at Group level, where relevant, and in particular, when the Prudential Regulation Authority ('PRA') is in attendance. The chairs of the principal subsidiary risk committees are regular attendees at the Group Risk Committee.

 

 

 

Board activities during 2021

During 2021, the Board was focused on HSBC's strategic direction and overseeing performance and risk. It considered performance against financial and other strategic objectives, key business challenges, emerging risks, business development, investor relations and the Group's relationships with its stakeholders. The end-to-end governance framework facilitated discussion on strategy and performance by each of the global businesses and across the principal geographical areas, which enabled the Board to support executive management with its delivery of the Group's strategy.

The Board's key areas of focus in 2021 are set out by theme below.

Strategy and business performance

Since the Group announced a new strategic focus and associated transformation programme in February 2020, it has set out to reshape underperforming businesses, simplify the organisation and reduce costs. The strategy aims to increase returns for investors, create capacity for future investment and build a sustainable platform for growth.

The Board, which held a dedicated strategy session in May 2021, assessed the delivery of strategic achievements throughout the year through both the perspectives of the global businesses and the regions. The Board took a holistic view by reviewing management's strategic alignment to, and outcomes against, HSBC's four strategic pillars of: focus on our strengths, digitise at scale, energise for growth and transition to net zero.

Environmental, social and governance

In 2020, the Group announced its new climate ambition to align financed emissions to net zero by 2050 and become net zero for its own operations and supply chain by 2030. The Group aims to achieve this by supporting clients on the road to a net zero carbon economy and a focus on sustainable finance opportunities. In 2021, the Board considered more climate matters at its meetings, including participating in four climate 'deep-dives' and approving the climate-related resolution for the 2021 AGM. For further details on how the Board is meeting its climate agenda ambitions, see 'Board decision making and engagement with stakeholders' on page 21 and the ESG review on page 43.

The Board has also considered other sustainability matters, including human rights, a new thermal coal phase-out policy, the operating model for sustainability and the methodology for climate-aligned financing.

The Board received regular reports on the continuing challenges presented by the ongoing Covid-19 pandemic, which supported the Group's responses and measures to mitigate the effects, including, providing medical aid and assistance to our colleagues in India and other regions.

The Board takes overall responsibility for ESG strategy, overseeing executive management in developing the approach, execution and associated reporting. It has enhanced its oversight of ESG matters, with a dedicated agenda item on this topic introduced for 2022. Management has also enhanced its governance model with the introduction of a new ESG Committee and supporting forums, which will support senior management in the delivery of the Group's ESG strategy, key policies and material commitments by providing holistic oversight over - and management and coordination of - ESG commitments and activities.

Financial decisions

The Board approved key financial decisions throughout the year and approved the Annual Report and Accounts 2020, the Interim Report 2021 and the first quarter and the third quarter Earnings Releases.

At the start of 2021, the Board approved the 2021 annual financial resourcing plan and in December 2021 approved the financial resourcing plan for 2022. The Board monitored the Group's performance against the approved 2021 financial resourcing plan, as well as the plans of each of the global businesses. The Board also approved the renewal of the debt issuance programme, and as announced on 26 October 2021 the buy-back programme.

Following the decision in 2020 to cancel the fourth interim dividend for 2019, on 23 February 2021, we announced that after considering the requirements set out in the PRA's temporary approach to shareholder distributions for 2020, an interim dividend for 2020 of $0.15 per ordinary share would be paid in cash on
29 April 2021. On 2 August 2021, we announced an interim dividend of $0.07 for the 2021 half-year paid in cash on
30 September 2021. For further details of dividend payments, see page 397 and 'Board decision making and engagement with stakeholders' on page 21.

The Board has adopted a policy designed to provide sustainable dividends going forward. For the financial year 2021, we are at the lower end of our target dividend payout ratio range of between 40% and 55% of reported earnings per ordinary share ('EPS'), driven by ECL releases and higher restructuring costs. The dividend policy has the flexibility to adjust EPS for non-cash significant items such as goodwill or intangible impairments. The Board believes this payout ratio approach will allow for a good level of income to shareholders and a progressive dividend, assuming good levels of economic and earnings growth.

Risk, regulatory and legal considerations

The Board, advised by the Group Risk Committee, promotes a strong risk governance culture that shapes the Group's risk appetite and supports the maintenance of a strong risk management framework, giving consideration to the measurement, evaluation, acceptance and management of risks, including emerging risks.

The Board considered the Group's approach to risk including its regulatory obligations. A number of key frameworks, control documents, core processes and legal responsibilities were also reviewed and approved as required. These included:

• the Group's risk appetite framework and risk appetite statement;

• the individual liquidity adequacy assessment process;

• the individual capital adequacy assessment process;

• the Group's obligations under the Modern Slavery Act and approval of the Modern Slavery and Human Trafficking Statement;

• stress testing and capabilities required to meet the PRA's resolvability assessment framework;

• the revised terms of reference for the Board and Board committees; and

• delegations of authority.

The Board also reviewed and monitored the implications of geopolitical developments during the year including US-China relations and the impacts to trade following the UK's departure from the EU.

Technology

Throughout the year, the Board received regular updates on technology from the Group Chief Operating Officer, including updates on the refreshed technology strategy and restructuring of the technology leadership function.

In early 2021, the Technology Governance Working Group was established to oversee and enhance the Group's governance of technology. For further details on this group's work and the future of the Board's oversight of technology governance, see page 227.

People and culture

The Board continued to spend time discussing people and culture-related topics. To set the right cultural tone, since March 2021, each Board meeting has begun with a Director or regular attendee describing a 'cultural moment' he or she had experienced, including observations of behaviours within the Group aligned to the purpose and values. Once a year the chairs from each of the principal subsidiaries present to the Chairman's Forum on their respective board engagement activities and learnings, including cultural insights. Twice a year the Group Chief Human Resources Officer attends the Board to provide insights into the Group's employee Snapshot survey results measuring employee sentiment, talent plans, progress on the embedding of the new purpose and  values, and the measurement of culture. This reporting includes a culture insights report, which allows the Board to monitor culture through receipt of data on culture perceptions and using the indicators of behaviours/sentiment and business outcomes/people data. These presentations help enable the Board to monitor and assess the organisation's culture.

Board engagement with management and the wider workforce continued to remain a strong area of attention.

Governance

The Board continued to oversee the governance, smooth operation and oversight of the Group and its principal and material subsidiaries. Following a review of subsidiary governance, the Board oversaw the implementation of the review findings, with the support of the Nomination & Corporate Governance Committee.

The Board also supported new governance initiatives to encourage simplification and promote effective decision making in the business. Such initiatives included the refinement of Board and committee papers, and a review to reduce unnecessary committee meetings to free management time and encourage individual accountability and decision taking.

Succession planning was considered at the Nomination & Corporate Governance Committee. During the year, Laura Cha, Henri de Castries and Heidi Miller retired as independent non-executive Directors. The Board appointed Rachel Duan and Dame Carolyn Fairbairn as independent non-executive Directors who joined the Board in September 2021. The Board, supported by the Nomination & Corporate Governance Committee, will continue to review the skills and experience of the Board as a whole to ensure that it comprises the relevant skills, diversity, experiences and competencies to discharge its responsibilities effectively.

For further details on the review, subsequent actions and changes to the Board, see the Nomination & Corporate Governance Committee report on page 237.

The Board monitored its compliance with the UK Corporate Governance Code, the Hong Kong Corporate Governance Code and the Companies Act 2006 throughout the year.

 

 

 

 

 

  

The Board continued to place great emphasis on the importance of engagement with the workforce, including colleagues affected by the continued impact of the Covid-19 pandemic and the return to offices in the UK and elsewhere. The Board also considered the impact of the launch of our new purpose and values and the ongoing transformation activity, including the announcement of the disposal of our retail businesses in the US and France.

In accordance with the UK Corporate Governance Code, the Board reaffirmed that it continued to believe that the 'alternative arrangements' approach remained most appropriate for the Group in engaging and understanding the views of the workforce. The programme of engagement covered a variety of interaction styles: more bespoke sessions with smaller groups; formal presentations; Q&A opportunities; and other sessions to facilitate engagement across a breadth of experience, geographical spread and seniority. This variety of engagements enabled open dialogue and two-way discussions between Directors and employees. These sessions allowed the Board to gain valuable insight on employee perspectives, which in turn informed their deliberations and decision making at Board and committee meetings. The Board receives updates on how the Group engages with stakeholders, including the workforce, by way of the Group Chief Executive's Board report and the Group Chairman's weekly Board note. In addition, the Board's agenda regularly includes non-executive Director workforce and other stakeholder engagement updates. These help to inform the Board of employee initiatives and sentiment and allow the Board to plan for future engagement activities. For further details of how the Board considered the views of employees and other stakeholders, see the 'Board decision making and engaging with stakeholders' on page 21.

The flexibility of this approach allowed all Board members the opportunity for direct engagement - albeit often virtually during 2021 - with a broad cross-section of the workforce, spanning global businesses, functions and geographies. It also gave insights provided by management through our employee listening tools and surveys. The Board received formal updates from the Group Chief Executive and the Group Chief Human Resources Officer on employee views and sentiment. These include results of employee engagement surveys, benchmarked data, and additional surveys to understand well-being throughout the Covid-19 pandemic. The Chairman's Forum meetings also discussed employee feedback from the Group's subsidiaries.

Specific engagement between the Board and the wider workforce included meetings and events with:

• representatives of the employee resource groups and each of the non-executive Directors who have been partnered to support the designated groups: Ability, Balance, Embrace, Faith, Generations, Nurture, Pride, and Communities;

• the Nurture employee resource group, which hosted online events on domestic abuse and working fathers, during which non-executive Directors discussed with a small group of employees how the Group had supported them during such challenging times and how the Board could promote further initiatives;

• first and second year members of the HSBC graduate scheme, who discussed their experiences of hybrid working and HSBC's culture, purpose and values;

• US executive management, who held succession and emerging talent sessions, and who also discussed our net zero ambitions, career pathways, and the delivery of our strategy; and

• African heritage employee resource group leaders, who held a roundtable event to discuss inclusivity at work.

 
 
 

 

 

Board activities in 2021

Main topic

Sub-topic

Meetings at which topics were discussed1

 

 

Jan

Feb

Mar

Apr

May

Jun

Jul

Sep

Nov

Dec

Strategy

Group strategy

ô

ô

ô

ô

l

ô

ô

ô

ô

l

Regional strategy/global business strategy

l

l

ô

l

l

l

l

l

ô

ô

Environmental, social, governance

ô

ô

ô

ô

l

ô

ô

l

l

l

Business and financial performance

Region/global business

l

l

ô

l

l

ô

l

l

ô

l

Financial performance

l

l

ô

l

l

ô

l

l

ô

l

Financial

Results and accounts

l

l

ô

ô

ô

ô

ô

ô

ô

ô

Dividends

l

l

ô

ô

ô

ô

ô

ô

ô

ô

Group financial resource planning

l

ô

ô

l

ô

ô

ô

ô

ô

l

Risk

Risk function

l

l

ô

l

l

ô

l

ô

ô

l

Risk appetite

l

ô

ô

ô

ô

ô

l

l

ô

l

Capital and liquidity adequacy

l

ô

l

l

ô

ô

ô

ô

ô

ô

Regulatory

Regulatory and legal matters2

ô

l

l

l

l

l

l

l

ô

l

Regulatory matters with regulators in attendance3

ô

ô

ô

ô

ô

ô

l

l

ô

ô

External

External insights

ô

l

ô

l

ô

ô

l

ô

ô

l

Technology

Strategic and operational

l

ô

ô

ô

ô

ô

l

ô

l

l

People and culture

Purpose, values and engagement

l

l

ô

l

ô

ô

ô

l

ô

ô

Governance

Subsidiary governance framework

ô

l

ô

ô

ô

ô

ô

ô

ô

ô

Policies and terms of reference

l

ô

ô

l

ô

l

l

ô

ô

ô

Board/committee effectiveness

l

ô

ô

ô

ô

ô

ô

ô

ô

ô

Appointment and succession

l

l

l

ô

l

l

l

ô

ô

ô

 

AGM and resolutions

l

l

ô

l

l

ô

ô

ô

ô

ô

1  No formal Board meetings were held during August and October 2021.

2  Includes resolvability assessment framework, modern slavery and human trafficking, statement of business principles and code of conduct, regional updates and listing renewals.

