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HSBC Holdings PLC (HSBA)

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Tuesday 23 February, 2021

HSBC Holdings PLC

Annual Financial Report - Part 6

RNS Number : 0672Q
HSBC Holdings PLC
23 February 2021
 

Corporate governance report

 

Page

Group Chairman's governance statement

196

The Board

198

Senior management

202

How we are governed

204

Board activities during 2020

210

Board committees

214

Directors' remuneration report

233

Share capital and other related disclosures

269

Internal control

274

Employees

275

Statement of compliance

279

Directors' responsibility statement

280

 

 

 

 

HSBC is committed to high standards of corporate governance. We have a comprehensive range of policies and systems in place designed to ensure that the Group is well managed, with effective oversight and control.

 

 

 

Group Chairman's governance statement

Despite the challenging environment, the Board remained informed on relevant issues, engaged with stakeholders, and oversaw the development of our new Group purpose and values.

 

 

 

''Governance improvements will remain an area of focus for the Board and its subsidiaries in the years ahead as the Group aims to achieve its ambition of operating with world-class governance."

 

Dear Shareholder

With the global pandemic and challenging macroeconomic and geopolitical environment, 2020 was an extraordinary year for the Board. These challenges have highlighted the importance of our governance framework and operating practices. Against this backdrop, the Board oversaw the development of the Group's future purpose and strategy led by the Group Chief Executive. We adapted our Board and senior management engagement schedule to ensure that as a Board, we continued to deliver on our responsibilities to our key stakeholders.

As Group Chairman, I am ultimately responsible for the Group's governance arrangements and the effective operation of the Board. I am also responsible for ensuring that the Board sets the right tone from the top of the organisation and monitors the Group's culture. Given the unique challenges faced during 2020 as a result of the Covid-19 outbreak, it was important that the Board was properly informed on a regular basis on all key issues and priorities affecting the Group. To achieve this, we increased our Board communication and met more frequently during 2020, albeit remotely and with scheduling flexed to meet the challenges of Directors based in different time zones. This allowed us to share insights and receive updates on key developments, supported by the attendance of external subject matter experts.

Given the restrictions on travel and large gatherings, and the guidance available to us at the time, we took the decision to hold the 2020 AGM behind closed doors. As we approach our 2021 AGM, we will continue to monitor the situation, and will prioritise the health and safety of the Board, our colleagues and of course our shareholders. Further details will be provided when our Notice of AGM is published on 24 March 2021.

Board changes

Following a thorough and robust search process, as more fully set out in the Nomination & Corporate Governance Committee report on page 213, the Board unanimously supported the appointment of Noel Quinn as Group Chief Executive on 17 March 2020. Noel has provided strong direction and excellent leadership to HSBC through these unprecedented times.

I would like to thank Sir Jonathan Symonds and Kathleen Casey who stepped down from the Board earlier this year. We subsequently appointed three new Directors, James Forese, Steven Guggenheimer and Eileen Murray, who collectively bring strong universal banking, operational and technology expertise. 

While the Board and its committees have operated well in a virtual environment, I do not underestimate the value of in-person meetings. Our three new Directors underwent a successful virtual non-executive Director induction programme during the year and we look forward to welcoming them in person at an appropriate point in the future.

Today we also announce that Laura Cha will step down from the Board at the conclusion of our 2021 AGM in May. On behalf of the Board, I wish to thank Laura for her outstanding dedication and the enormous contribution she has made to the success of HSBC over many years. I greatly appreciate the support and counsel that she has provided to me personally on many occasions since I became the Group Chairman.

The Board initiated a search for suitable candidates to join and strengthen the expertise on the Board, and further enhance our Board diversity and knowledge of Asia. I was delighted that last week we were able to announce the appointment of Dame Carolyn Fairbairn as an independent non-executive Director. Carolyn will bring a wealth of relevant experience to our Board and her appointment will be effective from 1 September 2021. I am pleased to report we are in advanced stages on other searches that will result in further strengthening the Board's skill set.

Board evaluation

In line with best practice, the Board and its committees again conducted a review of the effectiveness of our operation and practices.

Our 2019 review identified a number of areas for improvement in the way that the Board operated. We took a number of actions during the second half of 2019 and throughout 2020 to address the areas identified, which contributed to improved effectiveness despite the challenges posed by Covid-19 and the uncertain geopolitical environment.

We took the decision to once again invite Dr Tracy Long, the independent board evaluator, to facilitate our 2020 review, provide assurance on the progress made, and identify any areas where further action was required. Further details of the process, findings and recommendations from the 2020 review can be found on page 211.

 

Subsidiary governance

During the year, the Board requested the Group Company Secretary and Chief Governance Officer to undertake a review of subsidiary governance, including a review of the composition of the principal subsidiary boards. Following this exercise, principal subsidiaries will report to the Nomination & Corporate Governance Committee during 2021 on their future board compositions and succession plans to help ensure that they have effective and diverse skill sets that are aligned with our future strategy. Further details are set out in the Nomination & Corporate Governance Committee report on page 213.

We enhanced our subsidiary accountability framework, which applies to all subsidiaries within the Group, by supplementing this with clear principles and provisions. The refreshed framework builds on the progress made to enhance Group standards with the aim of achieving world-class governance across all our subsidiaries.

We strengthened connectivity between the HSBC Holdings Board and principal subsidiaries by increasing the frequency of the Chairman's Forum meetings. These monthly meetings - which I chair - are attended by the chairs of the Holdings Board committees and the chairs of the principal subsidiaries' boards. Given the significant uncertainty and challenges that the Group, the industry and wider society encountered in 2020, these more frequent meetings proved hugely beneficial in identifying and navigating the challenges facing the Group globally.

Purpose and values

As we developed our purpose and values, the Board undertook significant engagement with key stakeholders. Their input was important and influenced the outcome. It is critical that the values and associated behaviours are embedded across the Group. Senior management's success in embedding the purpose and values will be overseen by the Board. The Board and the Group Executive Committee set the tone from the top by adopting these refreshed values, which will inform the Board's engagement practices and help facilitate an open and collaborative relationship with its stakeholders. The boardroom guidelines, which set out the ways of working between the Board and management and which were implemented in 2020, also support the engagement between the Board and management.

Further details of the Board's consideration when developing the purpose and values can be found in our section 172 statement on page 24 .

Climate commitments

Environmental, social and governance ('ESG') issues have been an area of significant Board focus during 2020. This has been in the form of formal consideration of our strategy and ambitions in relation to ESG and climate issues, as well as training to provide the Board with insight and an understanding of the developing landscape and stakeholder expectations.

Recognising the importance of these matters to our stakeholders, investors and customers, the Board was pleased to announce our updated climate ambition in October 2020. Further information is provided on pages 24 and 44.

 

Workforce engagement

Members of the Board and subsidiary boards engaged actively with our employees during 2020 in line with the requirements of the 2018 UK Corporate Governance Code in relation to workforce engagement.

Despite travel restrictions, all of the non-executive Directors engaged directly with members of the workforce across our global business lines, and through our employee resource groups. This has provided great insight into the views of the wider workforce and gave valuable context for the Directors in informing their discussions at the Board. Further details of our workforce engagement practices during 2020 can be found on page 210.

 

Looking ahead

I am pleased with the progress that the Board and broader Group have made in enhancing our governance practices during 2020. Governance improvements will remain an area of focus for the Board and its subsidiaries in the years ahead as the Group aims to achieve its ambition of operating with world-class governance.

