Annual Financial Report - 29 of 44

RNS Number : 1498A

HSBC Holdings PLC

27 March 2012

Board of Directors

The purpose of HSBC's management structure, headed by the Board of Directors of HSBC Holdings (the 'Board') and led by the Group Chairman, is to deliver sustainable value to our shareholders. The Board sets the strategy and risk appetite for the Group and approves capital and operating plans presented by management for the achievement of the strategic objectives it has set. This ensures the efficient application of our resources for the achievement of these objectives. Implementation of the strategy set by the Board is delegated to the Group Management Board ('GMB') which is led by the Group Chief Executive.

Directors

HSBC Holdings has a unitary Board. The authority of each Director is exercised in Board meetings where the Board acts collectively. At 27 February 2012, the Board comprised the Group Chairman, Group Chief Executive, two other executive Directors and thirteen non-executive Directors. Their names and brief biographical particulars are listed on pages 218 to 223. The Group Chairman, Group Chief Executive and two other executive Directors are employees. Non-executive Directors are not HSBC employees and do not participate in the daily business management of HSBC; they bring an external perspective, constructively challenge and help develop proposals on strategy, scrutinise the performance of management in meeting agreed goals and objectives, and monitor the risk profile and the reporting of performance. The non-executive Directors bring experience from a number of industries and business sectors, including the leadership of large complex multinational enterprises.

Terms of appointment

The Board has determined the time commitment expected of non-executive Directors to be not less than 24 days per annum and not less than 30 days per annum in total for non-executive Directors appointed to the Group Audit Committee, Group Risk Committee or Group Remuneration Committee and for the Deputy Chairman and senior independent non-executive Director.

Letters setting out the terms and conditions of appointment of each of the non-executive Directors, including the time commitment expected of each of them, are available for inspection at 8 Canada Square, London E14 5HQ and will be made available for 15 minutes before the Annual General Meeting and during the Meeting itself.

Powers of the Board

The Board is responsible for managing the business of HSBC Holdings and, in doing so, may exercise its powers, subject to any relevant laws and regulations and to the Articles of Association. In particular, the Board may exercise all the powers of the Company to borrow money and to mortgage or charge all or any part of the undertaking, property or assets (present or future) of HSBC Holdings and may also exercise any of the powers conferred on it by the Companies Act 2006 and/or by shareholders. The Board is able to delegate and confer on certain Directors holding executive office any of its powers, authorities and discretions (including the power to sub-delegate) for such time and on such terms as it thinks fit. In addition, the Board may establish any local or divisional boards or agencies for managing the business of HSBC Holdings in any specified locality and delegate and confer on any local or divisional board, manager or agent so appointed any of its powers, authorities and discretions (including the power to sub-delegate) for such time and on such terms as it thinks fit. The Board may also, by power of attorney or otherwise, appoint any person or persons to be the agent of HSBC Holdings and may delegate to any such person or persons any of its powers, authorities and discretions (including the power to sub-delegate) for such time and on such terms as it thinks fit.

The Board delegates the management and day-to-day running of HSBC to the GMB but retains to itself approval of certain matters including operating plans, risk appetite and performance targets, procedures for monitoring and controlling operations, the authority or the delegation of authority to approve credit, market risk limits, acquisitions, disposals, investments, capital expenditure or realisation or creation of a new venture, specified senior appointments and any substantial change in balance sheet management policy.

The Directors who served during the year were S A Catz, L M L Cha (appointed 1 March 2011), V H C Cheng (retired 27 May 2011), M K T Cheung, J D Coombe, R A Fairhead, D J Flint, A A Flockhart, S T Gulliver, J W J Hughes-Hallett, W S H Laidlaw, J R Lomax, I J Mackay, G Morgan, N R N Murthy, Sir Simon Robertson, J L Thornton and Sir Brian Williamson.

HSBC Holdings was registered in Hong Kong under part IX of the Companies Ordinance on 17 January 1991.

Board meetings

Seven Board meetings and a two-day strategy meeting were held in 2011. At least one Board meeting each year is held in a key strategic location outside the UK. During 2011, Board meetings were held in Hong Kong and Washington D.C.

The table below shows each Director's attendance at meetings of the Board held while he or she was a Director during 2011. No meetings of the Board were held at short notice in 2011.

Eleven meetings of committees of the Board appointed to discharge specific business were held during 2011. These meetings are not shown in the table below.

During 2011, the non-executive Directors and the Group Chairman met three times without the other executive Directors. The non-executive Directors also met without the Group Chairman to appraise the Group Chairman's performance.

Attendance record

	Board

Number of meetings held .................................	7

S A Catz ..........................................................	6
L M L Cha¹ .....................................................	5
V H C Cheng² ..................................................	3
M K T Cheung ................................................	7
J D Coombe ....................................................	7
R A Fairhead³...................................................	4
D J Flint ..........................................................	7
A A Flockhart .................................................	7
S T Gulliver .....................................................	7
J W J Hughes-Hallett .......................................	7
W S H Laidlaw ................................................	7
J R Lomax ......................................................	7
I J Mackay ......................................................	7
G Morgan ........................................................	6
N R N Murthy .................................................	6
Sir Simon Robertson ........................................	7
J L Thornton ..................................................	6
Sir Brian Williamson .......................................	7

1 Appointed a Director on 1 March 2011 - eligible to attend 5 Board Meetings.

2 Retired as a Director on 27 May 2011 - eligible to attend 4 Board Meetings.

3 Took a temporary leave of absence due to illness.

Group Chairman and Group Chief Executive

The roles of Group Chairman and Group Chief Executive are separate and held by experienced full‑time Directors. There is a clear division of responsibilities at the head of the Company between the running of the Board and the executive responsibility for running HSBC's business. The key responsibilities of the Group Chairman and the Group Chief Executive are set out below.

Key responsibilities

Group Chairman - D J Flint

Appointed December 2010

· Leads the Board and ensures its effectiveness.

· Develops relationships with governments, regulators and investors.

· Leads the Group's interactions on matters of public policy and regulatory reform with regard to the banking and financial services industry.

· Maintains corporate reputation and character.

· Undertakes performance management of the Group Chief Executive.

Group Chief Executive - S T Gulliver

Appointed January 2011

· Develops, and delivers performance against, business plans.

· Develops Group strategy, in agreement with the Group Chairman, for recommendation to the Board.

· As Chairman of the GMB, drives performance within strategic goals and commercial objectives agreed by the Board.

The Group Chief Executive has an office in London and in Hong Kong.

Deputy Chairman and senior independent non-executive Director

The key responsibilities of the Deputy Chairman and senior independent non-executive Director are set out below.

Key responsibilities

Deputy Chairman and senior independent non-executive Director - Sir Simon Robertson¹

· Deputises for the Group Chairman at meetings of the Board or shareholders.

· Supports the Group Chairman in his role.

· Acts as an intermediary for other non-executive Directors
when necessary.

· Leads the non-executive Directors in the oversight of the
Group Chairman.

· Ensures there is a clear division of responsibility between the Group Chairman and Group Chief Executive.

· Is available to shareholders should they have concerns which contact through the normal channels cannot resolve or for which such contact would be inappropriate.

1 Appointed senior independent non-executive Director in 2007 and Deputy Chairman in December 2010.

Board balance and independence of Directors

The Board includes a strong presence of both executive and non-executive Directors and no individual or small group can dominate its decision making. The size of the Board is appropriate given the complexity and geographical spread of our business and the significant time demands placed on the non-executive Directors, particularly those who serve as members of Board committees.

The Nomination Committee regularly reviews the structure, size and composition of the Board (including the skills, knowledge and experience required of Directors) necessary to address and challenge adequately key risks and issues that confront, or may confront, the Board and makes recommendations to the Board with regard to any changes. The Nomination Committee maintains a forward-looking schedule of potential candidates as Directors that takes into account the needs and developments of the Group's businesses and the expected retirement dates of existing Directors.