3  Meetings attended by members of the Financial Conduct Authority, Prudential Regulation Authority, Monetary Authority of Singapore, Hong Kong Monetary Authority.

 

The Board and its committees are committed to regular, independent evaluation of their effectiveness at least once every three years.

In 2020, the Nomination & Corporate Governance Committee invited Dr Tracy Long of Boardroom Review Limited to support the Board with its annual evaluation and to conduct a follow-up review on the Board's progress against the findings and recommendations from her 2019 report.

In 2021, the Nomination & Corporate Governance Committee approved the conducting of an internal evaluation of the Board and its committees, with the assistance of an externally facilitated questionnaire system managed by Lintstock, an independent service provider with no other connection to the Group or any individual Director. The questions were designed by the Group Company Secretary and Chief Governance Officer and included some of the themes addressed by Dr Long's previous reviews, namely: leadership, shared perspective, culture, end-to-end governance and future thinking. A summary of the effectiveness reviews of the Board and the Board committees can be found on page 235 and in the respective committee reports on pages 237 to 267.

To gather qualitative feedback the Group Company Secretary and Chief Governance Officer, together with the Deputy Group Secretary, conducted one-to-one interviews with all questionnaire respondents, including all the Board Directors, regular attendees of the relevant meetings and key advisers. The Group Chairman and committee chairs also participated in additional discussion following the consolidation of feedback in respect of the individual committees.

 

In general, there were consistent findings across the Board and committee reviews. These included: a desire to be more forward looking; more discussion of contextual matters such as economic, social, and geopolitical issues; maintaining a supportive and challenging relationship between the Board, its committees and senior management; providing clear governance for our subsidiaries; and a more consistent approach in leading and living the Group purpose and values.

At its January 2022 meeting, the Board considered the findings and noted the following areas of focus:  in person Board and committee meetings; succession planning; diversity in Board composition including the need for more Asian and banking experience; prioritising digital opportunities; and more Board meeting time dedicated to customers.

The Group Chairman led a discussion at which the Board agreed the actions and priorities to be implemented, which will be monitored and addressed on an ongoing basis. Similar discussions were carried out by each of the committee chairs in their respective January meetings. Progress against these actions will be included in the Annual Report and Accounts 2022.

During 2021, a review of the Group Chairman's performance was led by the Senior Independent Director in consultation with the other independent non-executive Directors, management and key stakeholders. Non-executive Directors also undergo regular individual reviews with the Group Chairman. These reviews confirmed that the performance of the Group Chairman and each Director was effective and that each had met their time commitments during the year.

The review of executive Directors' performance, which helps determine the level of variable pay they receive each year, is contained in the Directors' remuneration report on page 268.
 

 

Summary of 2020 Board effectiveness recommendations and actions:

 

Recommendation from the evaluation

Progress against recommendations

 

• Continue to focus on Board succession planning, building on the progress made during 2020 to facilitate and manage succession for Board and committee positions, cognisant of diversity in all aspects and making full use of external advisers and skills matrix analysis.

• Embed executive succession so that it translates into a stronger, more diversified talent pool for future senior leadership.

Significant time has been allocated at Nomination & Corporate Governance Committee meetings to discuss these items. An additional session was held in March to discuss Board and committee composition, and senior executive changes. Discussions have included succession candidates at the layer below the GEC, and plans to simplify the senior grade structure at managing director level and above.

Progress reports for the Asia talent programme were submitted to Nomination & Corporate Governance Committee meetings, with the first received at the May meeting.

 

 

 

 

• Optimise use of Board information to enhance testing of the effectiveness of the strategic and business plans with reference to the evolving external factors and competitive landscape across its key markets.

The Board operating rhythm continues to be effective. Positive feedback from non-executive and executive Directors confirmed that the Board Oversight Sub-Group is valuable for all stakeholders.

We have made use of the expertise and experience of our non-executive Directors by rotating attendance at our Board Oversight Sub-Group meetings, according to the topic to be discussed.

Regular feedback is sought from members of the GEC and the Board to ensure that the Board operating rhythm continues to support the Group's decision making.

 

 

 

 

• Continue to review and determine the culture and key behaviours required to support the delivery of the revised strategy with a clear focus on pace and execution.

The Board Oversight Sub-Group meetings supported both the executive Directors and the Board to take strategic decisions in a timely manner, and ensure effective use of time in Board meetings. The enhanced strategy was announced alongside the 2021 interim results, including the Group's proposed disposal of the US retail banking franchise.

Cadence of reporting to the Board in support of its oversight of culture was  agreed. This takes place twice per year alongside updates on workforce engagement. The Board has adopted a 'culture moment' at the beginning of each meeting.

 

 

 

 

• Maintain and evolve good quality papers and presentations to the Board to continue providing insight and supporting informed decision making

The Group's new Board paper template and guidance on the most effective writing approach has now been implemented across the Board and committee meetings.

We also provided presenter and chair training to members of the Group Executive and wider management.

 

 

Summary of 2021 Board effectiveness recommendations and actions

 

Findings from the evaluation

Recommendations for action

 

• The Board's overall skills and capability, and diversity and inclusion representation, could be improved, particularly with Asian background and banking experience.

• Significant collective knowledge of existing chairs who are all extremely able and active in their roles must be considered as part of succession planning.

• Strong relationships exist among Board members and senior management with the Board providing appropriate challenge and support  as necessary.

• The Board Oversight Sub-Group has been a useful forum for Directors and senior management to hold discussions in advance of Board meetings.

• There is a strong desire to return to in-person meetings. The Group Chairman was complimented on his management of meetings and Board communication throughout the pandemic.

• Increased engagement outside of formal meetings with executives and employees to aid focused, informed and efficient discussion in formal meetings was welcomed.

The Board will support the Nomination & Corporate Governance Committee's focus on identifying and securing additional Board members, reflecting on the membership of the committees, and with a particular focus on Hong Kong, mainland China and south-east Asian representation, as well as banking expertise and diversity. In addition, through the Nomination & Corporate Governance Committee, the Board should consider the tenure of the Chairs of the Board, the Group Audit Committee and the Group Risk Committee to ensure there is well planned succession so as not to lose their collective knowledge and experience within too short a space of time.

The Board will explore different approaches to in-person meetings during 2022 to allow members to meet face to face in different locations, and to continue to facilitate communication between the Board and management.

The Board will support an appropriate level of employee and customer engagement outside formal meetings while ensuring both receive adequate time on the Board agenda.

 

 

 

 

• Board meetings were efficiently and effectively managed, in terms of the logistics and support, as well as the quality of materials which had improved during the year as a result of the introduction of the new templates. Continuation of that improvement would help the effort to reduce length, improve timelines and drive clarity.

• The Board should build on foundational work to date to provide greater clarity on climate matters, and more broadly ESG issues.

• The Board should increase its focus on understanding of - and attention to - customers, and also digital opportunities and threats.

• Strategic oversight was highly regarded overall, with a request for the development of Board materials to more easily track progress of the strategic priorities. Attention to execution, prioritisation, capability and capacity were recurring themes.

Senior management will clearly articulate progress against strategic objectives in Board materials, particularly in relation to relevant strategic levers and prioritisation. The forward agenda planner will capture the key areas of future focus, particularly ESG, digital and customer issues.

The improvement in style and content of Board and committee papers will continue in 2022 with the Corporate Governance and Secretariat facilitating management's commitment to improving information to the Board.

A 2022 Board meeting will include digital opportunities and threats as an agenda item.

 

 

 

 

• The Board oversaw risk matters as part of its dedicated sessions but suggested more focus on emerging risks and consideration of 'what keeps management awake at night' with forward-looking discussion and debate at Board meetings in addition to at the Group Risk Committee.

The Board will hold two forward-looking strategic risk discussions per year focused on emerging areas of threat and/or opportunity, to ensure that the Board is considering how to maximise growth opportunities and appropriate mitigants.

 

 

 

 

• The Board should continue to evolve good quality papers and presentations at meetings to continue providing insight, and support for, informed decision making.

Through the subsidiary accountability framework, the Board will continue to monitor progress of governance of principal subsidiaries and maintain subsidiary director interactions through the annual virtual Non-Executive Director Summit.

 

 

 

 

• The Board should look to improve coordination between Board committees and the Technology Governance Working Group to ensure minimal overlap in content and optimal coverage of relevant matters, and ensure appropriate reporting to the Board for discussion.

The Board will undertake a review of the Board committees' and Technology Governance Working Group's terms of reference, with particular reference to technology, transformation, data, cyber-related matters and ESG matters. In each case, the Board will ensure that there is clarity as to the remit and responsibilities of each committee and the Technology Governance Working Group, with a view to reducing any duplication and ensuring optimal coverage of relevant matters. Enhanced planning will be implemented across Board and committee agendas to improve rhythm of topics for discussion by the Board.

 

 

 

 

Board committees

 

 

Nomination & Corporate Governance Committee

 

 

 

The Committee has overseen another year of significant activity, with a number of changes to the Board and senior executive team, as well as to our subsidiary governance practices.

 

Dear Shareholder

I am pleased to present the Nomination & Corporate Governance Committee report, which provides an overview of the work of the Committee and its activities during the year.

The Committee has overseen another year of significant activity, with a number of changes to the Board and senior executive team, as well as to our subsidiary governance practices.

Executive development and succession has continued to be a priority for the Committee, with various joiners approved throughout the year, improving the capability and depth of our senior leadership team. This included the approval of a new senior leadership structure with an expanded Group Executive Committee and a new General Manager cohort with enterprise-wide responsibilities. The Committee has supported the establishment of a flagship development programme for senior executives and the first HSBC Bank Director Programme, which aims to prepare senior talent for roles on subsidiary boards.

Significant progress has also been made in enhancing our subsidiary governance practices over recent years, with further improvements made during 2021. In accordance with the recommendation arising from the subsidiary governance review undertaken in 2020, we implemented a refreshed subsidiary accountability framework, which now applies to all HSBC subsidiaries on a proportionate basis and provides greater clarity on the Group's expectations of subsidiary boards. A key element of this has been succession planning for our principal and material subsidiary boards, with the Committee overseeing all succession plans and considering requests for exceptions from the requirements of the framework.

As we look ahead to the remainder of 2022, the Committee will continue to play an important role in overseeing our work in improving the standards of corporate governance across HSBC and achieving our ambition of world class governance.

 

Mark E Tucker

Chair

Nomination & Corporate Governance Committee

22 February 2022

 

Membership

 

Member since

Meeting attendance in 2021

Mark Tucker (Chair)

Oct 2017

8/8

Laura Cha1

May 2014

4/4

Henri de Castries1

Apr 2018

4/4

Rachel Duan2

Sep 2021

2/2

Dame Carolyn Fairbairn2

Sep 2021

2/2

James Forese

May 2020

8/8

Steven Guggenheimer

May 2020

8/8

Irene Lee

Apr 2018

8/8

José Antonio Meade Kuribreña

Apr 2019

8/8

Eileen Murray3

Jul 2020

7/8

Heidi Miller1

Apr 2018

4/4

David Nish

Apr 2018

8/8

Jackson Tai

Apr 2018

8/8

Pauline van der Meer Mohr

Apr 2016

8/8

1  Laura Cha, Henri de Castries and Heidi Miller stepped down from the Board following the conclusion of the AGM on 28 May 2021.

2  Rachel Duan and Dame Carolyn Fairbairn were appointed to the Board on 1 September 2021.

3  Eileen Murray was unable to attend the December committee meeting for personal health reasons.

Key responsibilities  

The Committee's key responsibilities include:

• leading the process for identifying and nominating candidates for appointment to the Board and its committees;

• overseeing succession planning and development for the Group Executive Committee and other senior executives; and

• overseeing and monitoring the corporate governance framework of the Group and ensuring that this is consistent with best practice.

Committee governance

The Group Chief Executive, Group Chief Human Resources Officer and Group Company Secretary and Chief Governance Officer routinely attended Nomination & Corporate Governance Committee meetings.