As a result of the Covid-19 outbreak, we have had to adjust how we engage with our shareholders and other stakeholders, with in-person meetings substituted for virtual meetings where necessary. Despite this, we continued to engage fully with institutional investors. With encouraging news regarding successful vaccines, I look forward to resuming in-person engagement practices with our stakeholders when safe to do so.

 

 

Mark E Tucker

Group Chairman

23 February 2021

 

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 (63) 4C

Group Chairman

Appointed to the Board: September 2017

Group Chairman since: October 2017

 

Skills and experience: With over 30 years' experience in financial services in Asia and the UK, Mark has a deep understanding of the industry and the markets in which we operate.

Career: Mark was previously Group Chief Executive and President of AIA Group Limited ('AIA'). Prior to joining AIA, he held various senior management roles with Prudential plc, including as Group Chief Executive for four years. He served on Prudential's Board for 10 years.

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

External appointments:

Chair of TheCityUK

Non-executive Chairman of Discovery Limited

Member of Build Back Better Council

Supporting Chair of Chapter Zero

 

 

 

 

 

 

Noel Quinn (59)  

Group Chief Executive

Appointed to the Board: August 2019

Group Chief Executive since: March 2020

Skills and experience : Noel has more than 30 years' banking and financial services experience, both in the UK and Asia, with over 28 years at HSBC.

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 management roles across HSBC since joining in 1992. He was most recently Chief Executive Officer of Global Commercial Banking, having been appointed to the role in December 2015 and as a Group Managing Director in September 2016. Noel joined Forward Trust Group, a subsidiary of Midland Bank, in 1987 and joined HSBC in 1992 when the Group acquired Midland Bank.

 

External appointments:

Chair of the Financial Services Task Force of  the Sustainable Market Initiative

 

Ewen Stevenson (54)      

Group Chief Financial Officer

Appointed to the Board: January 2019

Skills and experience: Ewen has over 25 years' experience in the banking industry, both as an adviser to major banks and as an executive of 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 will assume responsibility for the Group's mergers and acquisitions activities in April 2021. 

 

Career: Ewen was Chief Financial Officer of Royal Bank of Scotland Group plc from 2014 to 2018. Prior to 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.

External appointments: None

 

 

 

 

 

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.

 

 

 

 

 

 

 

 

Independent non-executive Directors

Laura Cha, GBM (71) 4  

Independent non-executive Director

Appointed to the Board: March 2011

Skills and experience: Laura has extensive regulatory and policymaking experience in the finance and securities sector in Hong Kong and mainland China.

Career: Laura was formerly Vice Chairman of the China Securities Regulatory Commission, becoming the first person outside mainland China to join the Central Government of the People's Republic of China at Vice-Ministerial level. The Hong Kong Government awarded her the Grand Bauhinia Medal for public service.

She has previously served as non-executive Director of China Telecom Corporation Limited, Bank of Communications Co., Ltd, and Tata Consultancy Services Limited.

 

External appointments:

Chair of Hong Kong Exchanges and Clearing Limited

Non-executive Chair of The Hongkong and Shanghai Banking Corporation Limited

Non-executive Director of The London Metal Exchange

Non-executive Director of Unilever PLC

 

Henri de Castries (66) 3,4

Independent non-executive Director

Appointed to the Board: March 2016

Skills and experience: Henri has more than 25 years' international experience in the financial services industry, working in global insurance and asset management.

Career: Henri joined AXA S.A. in 1989 and held a number of senior roles, including Chief Executive Officer from 2000. In 2010, he was appointed Chairman and Chief Executive, before stepping down in 2016.

He has previously worked for the French Finance Ministry Inspection Office and the French Treasury Department.

 

External appointments:

Special Adviser to General Atlantic

Chairman of Institut Montaigne

Vice Chairman of Nestlé S.A.

Non-executive Director of the French National Foundation for Political Science

Member of the Global Advisory Council at LeapFrog Investments

Senior Independent non-executive Director of Stellantis NV

 

 

 

James Forese (58) 1,3,4

Independent non-executive Director

Appointed to the Board: May 2020

Skills and experience: James has over 30 years' 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 and Chief Executive Officer of Citigroup's Institutional Clients Group, he has been Chief Executive of its Securities and Banking division and head of its Global Markets business. On 1 January 2021, he became a non-executive Director of HSBC North America Holdings Inc.

 

External appointments:

• Non-executive Chairman of Global Bamboo Technologies

• Trustee of Colby College

 

Steven Guggenheimer (55) 2,4

Independent non-executive Director

Appointed to the Board: May 2020

Skills and experience: Steven is an experienced technology executive with a strong track record of advising businesses on digital transformation. He brings extensive insight into technologies ranging from artificial intelligence to Cloud computing.

Career: Steven has more than 25 years' experience at Microsoft, where he has held a variety of senior leadership roles. These include: Corporate Vice President for AI Business; Corporate Vice President of AI and ISV Engagement; Chief Evangelist; and Corporate Vice President, Original Equipment Manufacturer.

 

External appointments:

Non-executive Director of Forrit Technologies Limited

Advisor to Tensility Venture Fund

Advisory Board Member of 5G Open Innovation Lab

 

Irene Lee (67) 3,4   

Independent non-executive Director

Appointed to the Board: July 2015

Skills and experience: Irene has more than 40 years' experience in the finance industry, having held senior investment banking and fund management roles in the UK, the US and Australia.

Career: Irene held senior positions at Citibank, the Commonwealth Bank of Australia and SealCorp Holdings Limited.

Other past appointments include being a member of the Advisory Council for J.P. Morgan Australia, a member of the Australian Government Takeovers Panel and a non-executive Director of Cathay Pacific Airways Limited.

External appointments:

Executive Chair of Hysan Development Company Limited

Non-executive Director of The Hongkong and Shanghai Banking Corporation Limited

Non-executive Director of Hang Seng Bank Limited

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

Chair of Hang Seng Bank Limited (from the conclusion of its 2021 AGM)

 

 

Dr José Antonio Meade Kuribreña (51)2,4

Independent non-executive Director

Appointed to the Board: March 2019

Skills and experience: José has extensive experience across a number of industries, including in public administration, banking, financial policy and foreign affairs.

Career: Between 2011 and 2017, José 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.

 

External appointments:

Commissioner and Board Member of the Global Commission on Adaptation

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

 

 

 

Heidi Miller (67) 2,4

Independent non-executive Director

Appointed to the Board: September 2014

Skills and experience: Heidi has more than 30 years' senior management experience in international banking and finance.

Career:  Heidi was President of International at J.P. Morgan Chase & Co. between 2010 and 2012 where she led the bank's global expansion and international business strategy across the investment bank, asset management, and treasury and securities services divisions. Previously, she ran the treasury and securities services division for six years.

Other past roles included Chief Financial Officer of Bank One Corporation and Senior Executive Vice President of Priceline.com Inc.

She has previously served in non-executive Director roles for General Mills Inc., Merck & Co Inc. and Progressive Corp. She was also a trustee of the International Financial Reporting Standards Foundation. She is currently Chair of HSBC North America Holdings Inc.

External appointments:

Non-executive Director of Fiserv Inc.

Chair of the Audit Committee of Fiserv, Inc.

 

Eileen Murray (62) 1,2,4

Independent non-executive Director

Appointed to the Board: July 2020

Skills and experience: Eileen is an accomplished executive with 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. Prior to joining Bridgewater, she was Chief Executive Officer for Investment Risk Management LLC and President and co-Chief Executive Officer of Duff Capital Advisors.