The Board considers all of the non-executive Directors to be independent in character and judgement. The Board has determined S A Catz, L M L Cha, M K T Cheung, J D Coombe, J Faber, R A Fairhead, J W J Hughes-Hallett, W S H Laidlaw, J P Lipsky, J R Lomax, G Morgan, N R N Murthy, Sir Simon Robertson, J L Thornton and Sir Brian Williamson to be independent. The Board has determined L M L Cha to be independent. Her role as deputy chairman of, and former role as corporate relations adviser to, The Hongkong and Shanghai Banking Corporation, were considered not to be material. When determining independence the Board considers that calculation of the length of service of a non-executive Director begins on the date of his or her first election by shareholders as a Director of HSBC Holdings. Given the complexity and geographical spread of our business, the experience of previous service on a subsidiary company board can be a considerable benefit and does not detract from a Director's independence. In reaching its determination of each non-executive Director's independence the Board has concluded that there are no relationships or circumstances which are likely to affect a Director's judgement and any relationships or circumstances which could appear to do so were considered not to be material.

In accordance with the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited, each non-executive Director determined by the Board to be independent has provided an annual confirmation of his or her independence to HSBC Holdings.

Information and support

The Board regularly reviews reports on progress against financial objectives, business developments and investor and external relations. The chairmen of Board committees and the Group Chief Executive report to each meeting of the Board on the activities of the committees since the previous Board meeting. The Board receives regular reports and presentations on strategy and developments in the global businesses and principal geographical areas. Regular reports are also provided to the Board and Board committees on the Group's risk appetite profile, top and emerging risks, risk management, credit exposures and the Group's loan portfolio, asset and liability management, liquidity, litigation, compliance and reputational issues. The agenda and supporting papers are distributed in advance of all Board and committee meetings to allow time for appropriate review and to facilitate full discussion at the meetings. All Directors have full and timely access to all relevant information and may take independent professional advice if necessary at the Company's expense.

The Directors have free and open contact with management at all levels. Group Managing Directors and Group General Managers meet informally with Directors after Board meetings. When attending Board offsites and when travelling for other reasons, non-executive Directors are encouraged to take opportunities to see business operations at first hand and to meet management.

Non-executive Directors have an open invitation to attend meetings of the GMB and the Risk Management Meeting to further enhance their understanding and awareness of our businesses and the senior leadership team.

Induction and ongoing development

Full, formal and tailored induction programmes, with particular emphasis on the systems of risk management and internal controls, are arranged for newly appointed Directors. The programmes consist of a series of meetings with other Directors and senior executives to enable new Directors to familiarise themselves with our strategy, risk appetite, operations and internal controls. Directors also receive comprehensive guidance on directors' duties and liabilities. As part of the induction process the Group Company Secretary will coordinate the production of a development programme based on the individual Director's needs. Induction programmes are also arranged for newly appointed members of committees.

Directors are given opportunities to update and develop their skills and knowledge, through briefings by senior executives and externally run seminars throughout their directorship and while serving on committees. Focused in-house development programmes to enhance business awareness are arranged in conjunction with scheduled Board meetings. Directors have access to internal training and development resources.

A personalised approach to training and development of Directors is applied. Records of development activities are maintained by the Group Company Secretary for annual review by the Group Chairman with the Director concerned.

Performance evaluation

In November 2011, Oliver Wyman was commissioned to facilitate and report on the review of effectiveness of the Board, with particular focus on it meeting investor expectations and priorities, and to review progress made in the year since the previous review, which had focused on the Board's risk management and governance responsibilities. Oliver Wyman's report was prepared following interviews with Directors and senior members of management and a review of relevant documents. Factors assessed during Oliver Wyman's review included the Board's performance in key priority areas for investors including strategy, financial performance, risk, regulation, compensation, sustainability and corporate governance.

The Oliver Wyman report concluded that the Board operates effectively with a number of important strengths and that significant progress had been made during 2011 to address recommendations made by Oliver Wyman in last year's report. The report identified some areas where effectiveness could be enhanced. Oliver Wyman has provided and continues to provide consultancy services to the Group.

The report is used by the Board in its annual evaluation of its own performance and that of its committees, and by the Group Chairman in his review of the individual performance of Directors. The Board will monitor implementation of actions arising from its 2011 performance evaluation. All actions arising from the Board's 2010 performance evaluation have been implemented.

It is the intention of the Board to continue to undertake an evaluation of its performance and that of its committees and individual Directors annually, with external input to the process at least every third year.

Formal evaluation of the individual performance of each Director is undertaken annually by the Group Chairman using the findings of the performance evaluation process undertaken by the Board. During this evaluation, the Group Chairman discusses the contribution of the Director and the time spent by them in performing their responsibilities. The Group Chairman has confirmed that all of the non-executive Directors continue to perform effectively and to demonstrate commitment to their roles.

The non-executive Directors, led by the Deputy Chairman and senior independent non-executive Director, are responsible for the evaluation of the performance of the Group Chairman.

Appointment, retirement and re-election of Directors

The Board may at any time appoint any person who is willing to act as a Director, either to fill a vacancy or as an addition to the existing Board, but the total number of Directors shall not exceed twenty-five. Any Director so appointed by the Board shall retire at the Annual General Meeting following his or her appointment and shall be eligible for re-election but would not be taken into account in determining the number of Directors who are to retire by rotation at such meeting in accordance with the Articles of Association. The Board may appoint any Director to hold any employment or executive office and may revoke or terminate any such appointment. Shareholders may, by ordinary resolution, appoint a person a Director or remove any Director before the expiration of his period of office. On the recommendation of the Nomination Committee and in compliance with provision B.7.1 of the UK Corporate Governance Code, the Board has decided that all of the Directors should be subject to annual re-election by shareholders. Accordingly, all of the Directors will retire at the forthcoming Annual General Meeting and, with the exception of G Morgan and Sir Brian Williamson who are to retire, offer themselves for re-election. Each of the executive Directors is employed on a rolling contract which requires 12 months' notice to be given by either party. None of the non-executive Directors has a service contract with HSBC.

Relations with shareholders

All Directors are encouraged to develop an understanding of the views of major shareholders. Non-executive Directors are invited to attend analyst presentations and other meetings with institutional investors and their representative bodies. Directors also meet representatives of institutional shareholders annually to discuss corporate governance matters.

All executive Directors and certain other senior executives hold regular meetings with institutional investors. The Board receives a regular investor relations activity report which provides feedback from meetings with institutional shareholders and brokers, analysts' forecasts, information from research reports and share price performance data. Twice each year the Board also receives a report from one of our corporate brokers on market views and investor relations.

On several occasions during 2011, non-executive Directors, including the senior independent non-executive Director, met or corresponded with institutional investors and their representatives to discuss governance, remuneration and sustainability. In particular there was extensive consultation on the structure of the Group Performance Share Plan, the long-term incentive plan introduced in May 2011, under which awards are made to executive Directors and senior executives.

As senior independent non-executive Director, Sir Simon Robertson is available to shareholders should they have concerns which contact through the normal channels of Group Chairman, Group Chief Executive, Group Finance Director or other executives cannot resolve or for which such contact would be inappropriate. He may be contacted through the Group Company Secretary at 8 Canada Square, London E14 5HQ.

Conflicts of interest, indemnification of Directors, relevant audit information and contracts of significance

The Board has authority to approve Directors' conflicts and potential conflicts of interest and has adopted a policy and procedures for the determination of terms of authorisation for such situations. The Board's powers to authorise conflicts are operating effectively and the procedures are being followed. A review of situational conflicts which have been authorised from time to time and the terms of those authorisations is undertaken by the Board annually.

Our Articles of Association provide that Directors are entitled to be indemnified out of the assets of HSBC Holdings against claims from third parties in respect of certain liabilities. Such indemnity provisions have been in place during the financial year but have not been utilised by the Directors.