Russell Reynolds Associates, which supported the Committee and the management team in relation to Board and senior executive succession planning, regularly attended meetings during the year. It has no other connection with the Group or members of the Board.

The Group Company Secretary and Chief Governance Officer ensured that the Committee fulfilled its governance responsibilities, considering input from various stakeholders when finalising meeting agendas and tracking progress on actions and Committee priorities.

Board composition and succession

The main focus of the Committee during 2021 was on succession planning for the Board and committees. The Committee keeps the composition of the Board and its committees under constant review and continually strives to ensure that the membership, both individually and collectively, has the skills, knowledge and experience necessary to oversee, challenge and support management in the achievement of the Group's strategic and business objectives.

There were a number of retirements from the Board during the year, with Henri de Castries, Laura Cha and Heidi Miller retiring at the conclusion of the 2021 AGM. In addition, since the year-end, we announced that Irene Lee and Pauline van der Meer Mohr would retire from the Board at the conclusion of the 2022 AGM. The Committee is actively considering Pauline's successor as Chair of the Group Remuneration Committee and will provide an update in due course. 

The Committee considered both the short-term and long-term succession needs to identify candidates for immediate appointment, and to develop a pipeline for potential future appointments. This will ensure that the longer-term shape of the Board is well aligned to our purpose, strategy and values, and provides relevant skills, experience and knowledge of our priority markets.

In late 2020, the Committee engaged Russell Reynolds Associates to conduct a thorough and robust search to identify prospective candidates for appointment to the Board. This identified a number of potential candidates who met our agreed search criteria, which reflected prior feedback from stakeholders including investors, regulators and the management team. This was initially reviewed by the Group Chairman, with potential candidates presented and discussed by the Committee at various meetings during 2021. Following consideration by the Committee, and meetings between various members of the Committee and priority candidates to understand their interest and capacity, the Board approved the appointments of Rachel Duan and Dame Carolyn Fairbairn with effect from 1 September 2021.

A search for additional non-executive Director candidates, which looks to enhance the Board's collective knowledge and experience of banking and Asia in particular, was initiated during 2021. The search will also look to further enhance diversity on the Board in line with its diversity and inclusion policy. The Committee's search was again supported by Russell Reynolds. The Committee is actively progressing this search and will provide an update in due course.

Board diversity

The Board recognises the importance of gender, social and ethnic diversity, and the strengths this brings to Board effectiveness. There was a significant focus on diversity at Board and senior executive levels in 2021, with consultations issued by our UK regulators and the UK Listing Authority. We are well positioned against the proposals outlined in those consultations and, in line with the Board diversity and inclusion policy, remain committed to increasing diversity at Board and senior levels to ensure we reflect the markets and societies we serve. The policy, which was updated in 2021 to incorporate new targets on female representation, details our approach to achieving our diversity ambitions, and helps to ensure that diversity and inclusion factors are taken into account in succession planning. The revised Board diversity and inclusion policy is available at www.hsbc.com/who-we-are/leadership-and-governance/board-responsibilities.

At the end of 2021, we had a 38% female Board representation, with five female Board members out of 13. Our aspirational female representative target is at least 40% by the end of 2023, aligned to the recommendation in the final Hampton-Alexander Review. We continue to exceed the Parker Review target of at least one Director from an ethnic minority background by 2021, with four members of our Board self-identifying in line with the ethnicity/ethnic definition set by Parker. Given the global and international nature of HSBC, including our strong presence and heritage in Asia, the Committee expects the composition of the Board to exceed the current Parker Review recommendations. In line with our purpose and values, the Board believes that a diverse and inclusive Board, reflective of the communities we serve, is key to effective decision making and to developing a sustainable and successful business for HSBC.

Further details on activities to improve diversity across senior management and the wider workforce, together with representation statistics, can be found on page 72.

Independence

Independence is a critical component of good corporate governance, and is a principle that is applied consistently at both Holdings and subsidiary level. The Committee has delegated authority from the Board in relation to the assessment of the independence of non-executive Directors. In accordance with the UK and Hong Kong Corporate Governance Codes, the Committee has reviewed and confirmed that all non-executive Directors who have submitted themselves for election and re-election at the AGM are considered to be independent. This conclusion was reached after consideration of all relevant circumstances that are likely to impair, or could appear to impair, independence.

Senior executive succession and development

The Group Executive Committee underwent a period of significant change during 2021 and engaged Russell Reynolds to identify the best talent for roles on the committee. The changes included the addition of three new roles, as well as the appointments of new Co-Chief Executives for our Asia-Pacific region. These appointments recognised the leadership and capabilities that the Group requires to deliver our strategic commitments.

Succession plans for the Group Executive Committee members were approved at the Nomination & Corporate Governance Committee meeting in December. These reflected continued efforts to support the development and progression of diverse talent and promote the long-term success of the Group.

The Committee also discussed progress under the Asia talent programme, which aims to support the development of potential future leaders from the Group's key region. The initiative exceeded the target of appointing the top talent from the region into stretch roles as part of their development. As part of succession plans, we also identified at least one credible successor of Asia heritage for the region's key roles. Other regions across the Group have begun work to replicate the success in Asia, with updates on their efforts to be provided to the Committee during 2022.

Committee evaluation

The annual review of the effectiveness of the Committee was internally facilitated in 2021. The review concluded that the Committee continued to operate effectively, with a number of positive aspects of the Committee's operation and practices highlighted. Areas for improvement that were identified included the Committee's succession planning practices, and the need to review the support and guidance provided in relation to executive succession activity, including the expectations of leaders in relation to succession preparedness. The Committee discussed the outcomes of the evaluation in January 2022, and endorsed the findings and actions to be taken. The outcomes of the evaluation have been reported to the Board and the Committee will track progress on the recommendations through the year.

Subsidiary governance

The importance of robust, effective and proportionate governance at all levels of the Group is critical, with the 2020 subsidiary governance review of principal subsidiaries identifying a number of areas of good practice and areas where further improvement would be beneficial.

One of the recommended areas for improvement was a refresh of the existing subsidiary governance policy, and the subsidiary accountability framework, to provide greater clarity and guidance on the Group's expectations of various subsidiaries. The refreshed framework, which included additional principles, underpinned by provisions and detailed guidance, took effect from 1 April 2021.

Subsidiary board composition and ensuring effective succession planning practices were key objectives of the refreshed framework. The subsidiary governance review also recommended that guidance should be developed and enhanced with additional provisions to support effective board composition and succession planning. It also expected that boards should use a skills matrix. In connection with the revised expectations, all principal and material subsidiaries submitted their succession plans for the Committee's review. The Committee approved a number of required exceptions from strict compliance with the framework to manage transition for a limited period, and to reflect varying market practices, laws and regulations across our markets.

As part of efforts to make greater use of the skills, expertise and experience among our senior employees for roles on subsidiary boards, the Committee approved the development of the HSBC Bank Director Programme. This programme seeks to equip our internal talent with the appropriate skills and knowledge required to serve on a HSBC subsidiary board. The initiative was developed following consultation with our principal subsidiary chairs, who supported the greater use of an internal talent pool on subsidiary boards, where permitted by applicable laws and regulations.
 

Business governance review

Following the success of the 2020 review, an equivalent review of the executive governance practices across our three global businesses, Wealth and Personal Banking, Commercial Banking and Global Banking and Markets, was conducted during the fourth quarter of 2021. This work had the strong support of the Group Executive Committee, and involved desktop reviews, meeting observations and interviews.

Overall, the review concluded that the governance of the three global businesses operated effectively, and had improved as a

 

result of governance simplification initiatives sponsored by the Group Executive Committee. The main opportunities for improvement related to further simplification of governance structures. In particular, the role of the global business governance forums within regions and countries will be considered to avoid duplication by ensuring that their roles and responsibilities are clear and distinct.

The findings and recommendations from the review were discussed and endorsed by the Committee in January 2022, with oversight of the actions and next steps to be overseen by the respective global business executive committees and the Group Executive Committee.

 

Matters considered during 2021

 

Jan

Feb

Mar

Apr

May

Jul

Sep

Dec

Board composition and succession

 

 

 

 

 

 

 

 

Board composition, including succession planning and skills matrices

l

l

ô

l

l

l

l

l

Approval of diversity and inclusion policy

ô

ô

ô

ô

l

ô

ô

ô

Executive talent and development

 

 

 

 

 

 

 

 

Senior executive succession

l

l

l

l

l

l

l

ô

Approval of executive succession plans

ô

ô

ô

ô

ô

ô

ô

l

Talent programmes

ô

l

ô

ô

l

l

ô

ô

Governance

 

 

 

 

 

 

 

 

Board and committee evaluation

ô

ô

ô

l

ô

ô

l

l

Subsidiary governance

l

ô

ô

ô

ô

l

l

l

Subsidiary and executive appointments

l

l

ô

l

l

l

l

l

 

 

 

 

 

Group Audit Committee

 

 

 

 

"In 2021, the Group Audit Committee carried out significant development in our internal financial controls and regulatory reporting processes to meet a number of challenges."

Dear Shareholder

The Group Audit Committee ('GAC') had a busy agenda in 2021.

We carried out significant development in our internal financial controls and regulatory reporting processes to help meet the challenges of organisational transformation, the continued impact of the Covid-19 pandemic, a changing regulatory landscape and the growing demand for better and more ESG and climate reporting.

To ensure alignment of priorities and understand local challenges, I attended a number of principal subsidiary audit committee meetings. These were supplemented with regular communications that we cascade through the Group, informal meetings with audit committee chairs and a breakout session on key areas for focus at the Non-Executive Director Summit in July 2021.

I regularly met the whistleblowing team to discuss material whistleblowing cases and the effectiveness of whistleblowing arrangements. The GAC spent significant time considering enhancements to whistleblowing arrangements, management's responses to internal audit findings and the thematic and cultural insights that could be used to improve the speak-up culture.

The Committee received regular updates from the Group Chief Financial Officer and the Group Head of Internal Audit on functional transformation, its impact on the control environment and the capacity and capabilities of the functions. The Committee also invited the Global Finance Executive Committee for a private session, and I attended a session of the Global Internal Audit Executive Committee to discuss key topics and themes from a management perspective. 

Recognising the importance of providing enhanced trust in reporting to all stakeholders, the Committee provided a detailed response to the UK Government's consultation paper on 'Restoring Trust in Audit and Corporate Governance'.

The Committee implemented all the actions from the 2020 evaluation. The 2021 review determined that the GAC continued to operate effectively.

Eileen Murray stepped down as a member at the 2021 AGM. The Committee continues to have a wide range of financial services experience and I would like to thank all the GAC members and management for their diligent contributions and support to the work of the Committee during the year.

 

David Nish

Chair, Group Audit Committee, 22 February 2022

Membership

 

Member since

Meeting attendance

 in 20211

David Nish (Chair)

May 2016

11/11

James Forese2

May 2020

10/11

Eileen Murray3

Jul 2020

5/6

Jackson Tai

Dec 2018

11/11

Pauline van der Meer Mohr4

Apr 2020

10/11

1  These included two joint meetings with the Group Risk Committee.

2  James Forese was unable to attend one meeting due to extreme weather conditions disrupting air travel.

3  Eileen Murray was unable to attend one meeting due to personal circumstances and stepped down from the Group Audit Committee on 28 May 2021.

4  Pauline van der Meer Mohr was unable to attend one meeting due to personal circumstances and another due to a prior commitment.

Key responsibilities  

The Committee's key responsibilities include:

• monitoring and assessing the integrity of the financial statements, formal announcements and regulatory information in relation to the Group's financial performance, as well as significant accounting judgements;

• reviewing the effectiveness of, and ensuring that management has appropriate internal controls over, financial reporting;

• reviewing and monitoring the relationship with the external auditor and overseeing its appointment, tenure, rotation, remuneration, independence and engagement for non-audit services;

• overseeing the Group's policies, procedures and arrangements for capturing and responding to whistleblower concerns and ensuring they are operating effectively; and

• overseeing the work of Global Internal Audit and monitoring and assessing the effectiveness, performance, resourcing, independence and standing of the function.