She started her professional career in 1984 at Morgan Stanley, where she held several senior positions including Controller, Treasurer, and Global Head of Technology and Operations, as well as Chief Operating Officer for its Institutional Securities Group. From 2002 to 2005, she was Head of Global Technology, Operations and Product Control at Credit Suisse and served on its management and executive board.

 

External appointments:

Chair of the Financial Industry Regulatory Authority

Non-executive Director of Compass

Non-executive Director of Guardian Life Insurance Company of America

Director of HumanityCorp

Non-executive Director of Atlas Crest Investment Corp.

 

David Nish (60)1C,2,3,4   

Independent non-executive Director

Appointed to the Board: May 2016

Senior Independent non-executive Director since February 2020

Skills and experience: David has substantial international experience of financial services, corporate governance, financial accounting 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.

 

External appointments:

Non-executive Director of Vodafone Group plc

 

Jackson Tai (70) 1,2C,4

Independent non-executive Director

Appointed to the Board: September 2016

 

Skills and experience: Jackson has significant experience as a non-executive Director, having 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. between 2002 and 2007, having served as Chief Financial Officer and then as President and Chief Operating Officer. He was previously a managing director and senior officer for Asia-Pacific, and executive director and Head of Japan Capital Markets in the investment banking division of J.P. Morgan & Co. Incorporated, where he worked for 25 years.

Other former appointments include 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.

 

External appointments: 

Non-executive Director of Eli Lilly and Company

Non-executive Director of MasterCard Incorporated

 

 

 

 

 

 

 

 

Pauline van der Meer Mohr (61) 1,2,3C,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 formerly President of Erasmus University Rotterdam, a member of the Dutch Banking Code Monitoring Committee 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.

 

External appointments:

Chair of the Dutch Corporate Governance Code Monitoring Committee

Chair of the Supervisory Board of EY Netherlands

Deputy Chair of the Supervisory Board of Royal DSM N.V.

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.

 

Aileen Taylor (48) 

Group Company Secretary and Chief Governance Officer

Appointed: November 2019

 

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

Career: Aileen spent 19 years at the Royal Bank of Scotland Group, having held various legal, risk and compliance roles. She was appointed Group Secretary in 2010 and was most recently Chief Governance Officer and Board Counsel.

 

Former Directors who served for part of the year

Sir Jonathan Symonds

Sir Jonathan Symonds retired from the Board on 18 February 2020.

Kathleen Casey

Kathleen Casey retired from the Board on 24 April 2020.

 

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

 

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 Arden, 52

Group Chief Human Resources Officer

Elaine joined HSBC as Group Chief Human Resources Officer in June 2017. She was previously at the Royal Bank of Scotland Group, where she was Group Human Resources Director. She has held senior human resources and employee relations roles in a number of other financial institutions, 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 Banker Institute.

Colin Bell, 53

Chief Executive Officer, HSBC Bank plc and HSBC Europe

Colin joined HSBC in July 2016 and was appointed Chief Executive Officer, HSBC Bank plc and HSBC Europe on 22 February 2021. He previously held the role of Group Chief Compliance Officer, and also led the Group transformation oversight programme.

Colin previously worked at UBS, which he joined in 2007, where he was the Global Head of Compliance and Operational Risk Control. Colin joined the British Army in 1990 and he served for 16 years in a variety of command and staff roles and completed the Joint Services Command and Staff College in 2001.

Jonathan Calvert-Davies, 52

Group Head of Audit

Jonathan joined HSBC as Group Head of Audit in October 2019 and is a standing attendee of the Group Executive Committee. 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. Prior to joining HSBC, he led KPMG's financial services internal audit services practice. His previous roles include leading PwC's UK internal audit services practice. He also served as interim Group Head of Internal Audit at the Royal Bank of Scotland Group.

Georges Elhedery, 46

Co-Chief Executive Officer, Global Banking and Markets

Georges joined HSBC in 2005 and was appointed as 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. Georges previously served as Chief Executive Officer for HSBC, Middle East, North Africa and Turkey and Head of Global Markets; Head of Global Banking and Markets, MENA; and Regional Head of Global Markets, MENA.

Kirsty Everett, 44

Interim Group Chief Compliance Officer

Kirsty was appointed as Interim Group Chief Compliance Officer on 22 February 2021. She took on this role in addition to her existing responsibilities as the Global Chief Operating Officer for the Compliance function. She joined HSBC in March 2019 as the Chief of Staff and Head of Digital Transformation for Compliance.

Prior to joining HSBC, Kirsty was the designated Chief Compliance Officer, Head of Conduct Risk and Operational Risk, Head of Monitoring and Oversight at UBS, having originally joined from Deloitte in 2012.

 

 

Greg Guyett, 57

Co-Chief Executive Officer, Global Banking and Markets

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. Prior to 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.

John Hinshaw, 50

Group Chief Operating Officer

John became Group Chief Operating Officer in February 2020, having joined HSBC in December 2019. John has an extensive background in transforming organisations across a range of industries. Most recently, he 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.

Bob Hoyt, 56

Group Chief Legal Officer

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 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.

 

 

 

Pam Kaur,57

Group Chief Risk Officer

Pam was appointed Group Chief Risk Officer in January 2020, having joined HSBC in 2013. She was previously Head of Wholesale Market and Credit Risk and Chair of the enterprise-wide non-financial risk forum. Pam has also served as Group Head of Internal Audit and held a variety of audit and compliance roles at banks, including Deutsche Bank, RBS, Lloyds TSB and Citigroup. She serves as a non-executive Director of Centrica plc.

Nuno Matos, 53

Chief Executive Officer, Wealth and Personal Banking

Nuno joined HSBC in 2015 and was appointed Chief Executive Officer of Wealth and Personal Banking on 22 February 2021. He was previously the Chief Executive Officer of HSBC Bank plc and HSBC Europe, a role he held from March 2020. He has also served as Chief Executive Officer of HSBC Mexico, and as regional head of Retail Banking and Wealth Management in Latin America. Prior to joining HSBC, he held senior positions at Santander Group.

Stephen Moss, 54

Regional Chief Executive

Stephen joined HSBC in 1992.  He was named Regional Chief Executive in March 2020, with responsibility for overseeing the Group's businesses in Europe (apart from HSBC UK); the Middle East, North Africa and Turkey ('MENAT'); Latin America; and Canada. He previously held the role of Chief of Staff to the Group Chief Executive and oversaw the Group's mergers and acquisitions and strategy and planning activities.

Stephen will be appointed as CEO, MENAT, in April 2021 subject to regulatory approval.

Stephen is a non-executive Director of The Saudi British Bank, HSBC Bank Middle East Limited, HSBC Middle East Holdings B.V, HSBC Latin America Holdings (UK) Limited and HSBC Bank Canada.

Barry O'Byrne,45

Chief Executive Officer, Global Commercial Banking

Barry joined HSBC in April 2017 and was appointed Chief Executive 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. Prior to joining HSBC, Barry worked at GE Capital for 19 years in a number of senior leadership roles, including as CEO, GE Capital International and in CEO positions in Italy, France and the UK.

Michael Roberts, 60

President and Chief Executive Officer, HSBC USA

Michael joined HSBC in October 2019. He is an executive Director, President and CEO of HSBC North America Holdings Inc. He also serves as Chairman of HSBC Bank USA, N.A. and HSBC USA Inc.

Michael will assume executive responsibility for the Group's Canadian and Latin American businesses, in addition to his existing responsibilities in relation to the US. His expanded role as CEO, US and Americas will take effect from April 2021.