Each person who is a Director at the date of approval of this report confirms that so far as he or she is aware, there is no relevant audit information of which the auditor is unaware and the Director has taken all the steps that he or she ought to have taken as a Director in order to make himself or herself aware of any relevant audit information and to establish that the auditor is aware of that information. This confirmation is given pursuant to section 418 of the Companies Act 2006 and should be interpreted in accordance therewith and subject to the provisions thereof.

None of the Directors had, during the year or at the end of the year, a material interest, directly or indirectly, in any contract of significance with any HSBC company.

Corporate governance codes

We are committed to high standards of corporate governance. We have complied throughout the year with the applicable code provisions of The UK Corporate Governance Code issued by the Financial Reporting Council and the Code on Corporate Governance Practices in Appendix 14 to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, save that the Group Risk Committee (all the members of which are independent non-executive Directors), which was established in accordance with the recommendations of the Report on Governance in UK banks and other financial industry entities, is responsible for the oversight of internal controls (other than internal controls over financial reporting) and risk management systems (Code on Corporate Governance Practices provision C.3.3 paragraphs (f), (g) and (h)). If there were no Group Risk Committee, these matters would be the responsibility of the Group Audit Committee. The UK Corporate Governance Code is available at www.frc.org.uk and the Code on Corporate Governance Practices is available at www.hkex.com.hk.

The Board has adopted a code of conduct for transactions in HSBC Group securities by Directors. The code of conduct complies with The Model Code in the Listing Rules of the FSA and with The Model Code for Securities Transactions by Directors of Listed Issuers ('Hong Kong Model Code') set out in the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited, save that The Stock Exchange of Hong Kong Limited has granted certain waivers from strict compliance with the Hong Kong Model Code. The waivers granted by The Stock Exchange of Hong Kong Limited primarily take into account accepted practices in the UK, particularly in respect of employee share plans. Following a specific enquiry, each Director has confirmed he or she has complied with the code of conduct for transactions in HSBC Group securities throughout the year.

Board committees

The Board has established a number of committees consisting of Directors, Group Managing Directors and, in the case of the Corporate Sustainability Committee, co-opted non-director members. The key roles of the principal committees are described above. The Chairman of each non-executive Board committee reports to each meeting of the Board on the activities of the committee since the previous Board meeting.

The terms of reference of the non-executive Board committees are available at www.hsbc.com/boardcommittees. Each non-executive Board committee reviews its terms of reference annually.

Appointments of Directors to each non-executive Board committee are made for periods of up to three years, extendable by no more than two additional three-year periods.

Group Management Board

Members S T Gulliver (Chairman), A A Flockhart and I J Mackay, who are executive Directors, and A Almeida, S Assaf, R E T Bennett, A M Keir, S A Levey, M M Moses, S P O'Sullivan, B Robertson, P A Thurston and P T S Wong, all of whom are Group Managing Directors.

The GMB meets frequently and exercises the powers, authorities and discretions of the Board in so far as they concern the management and day-to-day running of HSBC Holdings. Matters reserved for approval by the Board are described on page 225.

The GMB is a key element of our management reporting and control structure such that all of our line operations are accountable either to a member of the GMB or directly to the Group Chief Executive, who in turn reports to the Group Chairman. The Board has set objectives and measures for the GMB. These align senior executives' objectives and measures with the strategy and operating plans throughout HSBC.

The Group Chief Executive (who is Chairman of the GMB) reports to each meeting of the Board on the activities of the GMB.

Regular Risk Management Meetings, chaired by the Group Chief Risk Officer, are held to review the policy and guidelines for the management of risk within the Group. Further information on the Risk Management Meeting can be found on page 234.

Group Audit Committee

Members¹	Meetings attended²

J D Coombe (Chairman)	7
M K T Cheung	7
R A Fairhead³	3
J R Lomax	6

Meetings held in 2011	7

1 All members are independent non-executive Directors.

2 During the year two meetings were held at short notice.

3 Took a temporary leave of absence due to illness.

The Group Audit Committee ('GAC') has non-executive responsibility for oversight of and advice to the Board on matters relating to financial reporting.

The Board has determined that M K T Cheung, J D Coombe, R A Fairhead and J R Lomax are independent according to SEC criteria and may be regarded as audit committee 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 Corporate Governance Code.

The governance structure for the oversight of financial reporting is set out below. Similar governance arrangements are in place in major operating subsidiaries.

Governance

Authority	Membership	Responsibilities

Board	Executive and non-executive Directors	· Responsible for financial statements · Appoints senior financial officers · Delegates authorities in relation to financial matters

GAC	Independent non-executive Directors	· Monitors the integrity of financial statements · Oversees the internal control systems over financial reporting, including reviewing their effectiveness · Monitors and reviews the effectiveness of the internal audit function · Reviews the Company's financial and accounting policies and practices · Advises the Board on appointment of the external auditor and is responsible for oversight and remuneration of the external auditor

Subsidiary board committees responsible for oversight of financial reporting	Independent non-executive directors and other independent members	· Provide certification to the GAC or intermediate audit committee on financial statements and internal controls over financial reporting of relevant subsidiaries

Committee's activities

The GAC undertook the following activities in the discharge of its responsibilities:

· Internal controls over financial reporting. The Committee satisfied itself that the system of internal control and compliance over financial reporting was effective through regular reports from the Group Finance Director, the Group Chief Accounting Officer, and the Group Head of Internal Audit. The Committee reviewed minutes of the Group Risk Committee ('GRC') and executive committee meetings including the GMB, Risk Management Meetings and the Disclosure Committee. The Committee undertook an annual review of the effectiveness of HSBC's system of internal control over financial reporting. HSBC's internal control system is described on page 240. The Committee also reviewed the adequacy of resources, qualifications and experience of staff in the finance function. Reports were submitted to the Committee on internal control matters in relation to the Sarbanes-Oxley Act. The Group Finance Director, the Group Chief Risk Officer, the Group Head of Internal Audit, the Group Chief Accounting Officer and other senior executives attended Committee meetings. The Committee had regular discussions with the external auditor and the Group Head of Internal Audit, with an opportunity at each meeting for discussions to take place without management present.

· Effectiveness of the internal audit function. The Committee satisfied itself that the internal audit function was effective and adequately resourced through regular meetings held with, and reports provided by, the Group Head of Internal Audit on internal audit issues, including the adequacy and effectiveness of resources. The Committee reviewed an annual report on the activities of the internal audit function and planned activities for the following year.

· Legal and regulatory environment. The Committee received regular updates on the application of changes in law, regulation, accounting policies and practices and regulatory developments, including reports on Basel III, the recommendations of the Independent Commission on Banking, regulation of Global Systematically Important Financial Institutions, and the Dodd-Frank Act. Regular reports were received on litigation. The Committee received reports on meetings with the FSA as part of the FSA's close and continuous supervisory regime.

· External auditor. The Committee provided oversight of the external auditor through regular meetings with the external auditor, including meetings without management present. Reports were received on the external auditor's strategy in relation to the audit of financial statements and the progress of the audit. The Committee has approved policies on the provision of non-audit services by the external auditor and its affiliates and on the employment by HSBC of former employees of the external auditor or its affiliates. The Committee reviewed the independence and objectivity of the external auditor through meetings with the external auditor, annual reports on employment of former employees of the external auditor and its affiliates and quarterly reports on provision of non-audit services. The external auditor provided written confirmation of its independence under industry standards. The Committee approved the remuneration and terms of engagement of, and recommended to the Board the re-appointment of, the external auditor.