Committee governance  

The Committee keeps the Board informed and advises on matters concerning the Group's financial reporting requirements to ensure that the Board has exercised oversight of the work carried out by management, Global Internal Audit and the external auditor.

Committee meetings usually take place a couple of days before Board meetings to allow the Committee to report its findings and recommendations in a timely and orderly manner. This is done through the Chair who comments on matters of particular relevance. The Board also receives copies of the Committee agenda and minutes of meetings.

The Group Chief Executive, Group Chief Financial Officer, Group Head of Finance, Global Financial Controller, Group Head of Internal Audit, Group Chief Risk and Compliance Officer, Group Company Secretary and Chief Governance Officer and other members of senior management routinely attended meetings of the GAC. The external auditor attended all meetings.

The Chair held regular meetings with management, Global Internal Audit and the external auditor to discuss agenda planning and specific issues as they arose during the year outside the formal Committee process. The Committee also regularly met separately with the internal and external auditors and other senior management to discuss matters in private.

The Committee Secretary regularly met with the Chair to ensure the Committee fulfilled its governance responsibilities, and to consider input from stakeholders when finalising meeting agendas, tracking progress on actions and Committee priorities. 

 

 

Matters considered during 2021

 

 

 

 

 

Jan

Feb

Mar

Apr

Jun

Jul

Sep

Oct

Nov

Dec

Reporting

 

 

 

 

 

 

 

 

 

 

Financial reporting matters including:

-  review of financial statements, ensuring that disclosures are fair, balanced and understandable

-  significant accounting judgements

-  going concern assumptions and viability statement

-  supplementary regulatory information

l

l

ô

l

l

l

l

l

l

l

ESG and climate reporting

l

l

ô

ô

ô

l

ô

l

l

l

Regulatory reporting-related matters

l

l

l

l

l

l

l

ô

ô

l

Certificates from principal subsidiary audit committees

ô

l

ô

ô

ô

l

ô

ô

ô

ô

Control environment

 

 

 

 

 

 

 

 

 

 

Control enhancement programmes

l

l

l

l

l

l

l

l

ô

ô

Group transformation

l

ô

ô

ô

l

ô

l

l

ô

l

Review of deficiencies and effectiveness of internal financial controls

l

l

ô

l

l

l

l

l

ô

l

Internal audit

 

 

 

 

 

 

 

 

 

 

Reports from Global Internal Audit

l

l

ô

l

ô

l

ô

l

ô

l

Annual audit plan, independence and effectiveness

l

ô

ô

l

ô

l

ô

ô

ô

l

External audit

 

 

 

 

 

 

 

 

 

 

Reports from external audit, including external audit plan

l

l

ô

l

l

l

l

l

ô

l

Appointment, remuneration, non-audit services and effectiveness

l

l

ô

l

l

ô

ô

l

ô

ô

Compliance

 

 

 

 

 

 

 

 

 

 

Accounting standards and critical accounting policies

l

l

ô

ô

ô

ô

ô

ô

ô

l

Corporate governance codes and listing rules

ô

l

ô

ô

ô

l

ô

ô

ô

ô

Whistleblowing

 

 

 

 

 

 

 

 

 

 

Whistleblowing arrangements and effectiveness

ô

l

ô

ô

l

ô

ô

ô

ô

l

 

 

Compliance with regulatory requirements

The Board has confirmed that each member of the Committee is independent according to the criteria from the US Securities and Exchange Commission, and the Committee continues to have competence relevant to the sector in which the Group operates. The Board has determined that David Nish and Jackson Tai are 'financial experts' for the purposes of section 407 of the Sarbanes-Oxley Act and have recent and relevant financial experience for the purposes of the UK and Hong Kong Corporate Governance Codes.

The GAC Chair had regular meetings with the regulators, including the UK's PRA and the Financial Conduct Authority ('FCA'). These included trilateral meetings involving the Group's external auditor PwC.

The Committee assessed the adequacy of resources of the accounting and financial reporting function. It also monitored the legal and regulatory environment relevant to its responsibilities.

How the Committee discharged its responsibilities

Connectivity with principal subsidiary audit committees

The Committee maintains a close working relationship with the principal subsidiary audit committees through formal and informal channels.

On a half-year basis, principal subsidiary audit committees provide certifications to the GAC regarding the preparation of their financial statements, adherence to Group policies and escalation of any issues that require the attention of the GAC. Recognising the additional focus on prudential regulatory reporting, the GAC sought additional information via these certifications regarding the governance, review and assurance activities undertaken by the principal subsidiary audit committees in relation to prudential regulatory reporting.

The GAC Chair regularly met with the chairs of the principal subsidiary audit committees, and attended meetings to enable close links and deeper understanding on judgements around key issues. Certain chairs and audit committee members from the principal subsidiary audit committees were also invited to attend meetings of the GAC on relevant topics.

At the Non-Executive Director Summit, the GAC Chair engaged with a number of subsidiary non-executive Directors in a breakout session to discuss key focus areas, including regulatory reporting, ESG and climate reporting and whistleblowing arrangements.

Regular post-meeting communications to principal subsidiary audit chairs were supplemented with informal quarterly catch-ups with a group of the audit committee chairs. These provided opportunities for the discussion of key matters impacting subsidiaries and the Group in between formal meetings.

Internal controls

In 2021, the GAC devoted significant time in overseeing management's approach to enabling a sustainable transformation of the control environment that supports financial, prudential regulatory and other regulatory reporting to meet the evolving expectations of regulators and other stakeholders. The programme will drive end-to-end organisational alignment so that principles and control standards can be designed to deliver a more integrated, standardised and automated control environment. The Committee received regular updates on the mobilisation of the programme workstreams, resourcing and engagement throughout the Group and with regulators. The oversight and implementation of the programme and its component parts will be a key focus for the Committee in 2022.

The Committee received regular updates and confirmations that management had taken, or was taking, the necessary actions to remediate any failings or weaknesses identified through the operation of the Group's framework of controls. For further details on how the Board reviewed the effectiveness of key aspects of internal control, see page 291.

As required by the Sarbanes-Oxley Act, the GAC received updates on the Group's work on section 404 compliance and the Group's broader financial control environment during the year. This was to assess the effectiveness of the internal control system for financial reporting and any developments affecting it. Based on this work, the GAC recommended that the Board support the assessment of the internal controls over financial reporting. 

Financial reporting

The Committee is responsible for reviewing the Group's financial reporting during the year, including the Annual Report and Accounts, Interim Report, quarterly earnings releases, analyst presentations and, where material, Pillar 3 disclosures and other items arising from the review of the Group Disclosure Committee. As part of its review, the GAC:

• evaluated management's application of critical accounting policies and material areas in which significant accounting judgements were applied;

• focused on compliance with disclosure requirements to ensure these were consistent, appropriate and acceptable under the relevant financial and governance reporting requirements;

• provided advice to the Board on the form and basis underlying the long-term viability statement; and

• gave careful consideration to the key performance metrics related to strategic priorities and ensured that the performance and outlook statements were fair, balanced and reflected the risks and uncertainties appropriately.

In conjunction with the Group Risk Committee ('GRC'), the GAC considered the current position of the Group, along with the emerging and principal risks, and carried out a robust assessment of the Group's prospects, before making a recommendation to the Board on the Group's long-term viability statement. The GAC also undertook a detailed review before recommending to the Board that the Group continues to adopt the going concern basis in preparing the annual and interim financial statements. Further details can be found on page 41.

Fair, balanced and understandable

Following review and challenge of the disclosures, the Committee recommended to the Board that the financial statements, taken as a whole, were fair, balanced and understandable. The financial statements provided the shareholders with the necessary information to assess the Group's position and performance, business model, strategy and risks facing the business, including in relation to the increasingly important ESG considerations.

The Committee reviewed the draft Annual Report and Accounts 2021 and results announcements to enable input and comment. It was supported by the work of the Group Disclosure Committee, which also reviewed and assessed the Annual Report and Accounts 2021 and investor communications.

This work enabled the GAC to provide positive assurance to the Board to assist them in making the statement required in compliance with the 2018 UK Corporate Governance Code.

ESG and climate reporting

During the year, the GAC reviewed the strategy, scope and status of ESG and climate reporting, including the climate change resolution and scenario analysis disclosure. Management updates were also informed by an HSBC-specific stakeholder feedback survey, which highlighted the appetite for more detailed ESG disclosures on climate metrics, emissions targets and plans on how these would be achieved. The Committee considered the operational, disclosure and litigation risks, which could arise from making further external commitments related to ESG and climate reporting. 

The development of methodologies, tools and data to support our ESG strategy remained a key challenge. The GAC discussed management plans to enhance and assure internal and external ESG data sourcing across the Group to develop a common ESG data inventory. The Committee considered the approach to subsidiary reporting, in particular the availability of granular data to support the Group subsidiaries in fulfilling their mandatory disclosure requirements.

Management updated the Committee on the verification and assurance framework to ensure that ESG and climate disclosures were materially accurate, consistent, fair and balanced. The GAC discussed the roles and work of the three lines of defence as part of this framework, as well as proposals for PwC to perform further limited assurance over specific ESG-related metrics.

The Committee oversaw and challenged management on the proposals to further expand the ESG review section of the Annual Report and Accounts to incorporate additional disclosures. These include the integration of TCFD disclosures, which were previously published in a stand-alone supplement, and net zero disclosures in relation to the special shareholder resolution on climate change. 

The GAC and the GRC held a joint meeting to review the progress made to deliver on the commitment - under the climate change special resolution - to publish a policy to phase out the financing of coal-fired power and thermal coal mining. The committees discussed the positions taken, and the risks associated with the policy, as well as the methodology for capturing and reporting the emissions data across the financing portfolio.

Regulatory reporting

The GAC focused on what improvements were required to regulatory reporting processes and controls, which were operating outside the Board's risk tolerance. The Committee continued to focus heavily on the quality and reliability of regulatory reporting to strengthen the end-to-end processes to meet regulatory expectations. It also challenged management on the scope of the regulatory reporting enhancement programmes. This was in response to findings from HSBC-specific external reviews and other regulatory pronouncements including the PRA's 'Dear CEO' letter on thematic findings on the reliability of regulatory reporting across the industry. The Committee Chair invited certain principal subsidiary audit committee members to GAC meetings to participate in discussions to ensure alignment and understanding of key issues and ongoing regulatory engagement.

Management discussed root cause themes, remediation of known issues and areas of increased risk identified from the risk-based read-across exercise. The Committee considered the near-term actions being taken by management, as well as the strategic remediation plan, including the costs, resources and time for implementation. It also challenged management on the delivery risks and the dependency on other ongoing programmes.

Management also highlighted potential impacts on some of the Group's regulatory ratios, such as CET1 and LCR, and adjustments required to external disclosures.

UK audit reform

The Committee spent significant time in reviewing a UK Government consultation paper - from the Department of Business,  Energy and Industrial Strategy - on 'Restoring Trust in Audit and Corporate Governance'. The GAC oversaw the development of the direct HSBC response to the consultation, as well as management's engagement across a number of industry bodies to understand wider views.

In addition, the Committee discussed the management activities being undertaken in preparation for future stages of the consultation. The GAC took steps to review its audit and assurance policy and expand assurance in certain areas, particularly regulatory reporting and ESG. The Committee also considered the impact on the future audit tender strategy, and will be looking to tender in advance of the 10-year rotation point. The Committee has proactively started engagement with the Big Four and challenger audit firms, as part of its preparations.

The Committee will continue to monitor outcomes and next steps arising from the UK Government's consultation.

External auditor

The GAC has the primary responsibility for overseeing the relationship with the Group's external auditor, PwC.

PwC completed its seventh audit, providing robust challenge to management and sound independent advice to the Committee on specific financial reporting judgements and the control environment. The senior audit partner is Scott Berryman who has been in the role since 2019. The Committee reviewed the external auditor's approach and strategy for the annual audit and also received regular updates on the audit, including observations on the control environment. Key audit matters discussed with PwC are set out in its report on page 298.

External audit plan

The GAC reviewed the PwC external audit approach, including the materiality, risk assessment and scope of the audit. The Committee invited a number of the principal subsidiary audit partners to discuss their priorities as part of the review of the external audit plan.