Previously, he 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 of Citibank N.A.

John David Stuart (known as Ian Stuart),57
Chief Executive Officer, HSBC UK Bank plc

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.

Peter Wong,69

Deputy Chairman and Chief Executive Officer, The Hongkong and Shanghai Banking Corporation Limited

Peter joined HSBC in 2005 and is Chairman and non-executive Director of HSBC Bank (China) Company Limited, and a non-executive Director of Hang Seng Bank Limited. Other appointments include Council Member of Hong Kong Trade Development Council, a member of its Belt and Road Committee; and Chairman of the Hong Kong General Chamber of Commerce.

 

 

 

Additional members of the Group Executive Committee

Noel Quinn

Ewen Stevenson

Aileen Taylor

 

 

Biographies are provided on pages 198 and 201.

 

 

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 ensure that it is well managed, with effective oversight and controls. We comply with the provisions of the UK Corporate Governance Code and the applicable requirements of the Hong Kong Corporate Governance Code.

Board's role, Directors' responsibilities and 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; and

approving material transactions.

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. 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 2020, the Board comprised the Group Chairman, 11 non-executive Directors, and two executive Directors who are the Group Chief Executive and the Group Chief Financial Officer. With effect from 1 January 2020, the role of the Group Chief Risk Officer ceased to be a member of the Board.

For further details of the Board's career background, skills, experience and external appointments, see pages 198 to 201.

Operation of the Board

The Board is ordinarily scheduled to meet at least seven times a year. In 2020, due to the Covid-19 outbreak, the Board held 17 meetings. The Board agenda is agreed by the Group Chairman, working with the Group Company Secretary and Chief Governance Officer and the Group Chief Executive. For more information, see the section on 'Board activities during 2020' on page 209.

The Group Chief Risk Officer and Group Chief Legal Officer are regular attendees at Board meetings, and other senior executives attend as required.

Outside of Board meetings, the Board Oversight Sub-Group, established by the Group Chairman, meets in advance of each Board meeting as an informal mechanism for a smaller group of Board members and management to discuss emerging issues. This group provides regular opportunities for members of the Board to communicate with senior management to deepen understanding of, and provide input into, key issues facing the Group. For further details of how the Board engages with the workforce, see page 210.

 

The Board oversaw the implementation of various governance changes introduced in response to the Covid-19 outbreak. Board and committee agendas were tailored to focus on key priorities taking into account the need to hold most meetings via videoconference. The challenges that arose from communicating across three time zones were navigated by remaining agile in meeting arrangements and through increased frequency of communications during the year. 

In addition to substantially increasing the frequency of Board and executive committee meetings, the following changes were implemented to improve connectivity, and provide an understanding of the challenges and priorities of the management team as it led the organisation through the crisis:

The Group Chairman introduced a weekly Board update note.

Management produced a weekly Board report on its response to the Covid-19 outbreak.

A Board Oversight Sub-Group was set up to provide guidance to the executive team on emerging issues.

The chairs of our principal subsidiaries and the chairs of the Group's Board committees attended the Group Chairman's Forum each month.

 

 

In light of the increasingly significant role of technology in the Group's strategy, operations and growth prospects, in January 2021 the Board approved the establishment of a Technology Governance Working Group for a period of 12 months.

The working group has been tasked with developing recommendations to strengthen the Board's oversight of technology strategy, governance and emerging risks and enhance connectivity with the principal subsidiaries.

The working group will be jointly chaired by Eileen Murray and Steven Guggenheimer, given their expertise and experience in this area. Jackson Tai, the Group Risk Committee Chair, will be a member, along with other non-executive Directors to be nominated by each of our US, UK, European and Asian principal subsidiaries. The co-Chairs will each receive fees in respect of their leadership of the working group over the next 12 months. Details of these fees can be found on page 238.

Key IT and business staff will attend the Technology Governance Working Group to provide insights on key technology issues across the Group allowing the working group to make recommendations for enhanced Board oversight of technology.

The total time commitment expected of the co-chairs will be up to 30 days, reflective of the complexity and profile of the subject matter.

 

 

In 2020, the Group Chairman, Senior Independent Director and the Group Company Secretary and Chief Governance Officer engaged with a number of our large institutional investors in over 20 meetings, primarily ahead of the 2020 AGM. Topics that were raised 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, our climate policy and the impact of the Covid-19 outbreak on the Group, its employees, customers and communities.

The Group Remuneration Committee Chair also engaged with key investors and proxy advisory firms on our remuneration approach in respect of the 2020 performance year. During such engagements, the Group Remuneration Committee Chair kept investors informed on other matters including the Group's response to the C ovid-19 outbreak and the Group Chief Executive's and Group Chief Financial Officer's salary sacrifice and charitable donations.


 

 

Board roles, responsibilities and attendance

 

At 31 December 2020, the Board comprised the Group Chairman, 11 non-executive Directors and two executive Directors. The table below sets out their roles, responsibilities and attendance at Board meetings. For a full description of responsibilities see www.hsbc.com/who-we-are/leadership-and-governance/board-responsibilities.

 

 

 

Mark E Tucker1,2

 

17/17

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 foster open and constructive debate among Directors.

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

Evaluates the performance of the Board, Committees, non-executive Directors and Group Chief Executive.

Executive Director

Group Chief Executive

Noel Quinn2

17/17

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 stakeholders including the Group Chairman and the Board.

Executive Director

Chief Financial Officer

Ewen Stevenson2

17/17

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

17/17

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 Cha3

17/17

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 Castries3

17/17

James Forese3

12/12

Steven Guggenheimer3

12/12

Irene Lee3

17/17

Dr José Antonio Meade Kuribreña3

17/17

Heidi Miller3,4

16/17

Eileen Murray3,4

5/7

Jackson Tai3

17/17

Pauline van der Meer Mohr3

17/17

Kathleen Casey3

5/5

Sir Jonathan Symonds3

2/2

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  Mark Tucker, David Nish, Noel Quinn and Ewen Stevenson attended the AGM on 24 April 2020. As a consequence of the UK Government's Covid-19 guidance and prohibitions at the time of the AGM, only a limited number of Directors and essential personnel attended the AGM to ensure a quorum was present and to conduct the business of the meeting.

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. Kathleen Casey and Sir Jonathan Symonds retired from the Board on 24 April 2020 and 18 February 2020 respectively.

4  Eileen Murray was unable to attend two Board meetings owing to prior commitments made before her appointment to the Board. Heidi Miller was unable to attend one Board meeting that was arranged at short notice owing to a pre-scheduled external commitment.

 

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, comprehensive induction programmes to fit with their individual experiences and needs, including the process for dealing with conflicts. 

The structure of the induction allows a Board member to contribute meaningfully from appointment. An early focus on induction supports good information flows within the Board and its committees and between senior management and non-executive Directors, providing a better understanding of our culture and way of operating. During 2020 we welcomed three new non-executive Directors to our Board and also facilitated the Group Chief Executive's induction. For illustrations of the typical induction modules, see the 'Directors' induction and ongoing development in 2020' table on the following page.

Although there were constraints due to the Covid-19 outbreak, virtual meetings enabled our new non-executive Directors to engage with colleagues and key external personnel in a shorter time period than would have been the case if meeting in person.

When it is safe to recommence Board travel to our global locations, we will take opportunities to facilitate comprehensive face-to-face engagement. These opportunities provide invaluable insight and understanding of our business, customers, culture and people.