· Financial reporting. The Committee advised the Board on meeting its external financial reporting obligations through a review of financial statements, interim reports and interim management statements prior to approval by the Board. The Committee endorsed for inclusion in the financial statements the going concern statement and the statement of compliance with the provisions of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and the UK Corporate Governance Code. The Committee received reports on proposed changes to the Group's disclosures in the financial statements and the adequacy of procedures to identify transactions and matters requiring disclosure under certain accounting standards. A review of accounting policies and practices, including approval of the critical accounting policies, was undertaken. The Committee considered accounting provisioning for, and disclosure of, certain litigation and regulatory matters with external legal counsel providing a status update on these matters. The Committee reviewed minutes of the Disclosure Committee. A presentation was received from the Global Head of Tax on current tax issues. The disclosure of the results of the European Banking Authority ('EBA') EU-wide stress testing programme was considered. Reports were received on economic hedges which do not meet the requirements of hedge accounting.

· Terms of reference and effectiveness of the Committee. The Committee undertook a review of its terms of reference and of its own effectiveness. Changes were made to the terms of reference to minimise the overlap of responsibilities between the GAC and the GRC.

In addition to the scheduled Committee meetings, the Chairman met regularly with the Group Finance Director, the Group Chief Accounting Officer, the Group Chief Risk Officer, the Group Head of Internal Audit, other senior executives and the external auditor.

Terms of reference and subsidiary company audit oversight

Since May 2011, the GAC's responsibility for non-executive oversight of internal controls has been limited to oversight of internal controls over financial reporting, as a consequence of changes made to the terms of reference of the GRC and the GAC to minimise the overlap between the committees.

To ensure consistency of scope and approach by subsidiary company audit committees, the GAC has established core terms of reference to guide subsidiary companies when adopting terms of reference for their audit committees. The Committee's endorsement is required for any proposed material changes to subsidiary audit committee terms of reference and for appointments to such committees.

A forum for the chairmen of our principal subsidiary committees with responsibility for non-executive oversight of financial reporting and risk-related matters is held to facilitate a consistent approach to the way in which these subsidiary committees operate. The last forum was held in November 2010 and the next will be held in June 2012.

Arrangements relating to the external auditor

The Committee has recommended to the Board that KPMG Audit Plc be reappointed as auditor at the forthcoming Annual General Meeting.

An analysis of the remuneration paid in respect of audit and non-audit services provided by KPMG Audit Plc and its affiliates ('KPMG') for each of the past three years is disclosed in Note 8 on the Financial Statements.

The Board has approved, on the recommendation of the Committee, a policy for the employment by HSBC of former employees of KPMG and an annual report is received by the Committee on such former employees who are employed and the number in senior positions. This report enables the Committee to consider whether there has been any impairment, or appearance of impairment, of the external auditor's judgement or independence in respect of the audit.

The policies for the pre-approval of specific services that may be provided by the principal auditor are kept under review by the Committee and amended as necessary to meet the dual objectives of ensuring that we benefit in a cost effective manner from the cumulative knowledge and experience of our auditor, while also ensuring that our external auditor maintains the necessary degree of independence and objectivity. These pre-approval policies apply to all services where any HSBC company pays for the service, or is a beneficiary or addressee of the service, and has selected or influenced the choice of KPMG. All services provided by KPMG during 2011 were pre-approved by the Committee or were entered into under pre-approval policies established by the Committee.

The pre-approved services relate to regulatory reviews, agreed-upon procedures reports, other types of attestation reports, the provision of advice and other non-audit services allowed under SEC independence rules. The services fall into the categories of audit services, audit-related services, tax services and other services.

Group Risk Committee

The GRC is responsible for advising the Board on high-level risk-related matters and risk governance and for non-executive oversight of risk management and internal controls (other than over financial reporting).

Members¹	Meetings attended

R A Fairhead (Chairman)²	4
J D Coombe³	6
J W J Hughes-Hallett	5
J R Lomax	5

Meetings held in 2011	6

1 All members are independent non-executive Directors.

2 Took a temporary leave of absence due to illness. Resumed the role of Chairman in January 2012.

3 Chaired all meetings in 2011 as acting Chairman.

John Trueman, a non-executive director of HSBC Bank plc and Chairman of its risk and audit committees, has been invited by the GRC to attend its meetings. His experience of risk-related matters in the financial services industry is valued by the Committee.

Governance

All of HSBC's activities involve, to varying degrees, the measurement, evaluation, acceptance and management of risk or combinations of risks. The Board, advised by the Committee, requires and encourages a strong risk governance culture which shapes the Group's attitude to risk. The Board and the Committee oversee the maintenance and development of a strong risk management framework by the continual monitoring of the risk environment and top and emerging risks facing the Group, and mitigating actions planned and taken.

The Committee monitors the effectiveness of the Group's risk management and internal controls other than controls over financial reporting, which are monitored by the GAC.

The governance structure for the management of risk at HSBC is set out below. Similar governance arrangements are in place in major operating subsidiaries.

Authority	Membership	Responsibilities

Board	Executive and non-executive Directors	· Approves risk appetite, strategy and performance targets for the Group · Approves appointment of senior risk officers · Delegates authority for risk management

GRC	Independent non-executive Directors	· Advises the Board on: - risk appetite and alignment with strategy - alignment of remuneration with risk appetite (through the Group Remuneration Committee) - risks associated with proposed strategic acquisitions and disposals · Reviews the effectiveness of the Group's systems of risk management and internal controls (other than over financial reporting) · Oversees the maintenance and development of a supportive culture in relation to the management of risk

Risk Management Meeting	Group Chief Risk Officer Group Chief Executive Group Finance Director Senior management	· Formulates high-level Group risk policy · Exercises delegated risk management authority · Oversees implementation of risk appetite and controls · Monitors all categories of risk and determines appropriate mitigating action

Global Risk Management Board	Group Chief Risk Officer Chief Risk Officers of HSBC's global businesses and regions Heads of risk areas within the Global Risk Function	· Supports the Risk Management Meeting and the Group Chief Risk Officer in providing strategic direction for the Global Risk function, sets priorities and oversees their execution · Oversees consistent approach to accountability for, and mitigation of, risk across the Global Risk function

Subsidiary board committees responsible for risk-related matters	Independent non-executive directors and other independent members	· Provides certification to the GRC or intermediate risk committee on risk-related matters and internal controls (other than over financial reporting) of relevant subsidiaries

Risk reporting and monitoring

The GRC regularly monitors:

· the Group's risk appetite and risk profile against key performance/risk indicators, as set out in the Group's Risk Appetite Statement, on a Group-wide, global business and regional basis;

· the top and emerging risks facing the Group; and

· the risk profiles for separate categories of risk within the Group's business identified in the Group's Risk Appetite Statement, on a Group-wide, global business and regional basis;

and reviews the mitigating actions proposed by management.

Reports on these items are presented at each meeting of the Committee. Regular reports from the Risk Management Meeting, which is the executive body responsible for overseeing risk, are also presented.

In carrying out its responsibilities the Committee is closely supported by the Group Chief Risk Officer. The Committee also receives regular presentations from the Group Head of Compliance, Group Head of Internal Audit and other business, function and risk heads.

Risk appetite

Risk appetite is a key component of our management of risk. The Board, advised by the GRC, approves the Group's risk appetite, which describes the types and levels of risk that the Group is prepared to accept in executing our strategy and which is set out in the Group's Risk Appetite Statement. Embedding the Risk Appetite Statement and the related monitoring and reporting framework across the Group has continued to be an area of significant focus in 2011 with initiatives undertaken to establish and develop:

· Risk Appetite Statements for regions and global businesses, which are aligned with Group strategy and the Group's risk appetite; and

· reporting of risk appetite profile against the key performance/risk indicators set out in those Risk Appetite Statements to the Risk Management Meeting and to the GRC.