PwC highlighted the changes being made to their approach to enhance the quality and effectiveness of the audit. Changes for the 2022 audit included more auditing being performed centrally across legal entities and the increased use of technology solutions, some of which are aligned to technology change and transformation activities across HSBC.

Effectiveness of external audit process

The GAC assessed the effectiveness of PwC as the Group's external auditor, using a questionnaire that focused on the overall audit process, its effectiveness and the quality of output. PwC highlighted the actions being taken in response to the HSBC effectiveness review, including the development of audit quality indicators, which would provide a balanced scorecard and transparent reporting to the GAC. These focused on the following areas:

• findings from inspections across the Group on PwC as a firm;

• the hours of audit work delivered by senior PwC audit team members, the extent of specialist and expert involvement, delivery against agreed timetable and milestones and the use of technology;

• any new control deficiencies in Sarbanes-Oxley locations, proportion of management identified deficiencies and delivery of audit deliverables to agreed timelines; and

• outcomes and scores from annual audit surveys, independent senior partner reviews and prior period errors.

The GAC will continue to receive regular updates from PwC and management on the progress of the external audit plan and PwC performance across the audit quality indicators.

The GAC monitored the policy on hiring employees or former employees of the external auditor, and there were no breaches of the policy highlighted during the year. The external auditor attended all Committee meetings and the GAC Chair maintains regular contact with the senior audit partner and his team throughout the year.

Independence and objectivity

The Committee assessed any potential threats to independence that were self-identified or reported by PwC. The GAC considered PwC to be independent and PwC, in accordance with professional ethical standards and applicable rules and regulations, provided the GAC with written confirmation of its independence for the duration of 2021.

The Committee confirms it has complied with the provisions of the The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014 for the financial statements. The Committee acknowledges the provisions contained in the 2018 UK Corporate Governance Code in respect of audit tendering. In conformance with these requirements, HSBC will be required to tender for the audit for the 2025 financial year end and beyond, having appointed PwC from 1 January 2015.

The Committee believed it would not be appropriate to re-tender in 2021 as a change in auditor would have a significant impact on the organisation, including on the Global Finance function and would increase operational risk. In 2021, the Committee's priority was to monitor closely the ongoing industry developments and proposals on reform of the UK external audit market and the impact this may have on any tender process. As a result, the Committee has commenced planning for the next tender process in advance of the 10-year re-tender period, likely to take place no later than early 2023.

The Committee has recommended to the Board that PwC should be reappointed as auditor. Resolutions concerning the reappointment of PwC and its audit fee for 2022 will be proposed to shareholders at the 2022 AGM.

Non-audit services

The Committee is responsible for setting, reviewing and monitoring the appropriateness of the provision of non-audit services by the external auditor. It also applies the Group's policy on the award of non-audit services to the external auditor. The non-audit services are carried out in accordance with the external auditor independence policy to ensure that services do not create a conflict of interest. All non-audit services are either approved by the GAC, or by Group Finance when acting within delegated limits and criteria set by the GAC.

During the period, it was identified that PwC provided an impermissible training service via a publicly available seminar in respect of the implementation of a new Indonesian IT security regulation. The attendees at this seminar included six members of staff from HSBC Indonesia. The HSBC staff who attended the course were not from the Finance function and were not in roles relevant to the audit. In addition, HSBC Indonesia is not within the scope of the Group audit. In light of the nature and scope of the original service and the mitigating factors mentioned above, we do not believe that the provision of the service has affected PwC's professional judgement or integrity in respect of the audit of the Group. Mitigating actions have been implemented by both PwC and HSBC to reinforce the controls around the provision of non-audit services by PwC, including additional independence training and improved communication between relevant parties.

The non-audit services carried out by PwC included 69 engagements approved during the year where the fees were over $100,000 but less than $1m. Global Finance, as a delegate of GAC, considered that it was in the best interests of the Group to use PwC for these services because they were:

• audit-related engagements that were largely carried out by members of the audit engagement team, with the work closely related to the work performed in the audit;

• engagements covered under other assurance services that require obtaining appropriate audit evidence to express a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the subject matter information; or

• other permitted services to advisory attestation reports on internal controls of a service organisation primarily prepared for and used by third-party end users.

Ten engagements during the year were approved where the fees exceeded $1m. These were mainly engagements required by the regulator and incremental fees related to previously approved engagements, including the provision of services by PwC relating to the Section 166 Financial Services and Markets Act 2000 Skilled Person report. The PRA instructed a Section 166 review of HSBC's credit risk RWAs as reported at 31 December 2020 and agreed for PwC to provide a reasonable assurance opinion on the accuracy of the regulatory reporting at that date. One new engagement outside the scope of the pre-approved services related to preliminary advanced audit procedures for the adoption of IFRS 17 in 2023.

 

2021

2020

Auditors' remuneration

$m

$m

Total fees payable

  129.4 

  130.2 

Fees for non-audit services

  41.3 

  37.3 

 

Global Internal Audit

The primary role of the Global Internal Audit function is to help the Board and management protect the assets, reputation and sustainability of the Group. Global Internal Audit does this by providing independent and objective assurance on the design and operating effectiveness of the Group's governance, risk management and control framework and processes, prioritising the greatest areas of risk.

The independence of Global Internal Audit from day-to-day line management responsibility is critical to its ability to deliver objective audit coverage by maintaining an independent and objective stance. Global Internal Audit is free from interference by any element in the organisation, including on matters of audit selection, scope, procedures, frequency, timing, or internal audit report content. Global Internal Audit adheres to The Institute of Internal Auditors' mandatory guidance.

The Group Head of Internal Audit reports to the Chair of the GAC and there are frequent and regular meetings held between them. Results of audit work, together with an assessment of the Group's overall governance, risk management and control framework and processes are reported regularly to the GAC, GRC and local audit and risk committees, as appropriate. This reporting highlights key themes identified through audit activity, and the output from continuous monitoring. This includes business and regulatory developments and an independent view of emerging and horizon risk, together with details of audit coverage and any required changes to the annual audit plan.

Audit coverage is achieved using a combination of business and functional audits of processes and controls, risk management frameworks and major change initiatives, as well as regulatory audits, investigations and special reviews. In addition to the ongoing importance of regulatory-focused work, key risk theme categories for 2021 audit coverage were strategy, governance and culture, financial crime, conduct and compliance, financial resilience and operational resilience. In 2021, Global Internal Audit increased coverage on the Group's transformation programme and performed project audit activity for selected complex and high-priority business cases. Global Internal Audit also continued its 'real-time audit' approach, notably to cover areas of strategic importance. 'Real-time audits' provide real-time, independent ongoing observations to management, with issues being raised for significant observations that are not addressed in a timely manner. In addition, in 2021, Global Internal Audit implemented its revised 'culture audit' approach which assesses the impact of culture in supporting or inhibiting sustainable performance against strategic aspirations and managing risk within risk appetite. The approach combines internal audit and behavioural science principles, which align to regulator culture assessments and industry best practice.

Executive management is responsible for ensuring that issues raised by the Global Internal Audit function are addressed within an appropriate and agreed timetable. Confirmation to this effect must be provided to Global Internal Audit, which validates closure on a risk basis.

Consistent with previous years, the 2022 audit planning process includes assessing the inherent risks and strength of the control environment across the audit entities representing the Group. Results of this assessment are combined with a top-down analysis of risk themes by risk category to ensure that themes identified are addressed in the annual plan. Risk theme categories for the 2022 audit work continue to be strategy, governance and culture, financial crime, conduct and compliance, financial resilience and operational resilience. In 2022, a quarterly assessment of key risk themes will form the basis of thematic reporting and plan updates and will ultimately drive the 2023 planning process. The annual audit plan and material plan updates made in response to changes in the Group's structure and risk profile are approved by the GAC.

Based on regular internal audit reporting to the GAC, private sessions with the Group Head of Internal Audit, the Global Professional Practices annual assessment and quarterly quality assurance updates, the GAC is satisfied with the effectiveness of the Global Internal Audit function and the appropriateness of its resources. 

Global Internal Audit maintains a close working relationship with HSBC's external auditor, PwC. The external auditor is kept informed of Global Internal Audit's activities and results, and is afforded free access to all internal audit reports and supporting records.

Principal activities and significant issues considered during 2021

Collaborative oversight by GAC and GRC

The GAC and GRC worked closely to ensure there were procedures to manage risk and oversee the internal control framework. They also worked together to ensure any common areas of responsibility were addressed appropriately with inter-committee communication or joint discussions with the Chairs.

The Chairs are members of both committees and engage on the agendas of each other's committees to further enhance connectivity, coordination and flow of information.

Areas of joint focus for the GAC and GRC during 2021 were:

Sustainable control environment

As discussed in the 'Internal controls' section of this report, the GAC oversaw management's approach to create a sustainable transformation of the control environment. The programme, and its impact on the internal control environment as a whole, was also discussed by the GRC.

In conjunction with the GRC, the GAC monitored the remediation of significant deficiencies and weaknesses in controls raised by management and the external auditor. The GAC will continue to monitor the progress of remediation as well as efforts to integrate requirements of the Sarbanes-Oxley Act with the operational risk framework as part of the sustainable control environment programme. The committees will also continue to monitor the regulatory reporting enhancements programmes to bring regulatory reporting processes within the risk appetite.

In 2021, the GAC and GRC Chairs worked closely with the Group Chief Risk and Compliance Officer and the Group Head of Internal Audit to:

• ensure that risks and issues highlighted at the GAC from audit reports were appropriately captured and reported as part of the wider internal controls discussion at the GRC; and

• coordinate the approach and oversight required for the remediation of very high risk and high risk issues identified by Global Internal Audit, as well as the establishment of a single repository of issues across HSBC.

The GAC and the GRC also held a joint meeting to consider data strategy and data management. Further details can be found in the GRC report on page 250.

Financial reporting

In addition to the GRC's overall review of the Group's risk appetite and risk management framework, the GAC gave particular focus to risk measures impacting financial reporting. This included the review of the financial reporting, tax and pension risk appetite statements. The GAC and the GRC also considered how the approach to financial reporting risk appetite could be evolved to drive a reduction in the exposure to this risk over the medium term and provide better visibility to financial and prudential regulatory reporting separately.

The committees worked collaboratively in reviewing ESG and climate risks, as well as the financial and regulatory reporting impacts. For further details, see the 'ESG and climate reporting' section of this report on page 80.

Given the continued impact from the Covid-19 pandemic, the GAC and the GRC reviewed the risks arising from models used for the estimation of expected credit losses under IFRS 9. The committees challenged the underlying economic scenarios, additional scenarios added by management and the reasonableness of the weightings applied to each scenario in order to understand the impact on the financial statements.

Whistleblowing and speak-up culture

An important part of HSBC's values is ensuring that colleagues have the confidence to speak up when they observe unlawful or unethical behaviour. HSBC provides a variety of channels for colleagues to raise concerns, including through the Group's whistleblowing channel, HSBC Confidential (see page 87 for further information). The GAC is responsible for the oversight of the effectiveness of the Group's whistleblowing arrangements. The Group Head of Compliance provides periodic reporting to the GAC on the efficacy of the whistleblowing arrangements, providing an assessment of controls and detailing the results of internal audit assessments. The Committee is also briefed on culture and conduct risks and associated management actions arising from whistleblowing cases. The Chair of the GAC acts as the Group's whistleblowers' champion, with responsibility for ensuring and overseeing the integrity, independence and effectiveness of HSBC's policies and procedures on whistleblowing and the protection of whistleblowers. The Chair met with the Group Head of Conduct, Policy and Whistleblowing throughout the year for briefings on material whistleblowing cases and assessments of the whistleblowing arrangements.

The Committee has requested updates on a number of key areas during 2021, including: enhancements made to the Group's whistleblowing arrangements following an external benchmarking assessment in December 2020; completion of actions arising from Global Internal Audit reviews; and details of key emerging conduct themes across the arrangements. During 2022, the Committee will be provided with updates on how whistleblowing arrangements are actively supporting our purpose and values, and conduct approach.