Directors undertook routine training during 2020. 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 focused on areas such as:

 

technology and Cloud capability; climate change; financial crime; shareholder activism; and business and governance. External consultants, in conjunction with the Group Company Secretary and Chief Governance Officer, provided specific training to members of relevant boards and executive committees within scope for the Senior Managers and Certification Regime. This included practical examples of responsibility in decision making and discussion of relevant case studies. 

In addition, non-executive Directors 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.

Between the induction and training programmes, the Directors' understandings of key matters and risks for the business are supported so that they provide effective, informed and insightful challenge in their leadership and oversight roles.

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.

 

 

 

James Forese

Non-executive Director

'I was impressed with the smooth and thorough management of my induction at a time when the Covid-19 outbreak was otherwise creating confusion and uncertainty.

Shifting quickly to a remote, video-enabled process allowed me to be introduced to other Board members and to meet a wide range of senior executives from across the global businesses, regions and functions in quick succession.

Conversations with management were informative and comprehensive.

Where I had questions or wanted further conversations, the team responded swiftly and engaged in additional sessions as requested. Despite the lack of the usual in-person induction meetings, the open culture at HSBC helped me to come up the learning curve quickly and made me feel immediately welcomed.'


 

Directors' induction and ongoing development in 2020

Director

Induction1

Strategy and business briefings2

Risk and

control3

Corporate governance4

Global mandatory training5

ARCC, Chairs and Remco Forum

Subsidiary

Kathleen Casey

Laura Cha

Henri de Castries

James Forese

Steven Guggenheimer

Irene Lee

José Antonio Meade Kuribreña

Heidi Miller

Eileen Murray

David Nish

Noel Quinn

Ewen Stevenson

Jackson Tai

Mark Tucker

Pauline van der Meer Mohr

 

1  The induction programme is delivered through formal briefings and introductory sessions with Board members, senior management, treasury executives, legal counsel, auditors, brokers, tax advisers and regulators. Topics covered included: values, culture and leadership; governance and stakeholder management; Directors' legal and regulatory duties; 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 2020 included 'Asia growth: build and strengthen in Hong Kong' and 'Strategic priority: growth of UK ring-fenced bank'.

3  Directors received risk and control training. Examples of specific sessions held in 2020 included 'Governance of climate-related risk', 'Wholesale and retail credit risk management', 'Forward-looking financial crime risk issues', 'Resolvability assessment framework' and 'Technology terminology'.

4  All Directors received corporate governance training including 'Senior Managers and Certification Regime' and 'Climate and sustainable finance'.

5  Global mandatory training, issued to all Directors, mirrored training undertaken by all employees, including senior management. These included management of risk under the enterprise risk management framework, with a focus on operational risk; cyber risk and fraud; 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, and bribery and corruption risks; and our values and conduct, including workplace harassment and speaking up.

 

Board committees

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 213.

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. It meets with attendees determined by the nature of the proposed business to be discussed.

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 day-to-day management of the Group by recommendations and advice from the Group Executive Committee ('GEC'), an executive forum that he chairs comprising members of senior management.

The Directors are encouraged to have free and open contact with management at all levels and 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, although this was not possible during 2020 due to the Covid-19 outbreak.

 

The Group's executive governance is underpinned by the Group operating rhythm, which sets out the Board and executive engagement schedule. This was refreshed for 2020 to facilitate end-to-end governance flowing up from executive governance to the Board.

The Group operating rhythm is characterised by three pillars:

i.  The GEC normally meets every week to discuss current and emerging issues. However, during 2020 it met much more frequently as a result of Covid-19.

ii.  On a monthly basis, the GEC reviews the performance of  global businesses, principal geographical areas and legal entities. These performance reviews are supplemented by quarterly performance management review meetings between the Group Chief Executive and 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. 

iii. 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 separate committees are dedicated sub-committees of the GEC, and some operate under individual accountability. 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, people issues, diversity and inclusion, and talent and development. 

In addition to our regional company secretaries supporting our principal subsidiaries, we have corporate governance officers supporting our global lines of business, digital business services and our larger global functions to assist in effective end-to-end governance, consistency and connectivity across the Group.

 

Subsidiary governance

Subsidiaries are formally designated as principal subsidiaries by approval of the Board. 

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

HSBC North America Holdings Inc.

US

HSBC Latin America Holdings (UK) Limited

Mexico and Latin America

HSBC Bank Canada

Canada

 

To strengthen accountability and information flow, each principal subsidiary takes responsibility for the oversight of Group companies in its region through the subsidiary accountability framework. The guidance underpinning the framework principles defines how we escalate and cascade information and procedures between the Board, the principal subsidiary boards and their respective committees.

During 2020, a subsidiary governance review was undertaken by the Group Company Secretary and Chief Governance Officer to consider the application of the framework by the principal subsidiaries and certain material subsidiaries. This resulted in recommended changes to both the subsidiary accountability framework principles and their application. All relevant boards will consider and implement any recommendations and actions arising out of this review over the course of 2021. For further details of the subsidiary governance review, see the Nomination & Corporate Governance Committee report on page 213. 

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 and the chairs of the Group's audit, risk and remuneration committees to discuss Group-wide and regional matters. From March 2020, these meetings moved from twice a year to monthly, in response to the complex and dynamic environment. The Group Chairman hosted nine Chairman's Forums, which were also attended by relevant executive management, to cover sessions on strategy, the economy, regulatory matters, cyber risk and resilience, implementation of the subsidiary accountability framework and corporate governance.

The chairs of each of the Group Audit Committee, Group Risk Committee and Group Remuneration Committee also have regular dialogues with the respective committees of the principal subsidiaries to ensure an awareness and coordinated approach to key issues. These interactions are reinforced through Audit and Risk Committee Chairs' Forums, and the Remuneration Committee Chairs' Forum, which are held several times a year. 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.

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.

Board activities during 2020

During 2020, the Board focused on resetting the strategic direction, supporting the Group Chief Executive 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 2020 are set out by theme below.

Strategy and business performance

In February 2020, the Group's strategic review and associated transformation programme was announced. This aimed to reshape underperforming businesses, simplify the organisation and reduce costs, to position the Group to increase returns for investors, create capacity for future investment and build a sustainable platform for growth.

In contrast to 2019 when the Board held two dedicated strategy sessions, given the evolving external landscape during 2020, the Board engaged in ongoing dialogue with management throughout the year to progress development of the Group strategy. As part of the strategy review, the Board considered organic and inorganic opportunities to grow and restructure the business, as well as disposal options.

The Board announced its new climate statement with the Group's ambition to align financed emissions to net zero by 2050 and become net zero for its own operations and supply chain by 2030, its aim to support clients on the road to a net zero carbon economy and a focus on sustainable finance opportunities. For further details of our new climate ambitions, see page 44.

The Board received external insights on topics such as the economic implications of the Covid-19 outbreak and ongoing geopolitical issues at regular intervals throughout the year.

Financial decisions

The Board approved key financial decisions throughout the year and approved the Annual Report and Accounts 2019, the Interim Report 2020 and the first quarter and the third quarter Earnings Releases.

The Board approved the annual operating plan for 2020 at the start of 2020 and since 31 December 2020 has approved the annual operating plan for 2021. The Board monitored the Group's performance against the approved 2020 annual operating plan, as well as the operating plans of each of the global businesses. The Board also approved the renewal of the debt issuance programme.