Our risk appetite framework is underpinned by the following core characteristics:

Risk appetite: core characteristics

· Strong balance sheet

· Strong brand

· Healthy capital position

· Conservative liquidity management

· Risk must be commensurate with sustainable returns

· Robust Group structure of separate legal entities

· The global businesses should produce sustainable long-term earnings growth

· Risk diversification

These core characteristics are applied to define the Risk Appetite Statements on a Group-wide, global business and regional level. The relevant strategic and operational objectives, within which we expect businesses and regions to operate, are expressed quantitatively across the following dimensions:

Strategic and operational objectives
Earnings	1. Generate sustainable economic profit commensurate with the risks taken
Capital and liquidity	2. Maintain capital in excess of regulatory and internal Economic Capital requirements
	3. Maintain a strong tier 1 ratio comprising a high proportion of core tier 1
	4. Maintain a well diversified funding structure with a particular focus on advances to core funding ratios
	5. Off-balance sheet vehicles should not be material in size relative to the total balance sheet
Impairments and expected losses	6. Manage impairments and expected losses within the Group's tolerance
Risk category and diversification	7. Manage all risk categories within the risk appetite
	8. Harness benefits from business diversification to generate non-volatile and sustainable earnings
	9. Compete for business with international customers where market connectivity is critical; businesses with local customers where we have local scale, and products where global scale is critical to effectiveness
Scenario and stress testing	10. Use robust and appropriate scenario stress testing to assess the potential impact on the Group's capital adequacy and strategic plans

Top and emerging risks

Identifying and monitoring top and emerging risks is integral to our approach to risk management. We define a 'top risk' as being a current, emerged risk which has arisen across any of our risk categories, regions or global businesses and has the potential to have a material impact on our financial results or our reputation and the sustainability of our long-term business model, and which may form and crystallise within a one year horizon. We consider an 'emerging risk' to be one which has large uncertain outcomes which may form and crystallise beyond a one year horizon and, if it were to crystallise, could have a material effect on our long-term strategy.

The GRC discusses top and emerging risks with management at each of its meetings. Current top and emerging risks, which are summarised below, are viewed as falling under three broad categories: macro-economic and geopolitical; macro-prudential, regulatory and legal risks to our business model; and risks related to our business operations, governance and internal control systems.

Further details of top and emerging risks identified through our risk management processes are set out on page 99.

Categories	Top and emerging risks
Macro-economic and geopolitical risk	· Eurozone - risk of sovereign default · Eurozone member departing from the currency union · Increased geopolitical risk in certain regions
Macro-prudential, regulatory and legal risks to our business model	· Regulatory developments affecting our business model and Group profitability · Regulatory investigations and requirements relating to conduct of business and financial crime negatively affecting our results and brand · Dispute risk
Risks related to our business operations, governance and internal control systems	· Challenges to achieving our strategy in a downturn · Internet crime and fraud · Social media risk · Level of change creating operational complexity and heightened operational risk · Information security risk

Stress testing

Our stress testing and scenario analysis programme is central to the monitoring of top and emerging risks. It highlights the vulnerabilities of our business and capital plans to the adverse effects of extreme but plausible events.

The outcome of the testing and analysis is also used to assess the potential impact of the relevant scenarios on the demand for regulatory capital compared with its supply.

Management develops action plans to mitigate risks identified. The extent to which those action plans are implemented depends on management's evaluation of the risks and their potential consequences, taking into account HSBC's risk appetite.

Further information on scenario stress testing is set out on page 188.

Stress tests and scenario tests fall into three main classifications: regulatory scenarios; Group-wide business scenarios; and specific business or exposure scenarios.

During the year, the GRC reviewed the outcome of Group-wide stress tests and scenario analysis undertaken in accordance with the requirements of the FSA, the EBA and the IMF involving analysis of capital levels and requirements in various stress scenarios. We satisfied the required thresholds in each of these tests. The GRC also considered the outcome of stress tests undertaken on specific business risks and exposures, including exposure to eurozone counterparties and sovereigns and to the residential mortgage business in Hong Kong, and the implementation of action plans to mitigate risks where appropriate.

Internal Audit has conducted a review of stress testing within the Group including model development, validation and use, and the methodology, governance and management of enterprise-wide stress testing. The development of HSBC's stress testing and scenario testing analysis programme will continue to be an area of focus for the Committee.

Committee activities

The GRC undertook the following key activities in the discharge of its responsibilities:

· Oversight of executive risk management. Regular reports and presentations were received from the Group Chief Risk Officer including at each meeting a presentation of a 'risk map', which provided detailed analysis, on a Group-wide, global business and regional basis, of risk profiles for categories of risk identified in the Group Risk Appetite Statement, and of a top and emerging risks report which summarised proposed mitigating actions for identified risks. The Committee reviewed minutes of the GAC, Group Remuneration Committee and executive committee meetings including the GMB, the Risk Management Meeting and the Group Reputational Risk Policy Committee. Reports were received from the Group General Counsel on forward-looking legal risks, the Group Head of Compliance on forward-looking compliance risks and from the Group Remuneration Committee and Head of Group Performance and Reward. Updates were received on the on-going investigations by US regulatory and law enforcement authorities and US dispute risk, and compliance matters in the US. The Group Finance Director and the Group Chief Accounting Officer regularly attended meetings of the Committee and other senior financial, risk, internal audit, legal and compliance executives attended as appropriate.

· Stress testing. The Committee reviewed the outcome of stress tests as referred to in the section headed 'Stress Testing' on page 236.

· Review of effectiveness of internal controls. A series of presentations were made, and reports submitted by, the Group Chief Risk Officer and other business and function heads to the Committee on the risk control framework in their respective business or function. Reports from the Group Head of Internal Audit on the internal audit process and weaknesses identified in internal controls (other than over financial reporting) were presented to the Committee, as well as reports from the external auditor and regulators relating to the internal control system. The Committee undertook an annual review process of HSBC's system of internal controls, other than over financial reporting. HSBC's internal control system is described on page 240. The Committee had regular discussions at meetings with the external auditor and the Group Head of Internal Audit, with opportunities at each meeting for discussions to take place without management present.

· Risk appetite. The Group Risk Appetite Statement for 2011 was recommended to the Board for approval following consideration of the alignment of risk appetite and Group strategy. The Committee undertook regular reviews of the Group's risk profile against the key performance indicators set out in the Risk Appetite Statement and considered the need for any adjustment to the risk appetite. Reports and presentations were received from the Group Chief Risk Officer, including on liquidity and capital management and the results of HSBC's stress testing and scenario analysis programme.

· Alignment of remuneration with risk appetite. Presentations and reports were received on remuneration-related proposals to assist the Committee in giving advice to the Group Remuneration Committee on the alignment of remuneration with risk appetite. The GRC considered risk-related issues to be taken into account by the Group Remuneration Committee, including when determining the total variable pay funding pool for the 2011 performance year. The funding methodology, including the proposed ratio between variable pay funding, dividends and capital retained, was also considered. The Committee received presentations on the procedure for determining individual variable pay awards including the risk assessment process for identifying matters for which risk-related adjustments may be made to individual and team awards. The process by which an individual's adherence to HSBC Values and the Group's risk-related policies and procedures is taken into account in performance assessment and determination of variable pay was also presented to the Committee. The Committee considered the framework to be used by the Group Remuneration Committee in exercising its discretion in delivering performance awards for the 2011 performance year and the proposed design of the performance scorecard for the 2012 performance year. The Committee provided advice and feedback on risk-related matters to the Group Remuneration Committee where appropriate.

· Top and emerging risks. In monitoring top and emerging risks the Committee received regular reports from the Group Chief Risk Officer and the Group Head of Compliance as well as other members of senior management on risks identified and developments in the Group's business, including the changing regulatory environment and global market risk such as the implications of the eurozone crisis and the impact of the tightening of liquidity in the money markets. The Committee reviewed minutes of executive committee meetings including meetings of the GMB, the Risk Management Meeting and Group Reputational Risk Policy Committee.