 

 
 

 

 

Principal activities and significant issues considered during 2021

 

Areas of focus

Key issues

Conclusions and actions

 

 

Key financial metrics and strategic priorities

The GAC considered the key judgements in relation to external reporting to track the key financial metrics and strategic priorities and to review the forecast performance and outlook.

In exercising its oversight, the Committee assessed management's assurance and preparation of external financial reporting disclosures. The Committee was particularly focused on the ongoing Covid-19-related uncertainty and how management addressed and reflected the impact of the pandemic in external reporting and disclosures. The Committee reviewed the draft external reporting disclosures and provided feedback and challenge on the top sensitive disclosures, including key financial metrics and strategic priorities to ensure HSBC was consistent and transparent in its messaging.

 

Environmental, social and governance ('ESG') reporting

The Committee considered management's efforts to enhance ESG disclosures and associated verification and assurance activities. The GAC reviewed the 2021 ESG disclosure approach in line with our external commitments.

In relation to our climate change resolution, particular attention was given to the disclosure of the financed emissions. The Committee reviewed the ESG reporting strategy, including the broadening of ESG coverage in the Annual Report and Accounts and management's approach on integrated reporting, which will be further informed by feedback from external stakeholders.

 

Regulatory reporting assurance programme

The GAC monitored the progress of the regulatory reporting assurance programme to enhance the Group's regulatory reporting, impact on the control environment and oversee regulatory reviews and engagement.

The Committee reflected on the continued focus on the quality and reliability of regulatory reporting by the PRA and other regulators globally. The GAC reviewed management's efforts to strengthen and simplify the end-to-end operating model, including commissioning independent external reviews of various aspects of regulatory reporting. The Committee discussed and provided management's engagement plans with the Group's regulators, including any potential impacts on some of our regulatory ratios such as CET1 and LCR. We continue to keep the PRA and other relevant regulators informed of our progress. 

 

 

 

 

  

 

Expected credit losses

The measurement of expected credit losses involves significant judgements, particularly under current economic conditions. Despite a general recovery in economic conditions in 2021, there remains an elevated degree of uncertainty over ECL estimation under current conditions, due to macroeconomic, political and epidemiological uncertainties.

The GAC reviewed the economic scenarios for the key countries in which the Group operates, and challenged management's judgements as to the weightings assigned to these scenarios. The GAC also challenged management's approach to making management adjustments to account for the uncertainty in outcomes arising from Covid-19 and China commercial real estate,, including the rationale for such adjustments, the controls underpinning the adjustment processes, and under what conditions such adjustments could be reduced or removed. The GAC also challenged management on the overall levels of ECL across portfolios, including looking at historical performances of portfolios and peer group comparisons.

 

Goodwill, other non-financial assets and investment in subsidiaries impairment

During the year, management tested for impairment goodwill, other non-financial assets and investments in subsidiaries. Key judgements in this area relate to long-term growth rates, discount factors and what cash flows to include for each cash-generating unit tested, both in terms of compliance with the accounting standards and reasonableness of the forecast. During the year, the Group recognised $0.6bn impairment in relation to goodwill and an impairment reversal of $3.1bn in investments in subsidiaries.

The GAC received reports on management's approach to goodwill, other non-financial assets and investments in subsidiaries impairment testing and challenged the approach and methodologies used,with a key focus on the cashflows included within the forecasts and the discount rates used. The GAC also challenged management's key judgements and considered the reasonableness of the outcomes as a sense check against the business forecasts and strategic objectives of HSBC.

 

Associates (Bank of Communications Co., Limited)

During the year, management performed the impairment review of HSBC's investment in Bank of Communications Co., Ltd ('BoCom'). The impairment reviews are complex and require significant judgements, such as projected future cash flows, discount rate, and regulatory capital assumptions.

The GAC reviewed the judgements in relation to the impairment review of HSBC's investment in BoCom, including the sensitivity of the results to estimates and key assumptions such as projected future cash flows and regulatory capital assumptions. Additionally, the GAC reviewed the model's sensitivity to long-term assumptions including the continued appropriateness of the discount rates. The GAC also challenged management to review all aspects of its approach to accounting for BoCom to ensure the approach remains the most appropriate in terms of accounting judgements including compliance with the relevant accounting requirements.

 

Legal proceedings and regulatory matters

Management has used judgement in relation to the recognition and measurement of provisions, as well as the existence of contingent liabilities for legal and regulatory matters, including, for example, an FCA investigation into HSBC Bank's and HSBC UK Bank's compliance with the UK money laundering regulations and financial crime systems and controls requirements.

The GAC received reports from management on the legal proceedings and regulatory matters that highlight the accounting judgements for matters where these are required. The matters requiring significant judgements were highlighted. The GAC has reviewed these reports and agrees with the conclusions reached by management.

 

 

Valuation of defined benefit pension obligations

The valuation of defined benefit pension obligations involves highly judgemental inputs and assumptions, of which the most sensitive are the discount rate, pension payments and deferred pensions, inflation rate and changes in mortality.

The GAC has considered the effect of changes in key assumptions on the HSBC UK Bank plc section of the HSBC Bank (UK) Pensions Scheme, which is the principal plan of HSBC Group.

 

Valuation of financial instruments

Due to the ongoing volatile market conditions in 2021, management continuously refined its approach to valuing the Group's investment portfolio. In addition, as losses were incurred on the novation of certain derivative portfolios, management considered whether fair value adjustments were required under the fair value framework. Management's analysis provided insufficient evidence to support the introduction of these adjustments in line with IFRSs.

The GAC considered the key valuation metrics and judgements involved in the determination of the fair value of financial instruments. The GAC considered the valuation control framework, valuation metrics, significant year-end judgements and emerging valuation topics and agrees with the judgements applied by management.

 

Long-term viability and going concern statement

The GAC has considered a wide range of information relating to present and future projections of profitability, cash flows, capital requirements and capital resources. These considerations include stressed scenarios that reflect the increasing uncertainty that the global Covid-19 pandemic continues to have on HSBC's operations, as well as considering potential impacts from other top and emerging risks, and the related impact on profitability, capital and liquidity.

In accordance with the UK and Hong Kong Corporate Governance Codes, the Directors carried out a robust assessment of the principal risks of the Group and parent company. The GAC considered the statement to be made by the Directors and concluded that the Group and parent company will be able to continue in operation and meet liabilities as they fall due, and that it is appropriate that the long-term viability statement covers a period of three years.

 

Tax-related judgements

HSBC has recognised deferred tax assets to the extent that they are recoverable through expected future taxable profits. Significant judgement continues to be exercised in assessing the probability and sufficiency of future taxable profits, future reversals of existing taxable temporary differences and ongoing tax planning strategies.

The GAC considered the recoverability of deferred tax assets, in particular in the US, France and the UK. The GAC also considered management's judgements relating to tax positions in respect of which the appropriate tax treatment is uncertain, open to interpretation or has been challenged by the tax authority.

 

 

Impact of acquisitions and disposals

In 2021, HSBC engaged in a number of business acquisition and disposal activities, notably in the US, France, Singapore and India. There are a number of accounting impacts that need to be considered, including the timing of recognition of assets held-for-sale, gains or losses, and the measurement of assets and liabilities on acquisition or disposal.

The GAC considered the impacts of the planned exits of the French and US retail banking businesses and the timing of the accounting recognition of these transactions. The GAC also considered the financial and accounting impacts of other acquisitions and disposals.

 

 

 

 

  

 

Transformation and sustainable control environment

The GAC will oversee the impact on the risk and control environment from the Group transformation programme.

 

The Committee received regular updates on the Group transformation programme - and the broader change framework - to review the impact on the risk and control environment and to oversee progress of the transformation programme. In these updates, the Committee monitored the progress of the programme, and focused on the implementation of the new change framework and the management of the entire change portfolio. This oversight helped the Committee to understand the key improvements being made to the management of the change portfolio, and progress on the implementation.

Management's updates were supplemented by significant focus and assurance work from Global Internal Audit where a dedicated team continuously monitored and reviewed the Group transformation programme. This included carrying out a number of targeted audit reviews, in addition to audits of significant programmes. These reviews focused on key elements of change management.

 
 

Global Finance transformation

The Committee reviewed the proposals for the Global Finance organisational design, the migration to Cloud and the impact on financial controls.

The Committee has oversight for the adequacy of resources and expertise, as well as succession planning for the Global Finance function. During 2021, the Committee dedicated significant time to the review and progress of the multi-year Global Finance transformation programme, with the overall objectives being to improve the control environment and customer outcomes and to make use of technology to increase overall efficiency. In particular, the Committee discussed the challenges to Global Finance operations, including financial reporting, from the Covid-19 pandemic and sought assurance that controls were in place to maintain standards and quality.

The Committee has received regular status updates on the progress of the Global Finance transformation, the outcomes achieved to date and challenges encountered. The Committee has continued to dedicate significant time to the review of the progress of the programme.

A key objective of the programme is to improve the Group's control environment and a particular focus of the Committee has been the interaction of the Global Finance transformation programme and the programmes to enhance the Group's regulatory reporting control environment. The Committee has also considered the dependencies that key regulatory change programmes, such as the Basel III Reform programme, have on the Global Finance transformation. In addition, the Committee has specifically sought to understand the impact of new requirements and programme re-planning on the delivery and timing of programme outcomes. Sessions have been held with individual Committee members to support a more detailed understanding of the programme risks and challenges.

The results of Global Internal Audit reviews of the programme have been considered by the Committee and there have been frequent discussions with Global Internal Audit on its assessment of the progress and risks of the programme.

The Group Chief Financial Officer had private sessions with the Committee to share his perspectives on the progress of the Global Finance transformation and where additional focus was required.

 

 

 

 

  

 

IFRS 17 'Insurance Contracts'

The Committee will oversee the transition to IFRS 17 and consider the wider strategic implications of the change on the insurance business.

Earlier in 2021, management provided an update on the potential impact of IFRS 17 on HSBC's reported numbers in the financial statements, and conducted a walk-through of the relevant disclosure requirements applicable to HSBC, including an introduction to GAAP and potential non-GAAP metrics to support investor communications during and after the transitional period. In response to questions from GAC members, including from the Chair, relating to the overall financial management of the insurance business, a separate session was organised with the Chair of the GAC on 16 June 2021. The meeting covered different aspects of insurance financial management, with a particular focus on interest rate management and business strategy. Since then, HSBC released further information on the impact of IFRS 17 on HSBC's reported numbers, as part of the third quarter 2021 earnings release statement, as well as providing a briefing to analysts on IFRS 17. Feedback from analysts so far has been positive, particularly given HSBC was the first to provide high-level indicative impact based on planning assumptions. In December 2021, management provided an update on the disclosure of performance metrics on adoption of IFRS 17, including its current intention to continue to provide Value of New Business and embedded value metrics for comparability.

 

Basel III Reform

The GAC considered the implementation of the Basel III Reform and the impact on the capital requirements and RWA assurance. This was considered in the context of the strategy and structure of the balance sheet.

 

The Committee received an update on the progress and impact of the Basel III Reform programme on the Group. Management discussed the uncertainty over the final definition of the rules and the actions taken to ensure sufficient flexibility to make changes and mitigate risks from legislation being finalised at a later date. The discussion highlighted the dependencies of the Basel III Reform programme with other Group transformation programmes, in particular the dependency on adoption of the Finance on the Cloud solution and the impact on data delivery and storage.

The Committee reviewed and challenged management on the findings from an audit on the programme structure, governance and the significant cost increase year on year. Management explained the actions being taken in response to the audit findings and the reasons for the increase in costs, which included delays to implementation dates caused by the Covid-19 pandemic.

 
 

 

Interest rate benchmark replacement

The financial reporting risks of interest rate benchmark transition include the potential for volatility arising from financial instruments valuation, contract modification and hedge accounting. The transitions involve significant operational complexity for financial institutions, and industry approaches to transition continue to develop.

The GAC noted management's early adoption of 'Interest Rate Benchmark Reform - Phase 2' amendments to IFRSs in relation to benchmark reform, including the disclosures necessary to support adoption of the reliefs.