On 31 March 2020, HSBC announced that, in response to a written request from the Bank of England through the UK's Prudential Regulation Authority ('PRA'), the Board had cancelled the fourth interim dividend for 2019. Similar requests were also made to other UK incorporated banking groups. We also announced that until the end of 2020 we would make no quarterly or interim dividend payments or accruals in respect of ordinary shares. For further details of the dividend cancellation, see page 256 and our section 172 statement on page 22.

In December 2020, the PRA announced a temporary approach to shareholder distributions for 2020 in which it set out a framework for Board decisions on dividends. After considering the requirements of the temporary approach, on 23 February 2021 the Board announced an interim dividend for 2020 of $0.15 per ordinary share.

The Board has adopted a policy designed to provide sustainable dividends going forward. We intend to transition towards a target payout ratio of between 40% and 55% of reported earnings per ordinary share ('EPS') for 2022 onwards, with the flexibility to adjust EPS for non-cash significant items such as goodwill or intangibles 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.

The Group will not be paying quarterly dividends during 2021 but will consider whether to announce an interim dividend at the 2021 half-year results in August. The Group will review whether to revert to paying quarterly dividends at or ahead of its 2021 results announcement in February 2022. The 2020 interim dividend will be paid in cash with no scrip alternative. The Group has decided to discontinue the scrip dividend option as it is dilutive, including to dividend per share progression over time.

The dividend policy could be supplemented by buy-backs or special dividends, over time and not in the near term, should the Group find itself in an excess capital position absent compelling investment opportunities to deploy that excess.

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 Act 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 trade talks between the UK and the EU following the UK's departure, including no-deal contingency planning.

Technology

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

The newly appointed non-executive Directors with deep technology experience have worked in collaboration with the Group Chief Operating Officer to enhance the governance of technology.

The Board received technology training and educational sessions from both internal and external subject matter experts to understand further the evolving technology landscape.

People and culture

The Board continued to spend time discussing people and culture-related topics. The Group Chief Executive led discussions on the development of a new people strategy to support the Group's growth and transformation.

During the year, the Board shaped the revision of the Group's purpose and values statement, which was approved in December 2020. A sub-group of the Board was created to assist the process. It met regularly with management to provide support, guidance and constructive challenge, seeking to ensure the revised purpose and values remained aligned with the Group's culture and future strategy. For further details of how stakeholder engagement was used by the Board in setting the revised purpose and values, see the section 172 statement on page 22.

Governance

The Board continued to oversee the governance, smooth operation and oversight of the Group and its principal and material subsidiaries. During 2020, it undertook a review of subsidiary governance. For further details of the review and subsequent actions, see page 208.

Succession planning was considered by the Board following a thorough review at the Nomination & Corporate Governance Committee. During the year, Kathleen Casey retired as independent non-executive Director and Sir Jonathan Symonds retired as Deputy Group Chairman, Senior Independent Director and the Chair of the Group Audit Committee. The Board appointed David Nish in the role of Senior Independent Director and Chair of the Group Audit Committee, and appointed James Forese, Steven Guggenheimer and Eileen Murray as independent non-executive Directors. 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, experiences and competencies to discharge its responsibilities effectively.

For further details of the changes to the Board, see the Nomination & Corporate Governance Committee report on page 213.

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

 

 

The Board reaffirmed, in accordance with the UK Corporate Governance Code, that it would use 'alternative arrangements' in approaching workforce engagement. This flexible method allowed all non-executive Directors to have direct engagement across a wide network of employees in multiple geographies. The virtual working environment during the Covid-19 outbreak enabled more employees to participate in various workforce engagement activities. The programme of activities used a variety of interaction styles: more bespoke sessions with smaller groups; formal presentations; Q&A opportunities; and sessions to facilitate engagement across a breadth of experience and seniority. This enabled open dialogue and two-way discussions between non-executive Directors and employees. Non-executive Directors met with:

employees of the innovation teams in Wealth and Personal Banking, Commercial Banking and Global Banking and Markets where discussions focused on bespoke business-specific matters;

representatives of global employee resource groups where wide-ranging issues were discussed such as employee sentiment;

leaders and talent from Digital Business Services at an employee Exchange session; and

participants in the Asia talent programme.

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 outbreak. The Chairman's Forum meetings also discussed employee feedback from the Group's subsidiaries.

As the Board considered the Group's strategy and strategic initiatives throughout 2020, themes emerged that directly impacted the workforce. These helped shape subsequent workforce engagement sessions. These sessions continue to give the Board valuable insight on employee perspectives when reviewing proposals. For further details of how the Board considered the views of employees and other stakeholders, see the section 172 statement on page 22.

The Board looks forward to continuing its workforce engagement programme and holding in-person sessions when possible in 2021.

 
 
 

 

Board activities in 2020

Main topic

Sub-topic

Meetings at which topics were discussed1

 

 

Jan

Feb

Mar

Apr

May

Jun

Jul

Sep

Oct

Nov

Dec

Strategy

Group strategy

Regional strategy/Business line strategy

Environmental, social, governance

Business and financial performance

Region/Business line

Financial performance

Financial

Results and accounts

Dividends

Group annual operating plan

Risk

Risk function

Risk appetite

Capital and liquidity adequacy

Regulatory

Regulatory matters (including resolvability assessment framework)

Regulatory matters with regulators in attendance2

External

External insights

Technology

Strategic and operational

People and culture

Purpose, values and engagement

Governance

Subsidiary governance framework

Policies and terms of reference

Board/committee effectiveness

Appointment and succession

 

1  No formal Board meetings were held during August 2020.

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

 

Board and committee effectiveness, performance and accountability

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

Following the externally facilitated review of the Board and committee effectiveness in 2019, conducted by the external service provider Dr Tracy Long of Boardroom Review Limited, the Nomination & Corporate Governance Committee again invited Dr Long to support the Board with its annual evaluation. She was invited to conduct a follow-up review on the Board's progress against the findings and recommendations from her 2019 report, and more broadly on the effectiveness of the Board's operations. Dr Long is independent and has no other connection to the Group or any individual Director.

This external review was complemented by a review of the Board committees led by the Group Company Secretary and Chief Governance Officer. Details of the Board committees' effectiveness reviews, key findings and recommendations can be found in the respective committee reports on pages 213 to 232.

Dr Long acknowledged the progress that the Board had made in respect of her 2019 recommendations, with her 2020 review again focusing on the main themes from the previous review. These were: leadership, shared perspective, culture, end-to-end governance and future thinking. Qualitative feedback was gathered from one-to-one interviews held with members of the Board and regular Board attendees.

At the December Board meeting, the key findings presented were:

a strong focus on vision, strategy, and balancing short-term and long-term objectives;

a culture of collegiality and inclusion with positive team dynamics and healthy dialogue;

an open and transparent communication between the Board and management and the boards of the principal subsidiaries, a shared perspective on strategy and risk between the Board and management, with a focus on clarity of objectives;

a clear focus on operational resilience and support for clients, continuous Board and employee communications, attention to employee well-being, and documented lessons learned;

a clear focus on priorities, with sessions on current and dynamic topics as required; and

a strong link between culture and remuneration.

Following Dr Long's final report, the Group Chairman led a Board discussion in January 2021, at which the Board agreed the actions and priorities to be implemented, which will be monitored and addressed on an ongoing basis. Progress against these actions will be included in the Annual Report and Accounts 2021.

The following table outlines the main findings from the 2019 and 2020 reviews, progress against the 2019 findings and the actions agreed by the Board to address the areas that were identified as requiring improvement.