· Acquisitions. The Committee received reports and presentations on risk issues relating to proposed strategic acquisitions and advised the Board appropriately. The Group Head of Mergers and Acquisitions and other members of senior management involved in the proposed acquisitions attended meetings of the Committee as appropriate.

· Terms of reference and Committee effectiveness. The Committee undertook a review of its terms of reference and of its own effectiveness. Changes were made to the Committee's terms of reference to minimise the overlap of responsibilities between the GRC and the GAC.

In addition to the scheduled Committee meetings, the Chairman met regularly with the Group Chief Risk Officer, the Group Head of Internal Audit, the Group Finance Director, other senior executives and the external auditor.

Professional external advice on US compliance matters has been provided by Promontory Financial Group, US financial consultants.

Terms of reference and subsidiary company risk oversight

Since May 2011, the GRC has been responsible for non-executive oversight of risk management and internal controls, other than internal controls over financial reporting, as a consequence of changes made to the terms of reference of the GRC and the GAC to minimise the overlap between the committees.

To ensure consistency of scope and approach by subsidiary company committees, the GRC has established core terms of reference to guide subsidiary companies when adopting terms of reference for their non-executive risk committees (or audit committees if those committees are also responsible for risk oversight). The Committee's endorsement is required for any proposed material changes to subsidiary risk committee terms of reference and for appointments to such committees.

Group Remuneration Committee

Members¹	Meetings attended²

J L Thornton (Chairman)	8
J D Coombe	9
W S H Laidlaw	9
G Morgan	8

Meetings held in 2011	9

1 All members are independent non-executive Directors.

2 During the year two meetings were held at short notice.

The Group Remuneration Committee is responsible for approving remuneration policy. As part of its role, it considers the terms of bonus plans, share plans, other long-term incentive plans and the individual remuneration packages of executive Directors and other senior Group employees, including all in positions of significant influence and those having an impact on our risk profile and in doing so takes into account the pay and conditions across the Group. No directors are involved in deciding their own remuneration.

The Directors' Remuneration Report is set out on pages 256 to 274.
Nomination Committee

Members¹	Meetings attended

Sir Simon Robertson² (Chairman)	4
D J Flint³	4
R A Fairhead⁴	3
J W J Hughes-Hallett	4
Sir Brian Williamson	4

Meetings held in 2011	4

1 Since 2 December 2011, all members are independent non-executive Directors.

2 Appointed Chairman 2 December 2011.

3 Retired as Chairman and a member of the Committee on 2 December 2011.

4 Took a temporary leave of absence due to illness.

On 2 December 2011, Sir Simon Robertson was appointed Chairman of the Nomination Committee in succession to D J Flint who stepped down from the Nomination Committee. D J Flint has been invited to continue to attend meetings of the Committee.

Committee activities

The Committee undertook the following key activities in the discharge of its responsibilities:

· Appointments of new Director: The Committee oversaw the process for the appointment of L M L Cha as a Director. L M L Cha has been deputy chairman of The Hongkong and Shanghai Banking Corporation since 2 March 2007 and was therefore well known to members of the Board prior to her appointment as a Director. Neither external consultants nor advertising were considered necessary in relation to this appointment.

· Board appointment process. The Committee leads the process for Board appointments, with the support of external consultants as appropriate, and has satisfied itself that appropriate plans are in place for orderly succession to the Board reflecting an appropriate balance of skills and experience on the Board.

· Forward planning. The Committee maintains a forward-looking schedule of potential candidates for appointment to the Board that takes into account the needs and development of the Group's businesses and the expected retirement dates of current Directors.

· Size, structure and composition. The Committee monitored the size, structure and composition of the Board through consideration of the skills, knowledge and experience required of the Board and the skills, knowledge and

experience of the current Directors. The Committee considered the re‑election of Directors at the Annual General Meeting and on the recommendation of the Committee, the Board has decided that all Directors should be subject to re-election by shareholders in 2012.

· Gender diversity. The Committee reviewed Lord Davies of Abersoch's report 'Women on Boards' and amendments to the UK Corporate Governance Code. The benefits of diversity continue to influence succession planning and are key criteria in the instructions to external search consultants.

· Terms of reference and Committee effectiveness. The Committee undertook a review of its terms of reference and amendments were made to make explicit reference to the need to have regard to the benefits of diversity when identifying suitable candidates for appointment to the Board. The effectiveness of the Committee was reviewed as part of the Board's performance evaluation.

Before recommending an appointment to the Board, the Committee evaluates the balance of skills, knowledge and experience of the Board and, in light of this, and taking into account the needs of the Group's businesses, identifies the role and capabilities required for a particular appointment. Candidates are considered on merit against these criteria. Care is taken to ensure that appointees have enough time to devote to us. Prospective Directors are asked to identify any significant other commitments and confirm they have sufficient time to discharge what is expected of them.

Corporate Sustainability Committee

Members	Meetings attended

N R N Murthy (Chairman)	4
L M L Cha¹	3
V H C Cheng²	1
G V I Davis³	4
Lord May³	3
Dame Mary Marsh³	4

Meetings held in 2011	4

1 Appointed a member on 3 May 2011. Eligible to attend 3 meetings.

2 Retired as a Director on 27 May 2011. Eligible to attend 2 meetings.

3 Non-Director members of the Committee.

Sustainability governance

The Corporate Sustainability Committee is responsible for overseeing the Group's Corporate Sustainability policies (principally environmental, social and ethical matters) and for advising the Board, committees of the Board and executive management on such matters.

HSBC has a Corporate Sustainability department within Group Head Office and in each of our major regions and countries of operation. At an operational level, implementation of our sustainability policies is managed primarily by Group Corporate Sustainability, Group Human Resources and Global Risk.

HSBC reports on progress in developing and implementing our sustainability strategy annually in the HSBC Sustainability Report, which is independently verified and prepared using the Global Reporting Initiative. PricewaterhouseCoopers verified the Group's commitment to carbon neutrality and adherence to the Equator Principles. The HSBC Sustainability Report 2011 will be issued on 25 May 2012 and will be available at www.hsbc.com/sustainability.

Corporate sustainability

At HSBC, we recognise that environmental, social and economic issues can affect the Group's long-term success as a business. For us, corporate sustainability means achieving sustainable profit growth so that we can continue to reward shareholders and employees, build long-lasting relationships with customers and suppliers, pay taxes and duties in those countries where we operate, and invest in communities for future growth.

Our continuing financial success depends, in part, on our ability to identify and address certain factors which present risks or opportunities for the business. These can affect our reputation, drive employee engagement, help manage the risks of lending, leverage savings through eco-efficiency and secure new revenue streams. They generally fall into one or more of the four broad areas discussed below.

Business finance

We aim to build long-term customer relationships around the world through the provision of a consistent and high-quality service and customer experience. We use the benefits of our scale, financial strength, geographical reach and strong brand value to achieve this.

We aim to take advantage of the opportunities and manage the risks presented by emerging global trends by developing sustainable business models to address them. We understand that the world is changing; in 2011 the world's population was estimated to have passed seven billion people, compared to approximately three billion just 50 years earlier; people are also living longer - the percentage of the global population aged 65 years or older is now estimated to be about 7.5% of the total population, compared with about 5% 50 years ago. Increasing urbanisation is also a significant trend with over half the world's population now living in cities. The effects of continued population and economic growth are reflected in rising atmospheric CO₂ levels and high commodity prices, and are raising concerns over potential resource constraints. HSBC will continue to play a leading role in shaping the market response to these challenges, identifying how business can adapt in ways that bring both social and environmental benefits, while providing viable economic returns.In 2011, we continued to research the likely effects that climate change, and the responses to it, will have on our business and those of our customers. For example we published research reports into 'The World in 2050' and 'Scoring Climate Change Risk - Which countries are most vulnerable?'