The Committee considered the risks and financial reporting impacts arising from the Ibor transition. Management discussed actions being taken to mitigate the risks, which included new product development and a client outreach programme, to ensure we were ready to migrate and able to  explain the changes and outcomes arising from the transition to clients. Management advised about the operational challenges, such as the updates to current systems and processes that were required to support the accounting for the Ibor transition, and our external dependency on market and client readiness. In particular, management drew attention to the potentially material impact on hedge accounting programmes from the Ibor transition and the substantial costs and risks involved in the redocumentation of hedges.

The Committee discussed the approach being taken across the industry with management and PwC, and potential impacts on the control environment relevant to financial reporting from the Ibor transition.

 

 

 
 

 

 

 

Committee evaluation and effectiveness

The annual review of the effectiveness of the Board committees, including the GAC, was conducted internally in 2021. Led by the Group Company Secretary and Chief Governance Officer, the review concluded that the GAC continued to operate effectively. Management of meetings and reporting to the Board on discussions, in particular, were rated highly.

The review also made certain recommendations for continual improvement. The GAC was recommended to review the composition of the GAC to broaden the skillset, ensure clarity in roles and improve the coordination between the GAC and other Board committees and working groups relating to technology and ESG. Succession planning was also highlighted as a priority. The Committee considered the outcomes of the evaluation and accepts the findings. The evaluation outcomes were reported to the Board and the Committee will track progress against the recommendations during 2022.

 

Focus of future activities

At the beginning of each year, the Committee discusses its key priorities for the year ahead. In 2022, the Committee will continue to focus strongly on the remediation of controls, particularly those supporting regulatory reporting. The Committee will continue to monitor the execution of the Group's transformation programme and its impact on the risk and control environment. It will also monitor the interdependencies between the transformation programme and the implementation of large-scale regulatory change programmes, such as the Basel III reforms, the Ibor transition and IFRS 17 'Insurance Contracts'. A key priority will be to further embed ESG and climate-related disclosures to meet increasing expectations of stakeholders, in particular the implementation of robust processes and controls to support these disclosures. The Committee will focus on the audit tender strategy in preparation for the next re-tender, and will consider the impact of potential changes to the UK external audit market on HSBC's approach to audit and assurance.

 

 

 

Group Risk Committee

 

 

 

 

 

"The GRC provided oversight on the management of Covid-19-related financial risks, including the Group's release of expected credit loss reserves in response to the improving macroeconomic conditions."

 

Dear Shareholder

I am pleased to present the Group Risk Committee ('GRC') report.

The year commenced with a challenging risk outlook due to increasing Covid-19 infections and lockdowns across markets. The outlook began to stabilise by the second quarter, with the roll-out of global vaccine programmes, and the GRC monitored the impact of new strains, including the Omicron variant.

Against this backdrop, the GRC provided oversight on the management of Covid-19-related financial risks, including the Group's release of expected credit loss reserves in response to the improving macroeconomic conditions. The Committee worked closely with the Group Chief Risk and Compliance Officer in strengthening the Group's risk management framework to be even more forward looking, granular and risk connected. The GRC continued its oversight of people and operational challenges presented by the pandemic and market conditions.

Throughout the year, the GRC played a central role in reviewing and challenging management on the Group's regulatory submissions and programmes, including the Bank of England's requirements for the resolvability assessment framework. The GRC had primary non-executive responsibility for reviewing the outcomes of regulatory stress tests, including the Bank of England's biennial exploratory scenario on the financial risk from climate risk, and the 2021 solvency stress test. The GRC reviewed and challenged the Group's thermal coal phase-out policy and approach to climate-aligned finance in a joint meeting with the GAC. The Committee continued its oversight of the Group's preparations to meet the PRA's requirements on operational resilience.

The GRC continued to strengthen its composition, skills and experience to ensure that it remains well positioned to promote proactive risk governance. On 1 September 2021, we welcomed Dame Carolyn Fairbairn, a seasoned macroeconomic and political environment expert. Heidi Miller and Pauline van der Meer Mohr left the GRC on 28 May 2021. I extended our gratitude to each for their valued commitments and support to the GRC.

The GRC convened 11 formal meetings, two of which were joint meetings with the GAC, and 13 education and special meetings to review and challenge some of our most important responsibilities.


Jackson Tai

Chair

Group Risk Committee

22 February 2022

Membership

 

Member since

Meeting attendance in 20211

Jackson Tai (Chair)

Sep 2016

11/11

Dame Carolyn Fairbairn2

Sep 2021

3/3

Steven Guggenheimer

May 2020

11/11

José Antonio Meade Kuribreña

May 2019

11/11

Heidi Miller3

Sep 2014

6/6

Eileen Murray4

Jul 2020

9/11

David Nish5

Feb 2020

10/11

Pauline van der Meer Mohr6

Apr 2018

5/6

1  These included two joint meetings with the Group Audit Committee.

2  Dame Carolyn Fairbairn joined the GRC on 1 September 2021.

3  Heidi Miller stepped down from the GRC on 28 May 2021.

4  Eileen Murray was unable to attend two meetings due to personal circumstances.

5  David Nish was unable to attend one meeting due to a prior commitment.

6  Pauline van der Meer Mohr was unable to attend one meeting due to personal circumstances, and stepped down from the GRC on 28 May 2021.

Key responsibilities

The GRC has overall non-executive responsibility for the oversight of risk-related matters and the risks impacting the Group. The GRC's key responsibilities are:

• overseeing and advising the Board on all risk-related matters, including financial risks, non-financial risks and the effectiveness of the Group's conduct framework;

• advising the Board on risk appetite-related matters, and key regulatory submissions;

• reviewing the effectiveness of the Group's enterprise risk management framework and internal controls systems (other than internal financial controls overseen by the GAC); and

• reviewing and challenging the Group's stress testing exercises.

Committee governance

The Group Chief Risk and Compliance Officer, Group Chief Financial Officer, Group Chief Operating Officer, Group Company Secretary and Chief Governance Officer, Group Chief Legal Officer, Group Head of Internal Audit, Group Head of Finance and Group Head of Risk Strategy are standing attendees and regularly attend GRC meetings to contribute their subject matter expertise and insight. The Chair and members of the GRC also hold private meetings with the Group Chief Risk and Compliance Officer, the Group Head of Internal Audit and external auditor, PwC, following scheduled GRC meetings.

The participation of our senior business leaders, including the Group Chief Executive who attended 9 GRC meetings in 2021, reaffirmed the ownership and accountability of risks in the first line of defence and strengthened our holistic three lines of defence review of our most pressing risks.

The Chair meets regularly with the Group Chief Risk and Compliance Officer to discuss priorities, track progress on key actions and plan GRC meeting agendas. The Chair also has regular meetings with members of senior management to discuss specific risk matters that arise during the year outside formal meetings. The Chair meets regularly with the GRC Secretary and other members of the Corporate Governance and Secretariat to ensure the GRC meets its governance responsibilities, and to consider input from stakeholders when finalising meeting agendas, tracking progress on actions and GRC priorities. A summary of coverage is set out in the 'Matters considered during 2021' table on page 250.
 

 

Matters considered during 2021

 

Jan

Feb

Mar

Apr

May

Jun

Jul

Sep

Nov

Dec

Financial risk

l

l

l

l

l

l

l

l

ô

l

Credit risk

l

l

l

l

l

ô

l

l

ô

l

Climate risk

ô

ô

l

l

ô

ô

l

l

l

l

IT and operational risk including outsourcing, third-party risk management, cyber risk 

l

l

l

l

l

ô

l

l

ô

l

Model risk 

l

ô

ô

l

l

ô

ô

ô

ô

ô

People and conduct risk

ô

ô

l

ô

l

ô

ô

l

ô

l

Risk appetite

l

l

ô

ô

ô

ô

l

l

ô

l

Financial crime risk

l

l

l

l

l

ô

l

l

ô

l

Regulatory compliance

l

l

ô

l

l

ô

l

l

ô

l

Legal risk 

l

l

ô

l

ô

ô

l

ô

ô

l

 

 

How the Committee discharged its responsibilities

Activities outside formal meetings

The GRC held a number of meetings outside its regular schedule to facilitate more effective oversight of the risks impacting the Group. In particular, Directors' education meetings and GRC Chair's preview meetings strengthened the understanding of more technical topics and promoted constructive challenge. Areas covered included stress testing, ICAAP and ILAAP preparations, as well as recovery and resolution planning. Further details on these sessions are included in the 'Principal activities and significant issues considered during 2021' table starting on page 251. 

Connectivity with principal subsidiary risk committees

During 2021 the GRC continued to actively engage with principal subsidiary risk committees through the scheduled participation of principal subsidiary risk committee chairs at GRC meetings, and through two connectivity meetings with the principal subsidiary risk committee chairs. This participation and connectivity promoted the sharing of information and best practices between the GRC and principal subsidiary risk committees.

The GRC also received reports on the key risks facing particular principal subsidiaries at its regular meetings and continued to review certifications from the principal subsidiary risk committees. The certifications confirmed that the principal subsidiary risk committees had challenged management on the quality of the information provided, reviewed the actions proposed by management to address any emerging issues and that the risk management and internal control systems have been operating effectively.

The principal subsidiary risk committee chairs have attended regular GRC meetings, education meetings and special review meetings. The engagement facilitated the GRC's holistic review of regulatory submissions including stress tests, the Group recovery plan and the resolution self-assessment. The interactions furthered the GRC's understanding of the risk profile of the principal subsidiaries, leading to more comprehensive review and challenge by the GRC.

Collaborative oversight by the GRC and the GAC

The GRC collaborated with the GAC to address any areas of significant overlap and to oversee risk more comprehensively, through inter-committee communication and joint meetings. The GRC and GAC Chairs are members of both committees to strengthen connectivity and the flow of information between the committees.

Joint meetings with the GAC

The GRC and the GAC convened a meeting on data strategy and data management in April 2021, with the attendance and support of the Group Chief Executive and the chief executive officers of the three global businesses. The committees reviewed the Group's data strategy and the work required to embed its data policies, define its technology landscape and build a data-led culture. The committees challenged the first and second lines of defence on how they are pursuing a data-driven strategy across four key areas for the Group. In the process the committees reviewed the regulatory landscape in relation to the Group's use of data, and the roles of the first and second lines of defence as co-owners of the management of data risk. The committees also reviewed the Group's approach to harnessing and using data to better unlock value for our customers.

The GRC and the GAC convened a joint meeting in November 2021 to review HSBC's thermal coal phase-out policy and the Group's approach to climate-aligned finance. The committees reviewed the progress made to deliver on the commitment to publish a policy to phase out the financing of coal-fired power and thermal coal mining by 2030 in EU/OECD markets, and by 2040 in other markets. The committees recommended the thermal coal phase-out policy and the approach to climate-aligned finance to the Board for approval.

Sustainable control environment

The GRC continued to review and challenge the Group's internal controls to improve the control environment. The GRC reviewed entity level controls, which form the basis of HSBC's control environment, as well as the results and remediation plans of a self-assessment performed by entity level control owners. At the request of the GRC Chair, with support of the GAC Chair, the GRC received an update on the thematic analysis and remediation plans for any overdue very high risk and high risk issues identified by Global Internal Audit.

Financial risk

During 2021, the GRC and the GAC reviewed and challenged the Group's risk appetite and risk management framework relating to financial risk. In the process the committees discussed risk tolerance for financial reporting risk and financial reporting and tax risk, as well as improvement and remediation plans to enhance the broad regulatory reporting control environment.

Collaborative oversight by the GRC and the Technology Governance Working Group

The GRC worked closely with the Technology Governance Working Group to ensure appropriate alignment in the review, discussion, challenge and conclusions on technology risk-related matters. The GRC organised a technology-specific session with the working group in advance of the broader discussion at the joint GRC and GAC meeting on data strategy and data management. This ensured that the GRC benefited from the working group's expertise and challenge in advance of the GRC and GAC discussion. The GRC also arranged for the Technology Governance Working Group Co-Chairs to lead discussions on data, models and infrastructure at the GRC climate biennial exploratory scenario pre-meetings.

Coordination and collaboration between the GRC and the Technology Working Group is supported by cross-membership. The GRC Chair is a member of the Technology Working Group and the Co-Chairs of the Technology Working Group are members of the GRC.