During 2020, a review of the Group Chairman's performance was led by the Senior Independent Director in consultation with the other independent non-executive Directors. Non-executive Directors also undergo regular individual reviews with the Group Chairman. The reviews confirmed that the Group Chairman and each Director were effective and 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 240.
 

 

Summary of Board effectiveness recommendations and actions:

 

Recommendation from the 2019 and 2020 evaluations

Progress against 2019 recommendations

Agreed actions for 2020 recommendations

 

2019

Continue to provide strong leadership through a culture of collaboration, transparency, open communication and cooperation.

2020

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.

The Group Chairman enhanced his communication activities with the Board and executive management during 2020. Following the appointment of the new Group Chief Executive, the Group Chairman established a Board Oversight Sub-Group to engage further with management and provide a sounding board.

The Nomination & Corporate Governance Committee will allocate additional time for discussion and debate of external candidates for non-executive Director succession and the internal and external talent pool for senior management roles including executive Directors.

 

 

 

 

 

2019

Build on the shared perspective by ensuring that the Board agenda allows sufficient time and visibility of longer-term strategic perspectives aligned to its appetite for business risk.

2020

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 adapted the Group operating rhythm and increased the frequency of meetings throughout the Covid-19 outbreak to provide the opportunity to reflect and act in real-time on the evolving external factors.

The Board will continue to enhance the use of governance practices, such as the Board Oversight Sub-Group and the Group operating rhythm. It will also continue to use Board committees to underpin and deliver effective decision making.

 

 

 

 

 

2019

Reflecting the improvement in corporate culture, keep culture on the agenda to ensure ongoing transparency and escalation of issues. Maintain visibility and insight into cultural initiatives and differences across global businesses.

2020

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.

Alongside the strategic review, the Board oversaw work on refreshing the Group's purpose and values, driving a resetting of the culture to deliver the strategy.

The Group Chairman and Group Chief Executive will monitor progress of strategic decision making at pace. Increased insight into organisational cultural indicators provided to the Board will support delivering the desired organisational culture in line with strategy, purpose and values.

 

 

 

 

 

2019

Maintain focus on improving the quality of information and increased communication channels with subsidiaries and other stakeholders, including the voice of employees.

Communications with the principal subsidiary chairs was increased by holding monthly Chairman's Forums for most of the year. The Board continued to engage with key investors and regulators, with some of the key regulators attending a session with the Board. There were additional opportunities for employees to engage throughout the year given the extreme circumstances brought about by the Covid-19 outbreak.

 

 

 

 

 

 

2019

Continue to develop the Board agenda to provide focus on emerging issues.

2020

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

The Group Chairman, Group Chief Executive and Group Company Secretary and Chief Governance Officer met regularly throughout the year to plan Board meeting agendas to focus more effectively on emerging matters and external developments.

The Group Chairman and Group Chief Executive will sponsor a project to review Board reporting in 2021.

 

Board committees

 

Nomination & Corporate Governance Committee

"The Committee's priorities in 2021 will continue to be composition, succession and development of the Board, as well as efforts to enhance the Group's diversity, talent and bench strength for key executive positions."

 

Dear Shareholder

It has been a busy year for the Nomination & Corporate Governance Committee. This report provides an overview of the work of the Committee and its activities during the year.

Priorities during 2020

Succession planning for both the Board and our senior executive team remained a critical focus of the Committee in line with its responsibilities. In addition to the appointment of Noel as Group Chief Executive, we appointed three new independent non-executive Directors during the year. Details of the appointments are set out below.

In line with our strategic focus on Asia, we considered proposals from management on ways to improve how we support and develop our talent under the Asia talent programme. Asian representation on the Board remains of critical importance, given the benefits that having members with deep knowledge and insight into Asian culture and business practices can bring to our discussions as a Board.

Subsidiary governance has also been an area of focus for the Committee, and we have made great progress in this regard during the past couple of years. The Subsidiary Governance Review, which is summarised later in this report, has demonstrated the progress made while acknowledging there is more to do to support our ambition of achieving world-class governance across the Group.

Focus for 2021

The Committee's priorities in 2021 will continue to be composition, succession and development of the Board, as well as efforts to enhance the Group's diversity, talent and bench strength for key executive positions. In developing our talent, the Committee will continue to focus on the promotion of diverse candidates to ensure that the Group Executive Committee and other senior management are representative of the customers, communities and markets in which we operate.

As our strategy develops, we know that the skills and capabilities we require will evolve and the Committee has a key role to play.

 

Mark E Tucker

Chair

Nomination & Corporate Governance Committee

23 February 2021

Membership

 

Member since

Meeting attendance in 2020

Mark Tucker (Chair)

Oct 2017

9/9

Kathleen Casey1

Apr 2018

4/4

Laura Cha

May 2014

9/9

Henri de Castries

Apr 2018

9/9

James Forese

May 2020

5/5

Steven Guggenheimer

May 2020

5/5

Irene Lee

Apr 2018

9/9

José Antonio Meade Kuribreña

Apr 2019

9/9

Eileen Murray2

Jul 2020

3/4

Heidi Miller

Apr 2018

9/9

David Nish

Apr 2018

9/9

Jackson Tai

Apr 2018

9/9

Pauline van der Meer Mohr

Apr 2016

9/9

Sir Jonathan Symonds1

Apr 2017

3/3

1  Sir Jonathan Symonds stepped down from the Board on 18 February 2020. Kathleen Casey stepped down from the Board on 24 April 2020.  

2  Eileen Murray was unable to attend one Committee meeting owing to a prior commitment made before her appointment to the Board  

Group Chief Executive succession

The choice of Group Chief Executive is a matter of significance, and it was therefore important that we allowed ourselves the time to fully assess our options before arriving at our decision, given the potential ramifications on the future success of the Group and our stakeholders.

We conducted a thorough and robust search process with the support of an external search partner, Egon Zehnder, to identify the new Group Chief Executive. The Committee was delighted to have been able to source an internal candidate, in Noel Quinn, and believe that we identified the best candidate for the role and for the Group. Further information on Noel's appointment is set out in our section 172 statement on page 22. Egon Zehnder provides assistance with senior recruitment at HSBC. It has no other connection with the Group or members of the Board.

Following Noel's appointment on a permanent basis in March 2020, the Committee agreed a comprehensive induction and development plan to best support him to succeed in leading the Group through the various challenges we face. The Committee monitored this throughout the year, and will continue to support Noel and his executive team in the delivery of our strategic and business priorities.

Board composition

The composition of both the Board and its Committee continued to be a key focus during 2020, with progress made in ensuring that the Board possesses the necessary expertise to oversee, support and monitor management performance based on the longer-term strategy and developments in the external environment.

In James Forese, Steven Guggenheimer and Eileen Murray, the Board has added deep experience in the areas of banking, technology and operations, which will remain critical to the Board's discussions in the coming years. Further details on skills and previous experience are set out in the Board biographies on pages 198 to 201.

Russell Reynolds Associates supported the Board in identifying prospective non-executive Director candidates. It has also supported the Committee and the management team in senior executive succession planning, as part of an integrated approach to talent identification, assessment and development during 2020. Russell Reynolds also assists with senior recruitment at HSBC. They have no other connection with the Group or members of the Board. 

We refreshed our Board skills matrix in recognition of the changing context in which the Group is now operating and the strategic priorities. The revised skills matrix places greater emphasis on the need for competencies in areas such as transformation, ESG and climate given the Group's ambitions in these areas. The skills matrix will be a key tool in ensuring that the Board has the necessary range of skills and experience to discharge its responsibilities, oversee management and respond to emerging trends.