Operational environmental efficiency

We focus our environmental initiatives primarily on addressing and responding to issues associated with climate change, including energy use, water and waste management. This issue has the potential to affect materially our customers and, by extension, our long-term success, introducing new risks to business activity. At the end of 2011, we committed to a series of targets stretching through to 2020, which will further reduce HSBC's impact on the environment.

Community investment

We have a long-standing commitment to the communities in which we operate. Many of our key markets are emerging economies. Our operations bring benefits to our host countries through tax contributions, and to local people and businesses through employment, training, purchasing and investment. Beyond our core business, we aim to encourage social and economic opportunity through community investment activities.

Our focus is on education and the environment because we believe they are essential building blocks for the development of communities and are prerequisites for economic growth. These philanthropic programmes aim to involve employees in the work of local NGOs and charities. Our global education programmes focus on helping disadvantaged children, promoting financial literacy and environmental education and understanding. Our flagship US$100m environmental programme, the HSBC Climate Partnership, came to an end at the close of 2011. Over the last five years we have worked alongside The Climate Group, Earthwatch, Smithsonian Tropical Research Institute and WWF on tackling climate change. The Climate Partnership has created a global community of 2,233 HSBC employees, called Climate Champions, who have conducted research in the field and applied this learning to our business. The Partnership also benefitted from 63,000 days of volunteering HSBC colleagues.

In 2011, we donated a total of US$96m to community investment projects (2010: US$108m).

Employee issues

'Employee engagement' describes employees' emotional and intellectual commitment to their organisation and its success and is critical to the long-term ability of the Group to deliver the highest quality of financial services. Our Global People Survey shows that employees value our commitment to sustainable business practices and view us as being a leader in this regard. In 2011, 81% of colleagues said they were satisfied with the actions HSBC is taking to embed sustainability (e.g. environmental and social issues) into the way we run our business.

Sustainability risk

Our approach to managing sustainability risk is detailed in the Appendix to Risk on page 210.

Internal control

The Directors are responsible for internal control in HSBC and for reviewing its effectiveness. Procedures have been designed for safeguarding assets against unauthorised use or disposal; for maintaining proper accounting records; and for the reliability and usefulness of financial information used within the business or for publication. Such procedures are designed to manage and mitigate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement, errors, losses or fraud. The procedures also enable HSBC Holdings to discharge its obligations under the Handbook of Rules and Guidance issued by the FSA, HSBC's lead regulator.

The key procedures that the Directors have established are designed to provide effective internal control within HSBC and accord with the Internal Control: Revised Guidance for Directors on the Combined Code on corporate governance issued by the Financial Reporting Council. Such procedures for the ongoing identification, evaluation and

management of the significant risks faced by HSBC have been in place throughout the year and up to 27 February 2012, the date of approval of the Annual Report and Accounts 2011. In the case of companies acquired during the year, the internal controls in place are being reviewed against HSBC's benchmarks and integrated into HSBC's processes.

Key internal control procedures include the following:

· Delegation of authority within limits set by the Board. Authority to operate the various subsidiaries and responsibilities for financial performance against plans and for capital expenditure are delegated to their respective chief executive officers within limits set by the Board. Delegation of authority from the Board to individuals requires those individuals to maintain a clear and appropriate apportionment of significant responsibilities and to oversee the establishment and maintenance of systems of control appropriate to the business. The appointment of executives to the most senior positions within HSBC requires the approval of the Board.

· Group standards. Functional, operating, financial reporting and certain management reporting standards are established by global function management committees, for application across the whole of HSBC. These are supplemented by operating standards set by functional and local management as required for the type of business and geographical location of each subsidiary.

· Risk identification and monitoring. Systems and procedures are in place in HSBC to identify, control and report on the major risks including credit, market, liquidity, capital, financial management, model, reputational, pension, strategic, sustainability and operational risk (including accounting, tax, legal, compliance, fiduciary, information security, security and fraud, systems and people risk). Exposure to these risks is monitored by risk management committees, asset and liability committees and executive committees in subsidiaries and, for HSBC as a whole, by the GMB. Risk Management Meetings, chaired by the Group Chief Risk Officer, are held in each month (except August) to address asset, liability and risk management issues. The minutes of these meetings are submitted to the GAC, the GRC and the Board.

· Global Operational Risk and Control Committee. The Global Operational Risk and Control Committee ('GORCC'), which reports to the Risk Management Meeting, meets at least quarterly to monitor HSBC's operational risk profile and review the effective implementation of the Group's operational risk management framework. The GORCC receives quarterly reports on the Group's operational risk profile, including performance against risk appetite, top and emerging risks, control issues, operational risk loss events and key risk indicators.

· Disclosure Committee. The Disclosure Committee reviews material public disclosures made by HSBC Holdings for any material errors, misstatements or omissions. The membership of the Disclosure Committee, which is chaired by the Group Company Secretary, includes the Heads of the Finance, Legal, Risk, Compliance, Corporate Communications, Investor Relations and Internal Audit functions and representatives from the principal regions and global businesses. The integrity of disclosures is underpinned by structures and processes within the Finance and Risk functions that support expert and rigorous analytical review of financial reporting complemented by certified reviews by Heads of global businesses, global functions and certain legal entities.

· Financial reporting. The Group financial reporting process for preparing the consolidated Annual Report and Accounts 2011 is controlled using documented accounting policies and reporting formats, supported by a chart of accounts with detailed instructions and guidance on reporting requirements, issued by Group Finance to all reporting entities within the Group in advance of each reporting period end. The submission of financial information from each reporting entity to Group Finance is subject to certification by the responsible financial officer, and analytical review procedures at reporting entity and Group levels.

· Changes in market conditions/practices. Processes are in place to identify new risks arising from changes in market conditions/ practices or customer behaviours, which could expose us to heightened risk of loss or reputational damage. During 2011, attention was focused on:

- embedding further risk appetite and stress testing into the business of HSBC through refining processes around risk identification and forward-looking risks;

- the top and emerging risk process prompted a number of reviews and special papers on key risks, which were presented to the Risk Management Meeting, GRC and Board;

- managing geopolitical risk and ongoing instability in the eurozone;

- managing and mitigating the uncertain economic risks within major markets particularly in the US;

- a single name concentration risk process for HSBC's larger corporate exposures;

- the Group's global wholesale risk aggregation system which has been implemented Group-wide;

- the mitigation of information risks; and

- enhancement of polices and practices relevant to the prevention of financial crimes.

· Strategic plans. Periodic strategic plans are prepared for global businesses, support functions and certain geographies within the framework of the Group's strategy. Rolling operating plans, informed by detailed analysis of risk appetite describing the types and quantum of risk that we are prepared to take in executing our strategy, are prepared and adopted by all major HSBC operating companies and set out the key business initiatives and the likely financial effects of those initiatives.

· Governance arrangements. Governance arrangements are in place to provide oversight of, and advice to the Board on, material risk-related matters including assurance that risk analytical models are fit for purpose, used accordingly and complemented by both model-specific and enterprise-wide stress tests that evaluate the impact of severe yet plausible events and other unusual circumstances not fully captured by quantitative models.

· IT operations. Centralised functional control is exercised over all IT developments and operations. Common systems are employed for similar business processes wherever practicable.

· Functional management. Global functional management is responsible for setting policies, procedures and standards for the following risks: credit, market, liquidity, capital, financial management, model, reputational, pension strategic, sustainability and operational risk (including accounting, tax, legal, compliance, fiduciary, information security, security and fraud, systems and people risk). Authorities to enter into credit and market risk exposures are delegated with limits to line management of Group companies. The concurrence of the appropriate global function is required, however, to credit proposals with specified higher risk characteristics. Credit and market risks are measured and reported on in subsidiaries and aggregated for review of risk concentrations on a Group-wide basis.