 


 

 

Principal activities and significant issues considered during 2021

 

Areas of focus

Key issues

Conclusions and actions

 

 

The Group risk appetite statement defines the Group's risk appetite and tolerance thresholds and forms the basis of the first and second lines of defence's management of risks, the Group's capacity and capabilities to support customers, and the pursuit of strategic goals.

The GRC maintained oversight of changes to the Group's risk appetite statements, which in turn provided the basis for the Committee's regular interactive review of financial and non-financial management information at each GRC meeting. The GRC continued to promote the development of more granular risk appetite statements that are more forward looking and risk responsive. The Committee continued to strengthen the linkage between risk appetite statements with the Group's corporate strategy, stress testing, annual operating plan, as well as the Group's move towards stronger, sustainably higher returns for stakeholders, so that it may serve customers well. In January 2021, the GRC recommended the Group's climate risk appetite statement to the Board for approval. It also recommended significant changes to the Group's risk appetite statement, including in the areas of liquidity risk, wholesale credit risk metrics, climate risk, model risk, resilience risk, financial crime risk and regulatory compliance. 

 
 

 

 

 

  

 

Geopolitical developments and risks continue to present significant challenges for the Group's customer franchise and for the resilience of our operations.

The GRC continued to monitor global geopolitical risks that could impact the Group's strategy, business performance or operations, including trade tensions between the US and China and the related regulatory and reputational risks for operations globally.

 
 

 

 

 

  

 

Managing operational risk and counterparty credit risk to enable the Group's support of our customers, communities and the local economy throughout the Covid-19 pandemic.

The GRC continued to review the economic uncertainty stemming from the Covid-19 pandemic and the impact to the Group's own risk management and exposures, including those related to credit risk and models. The Committee received updates on the progress of economic recovery and how the Group continued to support customers and sustain operational resilience during the pandemic. The GRC closely monitored Covid-19-related lending and financial support packages, including forbearance and other support to customers following the closure of government lending schemes. 

 

 

 

 

  

 

Management's operational resilience programme defines the Group's policies and practices to strengthen its ability to protect customers. The programme identifies priority business services and their readiness to serve customers in the event of unforeseen disruptions in key markets.

The GRC continued its oversight of the Group's operational resilience programme with a focus on 2021 and 2022 regulatory commitments to the PRA. The GRC reviewed and challenged the remediation plans for identified gaps, relevant controls, and the business ownership model and its supporting infrastructure. The GRC worked with management, including the Group Chief Control Officer to ensure ownership and the delivery of resilience outcomes is embedded with business and function leaders in the first line of defence. The Committee encouraged early adoption of operational resilience learnings across key markets and business, as well as the effective management of third-party risk.

 
 

 

 

 

  

 

Technology resilience is the risk of unmanaged disruption to any IT system within HSBC, as a result of malicious acts, accidental actions or poor IT practice or IT system failure.

The GRC reviewed reports on the state of the Group's technology risk profile, as well as reports on cybersecurity. The GRC also maintained a strong focus on understanding the Group's data risk landscape and its data strategy and data management programme.

The GRC convened a joint meeting with the Group Audit Committee in April to review and challenge the data strategy and data management programme, which had the strong support of the Group Chief Executive and the chief executives of the global businesses. The committees agreed that the Group's data strategy and data management programme should be elevated to the highest level of prominence within the Group. Further details on the joint meeting are included in the 'Joint meetings with the GAC' section on page 250.

 

 

 

 

  

 

The Group promotes a culture that is effective in managing risk and leads to fair conduct outcomes. It seeks to actively manage the risk of not having the right people with the right skills doing the right thing, including risks associated with employment practices and relations.

The GRC monitored people risk and employee conduct, with support from the Group Chief Human Resources Officer and Group Chief Risk and Compliance Officer. The Committee considered people risk issues, including those arising from the impact of Covid-19, the link between remuneration and talent retention and acquisition, and reviewed workplace harassment data and insights. The GRC reviewed and challenged the alignment of risk and reward, and the impact of risk and compliance objectives on the Group's variable pay pool.

The GRC reviewed the Group's new conduct approach, which was refreshed in 2021, to reflect prevailing regulatory and industry standards and to align with the Group's new purpose and values. The GRC monitored progress in remediating the market conduct issues underlying the 2017 Federal Reserve Bank Consent Order (which remains in force) arising from its investigation into HSBC's historical foreign exchange activities, and to ensure the reforms are effective and sustainable in the long term.

 

 

 

 

  

 

 

The Group is committed to closely monitoring and managing the risk of knowingly or unknowingly helping parties to commit or to further potentially illegal activity, including both internal and external fraud

The GRC continued to review the Group's approach to managing its financial crime risk across a number of important areas. These included the Group's progress in enhancing its transaction monitoring framework, the use of next generation technology, the fraud landscape (particularly against heightened Covid-19 conditions), the Group's fraud risk profile and the nature and scale of insider risk and the strategies for managing such risk.

The GRC also maintained oversight of the ever-changing and increasingly complex international sanctions landscape in which the Group and its customers operate, as well as the Group's approach to managing its compliance with sanctions regimes globally.

 

 

 

 

The GRC oversees the Group's management of its financial risk.

The GRC reviewed the Group's ongoing capital and liquidity management activities, including early warning indicators, scenario stress testing and the Group's capital and liquidity adequacy.

The GRC conducted its annual review, challenge and recommendation of the Group ICAAP and ILAAP to the Board for approval. GRC members received both an education session and previewed the ICAAP and ILAAP submissions in depth, with input from the principal subsidiary risk committee chairs. In the process the Committee evaluated the Group's capital and liquidity strategies, capabilities including progress on the Group liquidity remediation programme and internal liquidity metric.

 
 

 

 

 

  

 

HSBC faces risk from the possibility of losses resulting from the failure of a counterparty to meet its agreed obligations to pay the Group

The Committee reviewed updates from management on the strategy and approach to manage credit risk and credit risk capabilities. The Committee reviewed forward economic scenarios and received quarterly updates on the Group's expected credit losses and provisions, loan impairment charges and the credit risk arising from the wholesale portfolio and mortgage books. The GRC also reviewed the potential impact for the Group from external and secondary market events and recommended a management-led comprehensive review of the learnings and actions to be taken to drive a stronger credit risk culture.

 
 

 

 

 

  

 

Successful delivery of our climate ambition will be determined by our ability to measure and manage all components of climate risk.

The GRC remained focused on climate risk, reviewed quarterly reports on climate risk management, and maintained oversight over delivery plans to ensure the Group develops robust climate risk management capabilities. The GRC reviewed the Group's approach to climate risk appetite.

The GRC approved the Group's climate biennial exploratory scenario stress test submission to the PRA. In preparation, the GRC reviewed the scenario and convened an education session. The GRC challenged management on the results of the submission during three preparatory meetings on the key risks of climate change. During the sessions the GRC reviewed the engagement with clients, their transition plans and the importance of advancing risk appetite and management actions; the challenges in relation to data, modelling and infrastructure support; and the impact of climate change on our physical risks including through our residential and corporate real estate mortgage books. The GRC also reviewed new business and lending opportunities for our Wealth and Personal Banking business to support customers.

The GRC and the GAC convened a joint meeting in November to review HSBC's thermal coal phase-out policy and the Group's approach to climate-aligned finance and recommended the thermal coal phase-out policy and approach to climate-aligned finance to the Board for approval. Further details on the joint meeting are included in the 'Joint meetings with the GAC' section on page 250.

 
 

 

 

 

  

 

HSBC faces risk from the inappropriate or incorrect business decisions arising from the use of models that have been inadequately designed, implemented or used, or from models that do not perform in line with expectations and predictions.

The GRC continued to receive ongoing updates on the Group's progress in managing model risk through the Group Chief Risk and Compliance Officer's Group risk profile report and from the second line of defence. In January 2021, the Committee received an update on a number of material post-model adjustments to the Group's wholesale portfolio, and on alternative modelling concepts being considered to recalibrate the idiosyncratic economic effects of the pandemic not captured by models. The update to the Committee in May 2021 reported on model risk deliverables against external review findings, improvements to enhance first line of defence engagement in the model lifecycle, and progress made to transform the model risk management function and implementation of new global model risk policy and standards.

 

 

 

 

  

 

HSBC performs internal and regulatory stress tests to measure the Group's resilience and performance against stress.

The GRC reviewed and approved the outcomes of the initial submission of the impairments and RWA impact to the Bank of England's solvency stress test in April 2021 and subsequently the final outcomes of the 2021 solvency stress test scenarios in May 2021. In advance of the review, the Committee convened a preview meeting with the principal subsidiary risk committee chairs to review the solvency stress test submissions and the key learnings for the principal subsidiaries, including early identification of adjustments that might strengthen resilience in advance of a stress event. The Committee also undertook significant review and challenge of the Group's 2021 GRC climate biennial exploratory analysis and approved the submissions to the PRA.

The GRC undertook a technical review of the 2021 Group internal stress test outcomes at a GRC Chair's preview meeting, which was followed by formal review and approval at the January 2021 GRC meeting. In the lead-up to the 2022 financial resource plan, the GRC reviewed and endorsed the economic scenarios underpinning the financial resource plan and Group internal stress test in July 2021. The GRC subsequently reviewed, challenged and approved the final Group internal stress test results in December 2021.

The GRC also reviewed the implications of the results of the Federal Reserve's Comprehensive Capital Analysis and Review severely adverse scenario stress test resubmission in relation to HSBC North America Holdings, and considered action being progressed by management in response.

 

 

HSBC is required to show how its resolution strategy could be carried out in an orderly way, including identification of any risks to successful resolution.

The GRC continued its oversight of the Group's progress in understanding its capabilities against the Bank of England's requirements for recovery and resolvability. The GRC reviewed and challenged the governance pathway for the 2021 Group recovery plan, including review of the recovery indicator framework and a special session to consider the key messages, the recovery playbook and strategic management actions. In advance of review by the Committee the GRC Chair met with senior management to consider the Group recovery plan, including principal subsidiary risk committee components.

The GRC was also heavily involved in the governance of the resolvability assessment framework, with updates on the valuation in resolution requirements, and the Group's resolvability self-assessment and resolvability assessment framework testing approach. The GRC reviewed and recommended the resolvability assessment framework self-assessment to the Board for approval. The Board meeting was preceded by four Board sub-Group preview meetings jointly sponsored by the GRC and GAC Chairs to examine the Group's submission.

 

 

 

 

Committee evaluation

During 2021, the GRC implemented the recommendations of the internal committee evaluation conducted by the Group Company Secretary and Chief Governance Officer in November 2020. This included strengthening the focus of meeting agendas, and further increasing the GRC's engagement with the Risk and Compliance functions and principal subsidiary risk committee chairs.

Continuing the commitment to regular evaluation, the Group Company Secretary and Chief Governance Officer performed an annual review of the effectiveness of the GRC in December 2021. The evaluation concluded that the GRC continued to operate effectively and in line with regulatory requirements, and identified enhancements, including a review of GRC composition, to help strengthen the GRC's ability to effectively review and challenge the Group's risk profile. Other recommendations included: strengthening the focus of agendas with an ongoing emphasis on emerging risks; continued enhancement to papers and presentations; optimising the use of member time spent outside of formal governance; and even stronger coordination of the roles of the Board committees. As with the GAC, succession planning will also remain a priority. The outcomes of the evaluation have been reported to the Board, and the GRC will track the progress in implementing recommendations during 2022.

 

 

 

Focus of future activities

The GRC's focus for 2022 will include the following activities. It will:

• oversee the continued strengthening of the Group's risk appetite and risk management framework;

• continue to review the Group's work to enhance its credit risk capabilities and culture;

• continue to oversee financial crime and fraud;

• oversee the delivery against climate change commitments and enhancing climate risk capabilities;

• continue the oversight of the delivery of technology-related programmes including the adoption of Cloud platforms, and enhancement of the Group's IT systems/platform; and

• oversee key regulatory actions, including the implementation of the Group's operational resilience strategy on a global basis, recovery and resolution, and stress testing submissions and capabilities.

 

 

 

 

 

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