· Reputational risk. Policies to guide subsidiary companies and management at all levels in the conduct of business to safeguard the Group's reputation are established by the Board and the GMB, subsidiary company boards, Board committees and senior management. Reputational risks can arise from environmental, social or governance issues, as a consequence of operational risk events or as a result of employees acting in a manner inconsistent with HSBC's Values. As a banking group, HSBC's good reputation depends upon the way in which it conducts its business but it can also be affected by the way in which clients, to which it provides financial services, conduct their business or use financial products and services.

· Internal Audit. The establishment and maintenance of appropriate systems of internal control is primarily the responsibility of business management. The Internal Audit function, which is centrally controlled, monitors the effectiveness of internal control structures across the whole of HSBC focusing on the areas of greatest risk to HSBC as determined by a risk-based grading approach. The Head of this function reports to the Group Chairman, the Group Chief Executive, the GAC and the GRC on risk-related matters.

· Internal Audit recommendations. Executive management is responsible for ensuring that recommendations made by the Internal Audit function are implemented within an appropriate and agreed timetable. Confirmation to this effect must be provided to Internal Audit. Executive management must also confirm annually as part of the internal audit process that offices under their control have taken, or are in the process of taking, the appropriate actions to deal with all significant recommendations made by the external auditor in management letters or by regulators following regulatory inspections.

In May 2011, amendments were made to the terms of reference of the GRC and the GAC to minimise the overlap between the Committees. As a

result, the GAC has non-executive responsibility for oversight of internal controls over financial reporting and the GRC has non-executive responsibility for internal controls other than over financial reporting.

The GRC and the GAC have kept under review the effectiveness of this system of internal control and have reported regularly to the Board of Directors. In carrying out their reviews the GRC and the GAC receive regular business and operational risk assessments; regular reports from the Group Chief Risk Officer and the Group Head of Internal Audit; reports on the annual reviews of the internal control framework of HSBC Holdings and of major operating subsidiary companies, in each case measured against HSBC benchmarks, which cover all internal controls, both financial and non-financial; semi-annual confirmations from chief executives of principal subsidiary companies as to whether there have been any material losses, contingencies or uncertainties caused by weaknesses in internal controls; internal audit reports; external audit reports; prudential reviews; and regulatory reports. The GRC monitors the status of top and emerging risks which impact the Group and considers whether the mitigating actions put in place are appropriate. In addition, when unexpected losses have arisen or when incidents have occurred which indicate gaps in the control framework or in adherence to Group policies, the GRC and the GAC review special reports, prepared at the instigation of management, which analyse the cause of the issue, the lessons learned and the actions proposed by management to address the issue.

The Directors, through the GRC and the GAC, have conducted an annual review of the effectiveness of our system of internal control covering all material controls, including financial, operational and compliance controls, risk management systems, the adequacy of resources, qualifications and experience of staff of the accounting and financial reporting function, and their training programmes and budget. The review does not extend to joint ventures or associates. The GRC and the GAC have received confirmation that executive management has taken or is taking the necessary actions to remedy any failings or weaknesses identified through the operation of our framework of controls.

Going concern basis

The financial statements are prepared on a going concern basis, as the Directors are satisfied that the Group and parent company have the resources to continue in business for the foreseeable future. In making this assessment, the Directors have considered a wide range of information relating to present and future conditions, including future projections of profitability, cash flows and capital resources. Further information relevant to the assessment is provided elsewhere in this Report. In particular, HSBC's principal activities, business and operating models, strategic direction and top and emerging risks are described in the 'Overview' section; a financial summary, including a review of the consolidated income statement and consolidated balance sheet, is provided in the 'Operating and Financial Review' section; and HSBC's objectives, policies and processes for managing credit, liquidity and market risk, and its approach to capital management and allocation, are described in the 'Risk' section.

Employees

At 31 December 2011, HSBC employed 298,000 full-time and part-time employees worldwide, compared with 307,000 at 31 December 2010 and 302,000 at 31 December 2009. The main centres of employment were the UK with approximately 51,000 employees, India 32,000, Hong Kong 30,000, the US 24,000, Brazil 24,000, Mexico 19,000, mainland China 17,000 and France 10,000.

In the context of the current global financial services operating environment, a high performance and values-led work force is critical. We encourage open and honest communication in decision making. Employment issues and the financial and economic factors affecting HSBC's performance are regularly shared with our employees.

Global People Survey

In 2011, we conducted our fifth Group-wide Global People Survey, which achieved a participation rate of 81%. The survey gives employees the opportunity to provide feedback on their experience of HSBC and involves them in identifying actions to improve their experience. Employee engagement improved 1 percentage point from 68% in 2010 to 69% in 2011. This was 2 percentage points higher than the financial services sector average and 7 percentage points above the external global average.

Those who participate in our corporate sustainability initiatives continue to exhibit higher levels of engagement. Employees reported improvement on personal aspects of their employment experience such as work-life balance and performance management. Their experience of a values-led culture and effective team working were also positive. Both were above the financial sector average with a values-led culture achieving 1 percentage point above the global best in class.

Reward

Our approach to reward is meritocratic and market competitive, underpinned by an ethical performance culture which aligns the interests of our employees, shareholders and regulators. See Employee share plans on page 245.

We negotiate and consult with recognised unions as appropriate. The five highest concentrations of union membership are in Argentina, Brazil, mainland China, Malta and Mexico. It is our policy to maintain well-developed communications and consultation programmes with all employee representative bodies and there have been no material disruptions to our operations from labour disputes during the past five years.

Diversity and inclusion

Our deep roots in many geographical regions and an international approach inform our perspective on diversity: ethnicity, age and gender diversity are areas of strategic focus. We remain committed to meritocracy, which requires a diverse and inclusive culture where employees believe that their views are heard, their concerns are attended to and they work in an environment where bias, discrimination and harassment on any matter (e.g. religion, sexuality and disability) are not tolerated and where advancement is based on objectivity. Our inclusive culture helps us respond to our increasingly diverse customer base, while developing and retaining a secure supply of skilled, committed employees. Oversight of our Diversity and Inclusion agenda and related activities resides with executives on the Group Diversity Committee, complemented by the Group People Committee and local People/Diversity Committees.

The role of HSBC Values in daily operating practice has taken on increased significance in the context of the global financial crisis with changes to regulatory policy, investor confidence and society's view of the role of banks.

Staff development

The development of talented employees in both developed and emerging markets is essential to the future strength of our business. We have implemented a systematic approach to identifying and deploying talented employees across the organisation to ensure an appropriate supply of high

calibre individuals with the skills and experience for current and future senior management positions.

In 2011, we continued to build global consistency across our learning curricula and to improve the relevance and quality of learning programmes. We have endeavoured to achieve a standard of excellence focusing on leadership and technical capability.

Employment of disabled persons

We believe in providing equal opportunities for all employees. The employment of disabled persons is included in this commitment and the recruitment, training, career development and promotion of disabled persons is based on the aptitudes and abilities of the individual. Should employees become disabled during their employment with us, efforts are made to continue their employment and, if necessary, appropriate training is provided.

Health and safety

The maintenance of appropriate health and safety standards remains a key responsibility of all managers and we are committed to proactively managing all health and safety risks associated with our business. Our objectives are to identify, remove, reduce or control material risks relating to fires and accidents or injuries to employees and visitors.

Group standards, instructions, policies and guidance for all Health, Safety and Fire Policies are set by Group Corporate Real Estate. Achieving these in each country in which we operate is the responsibility of the Chief Operating Officer of that country with support and coordination provided by the Health and Safety Coordinator for that country.

In terms of physical and geopolitical risk, Global Security and Fraud Risk provides regular Security Risk Assessments to assist management in judging the level of terrorist and violent criminal threat. Regional Security and Fraud Risk functions conduct regular security reviews of all Group buildings to ensure measures to protect our staff, buildings, assets and information are appropriate to the level of threat.

We remain committed to maintaining our preparedness and to ensuring the highest standards of health and safety wherever in the world we operate.

This information is provided by RNS

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