The Board remains committed to increasing its diversity, and ensuring that it is reflective of the markets and societies in which we serve.

Board changes

There have been a number of changes to the Board during the past year. In addition to the appointment of the three new non-executive Directors referred to above, in February 2020, we saw the departure of both Sir Jonathan Symonds and Kathleen Casey during 2020. David Nish was appointed in the role of Senior Independent Director and Chair of the Group Audit Committee in place of Sir Jonathan Symonds.

Laura Cha will retire from the Board at the conclusion of our 2021 AGM at the end of May.

As mentioned earlier in the report, Dame Carolyn Fairbairn will join the Board on 1 September 2021. We are in the process of concluding a search for suitable candidates to join and further strengthen the expertise and experience on the Board and its committees.

We have also considered our committee membership and as a result confirm that David Nish will step down from the Group Remuneration Committee following the publication of the Annual Report and Accounts 2020. David kindly agreed to remain a member throughout 2020 following his appointment as Senior Independent Director and GAC Chair in February 2020 to provide a strong link through all committees while new Board members were onboarded.

Senior executive succession and development

Following Noel's appointment as Group Chief Executive on an interim basis in August 2019, he took steps to refresh the composition of the then Group Management Board and repositioned this as the Group Executive Committee. This included the appointment of new incumbents for seven roles, meaning that we actioned a significant number of our succession plans for our most senior executive positions.

The Committee has therefore focused on rebuilding this bench strength during 2020 to ensure that we have a strong cohort of potential future leaders of HSBC. We have worked in partnership with Noel and our Group Chief Human Resources Officer to support an integrated approach to our assessment, development and external market benchmarking of executive talent.

The refreshed Group Executive Committee succession plan, which we discussed and approved at our meeting in December 2020, reflects the changing shape of the Group and involves greater diversity, in particular with regard to gender and ethnicity.

In connection with this, and to ensure we support and develop talent from the Group's key region, the Committee received an update on the Asia talent programme. This programme involves approximately 1,000 employees of high potential talent in the region and aims to support their development and progression both within the region and across the broader Group.

Committee evaluation

The annual review of the effectiveness of the Board committees, including the Committee, was internally facilitated for 2020. 

Overall the review concluded that the Committee continued to operate effectively. The review made certain recommendations for improvement, in particular regarding the time allocated for discussion of key items to ensure that the Committee has sufficient opportunity to discuss topics such as senior executive succession and development in the required depth. The Committee has considered and discussed the outcomes of the evaluation and accepts the findings.

The outcomes of the evaluation have been reported to the Board and the Committee will track progress on the recommendations during 2020.

Subsidiary governance review  

Following the implementation of the subsidiary accountability framework in 2019, during 2020 the Committee commissioned a governance review of the Group's seven principal subsidiaries, plus three material subsidiaries in the form of Hang Seng Bank, HSBC Global Asset Management and HSBC Private Bank (Suisse).

The review was led by our Group Company Secretary and Chief Governance Officer and focused on:

Board size, skills, tenure and fees;

governance support; and

the relationship between the Group and its subsidiaries.

Good boardroom practice and adherence to our Group governance expectations, including under the subsidiary accountability framework, were observed in the course of the review.

A number of recommendations were identified to raise the standard and ensure consistent application of governance across the organisation, and to further improve the transparency and engagement between the Group and its subsidiaries. These included:

Subsidiary accountability framework: a review and update to the principles under the subsidiary accountability framework to clarify and provide greater guidance on the Group's expectations;

Board composition, size and independence: clarification of the Group's expectations on the size, composition and independence of subsidiary boards and length of board tenure, to encourage proactive refreshment of subsidiary board membership. A number of our longer-serving subsidiary Directors have announced their retirement from the Group as a result of this review; and

Board reporting and management information: the need for greater consistency in the quality of reporting and management information, with work underway to ensure that the Board and its committees, as well as individuals on subsidiary boards and other senior governance forums, receive the information they require to make informed decisions.

Given the success and strong support that the review received at both Group and subsidiary level, including the Group Executive Committee, it has been agreed that a review of our governance practices in our global businesses will be undertaken in 2021.

Governance  

Our decision to create the Chief Governance Officer role in 2019 was in recognition of the significance the Board assigns to the governance agenda and the strategic importance of having best-in-class governance at HSBC, including in the oversight of subsidiaries. This role is held by the Group Company Secretary, now designated as the Group Company Secretary and Chief Governance Officer, reporting to the Group Chairman.

Despite the challenges we have faced as an organisation from a business and geopolitical perspective, we have made good progress in enhancing our overall governance arrangements during 2020, in particular the areas identified as requiring improvement in our 2019 Board effectiveness review.

This has included our new governance operating rhythm, which was established to provide robust end-to-end governance and more efficient and effective governance meetings across the Board, Group Executive Committee and subsidiaries. The new Group operating rhythm has resulted in greater alignment between our Board and the Group Executive Committee, and has driven the sequencing of meetings to allow for our subsidiaries and global business to have input on key matters prior to discussion and approval at the Board. This has been particularly pertinent during 2020, given the central role that our subsidiaries hold in developing and executing our strategic priorities. 

In line with the Board's commitment at the commencement of the UK Corporate Governance Code 2018, the Committee reviewed the Board's choice of an alternative mechanism to engage with and understand the views of the wider workforce with reference to developing market practice. During 2020, the Committee confirmed that it remained confident that our preferred mechanism of 'alternative arrangements' remained effective and believed that this was most appropriate for an organisation of our scale and geographical diversity. Engagement with the workforce will continue to be a priority for the Board in 2021. Further details on the arrangements we have in place to facilitate workforce engagement can be found on page 210.

Diversity

The Board diversity policy sets out our approach to achieving our diversity ambitions, and helps to ensure that diversity and inclusion factors are taken into account in succession planning.

In line with our ongoing commitment to diversity, we reviewed our Board diversity policy during 2020. This review included consideration of developments in best practice as well as regulatory expectations on board diversity, including those outlined by the PRA.

A number of minor updates were made to the characteristics that the Board will take into account when considering candidates for future appointment as Directors. These included adding social backgrounds to the Board diversity policy as a factor for consideration, and making amendments to emphasise the link between diversity of thought with risk avoidance and improved decision making. The revised Board diversity policy is available at www.hsbc.com/who-we-are/leadership-and-governance/board-responsibilities.

Our recent non-executive Director searches have prioritised diversity both in terms of gender and representation from those of Asia-Pacific heritage. These have been identified as areas where we needed to strengthen in anticipation of retirements from the Board in the coming years.

At the year-end, at 35% (five out of 14), our Board gender diversity met the Hampton-Alexander Review target of 33% female representation by the end of 2020. We have also met and exceeded the Parker Review targets of at least one Director from an ethnic minority background by 2021, with four members of our Board self-identifying as 'Directors of colour' in line with the definition set by Parker.

The Board is also extremely focused on diversity across the wider organisation, and believes that this is a critical component of

HSBC's future success. Further details on activities to improve diversity across senior management and the wider workforce, together with representation statistics, can be found on pages 64 to 65.

Independence of non-executive Directors

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.

Laura Cha, who joined the Board in 2011, will not be standing for re-election at the 2021 AGM. The Committee determined that Laura, notwithstanding her length of service, continues to be independent when taking into consideration all other relevant circumstances that are likely to impair, or could appear to impair, independence and that she will continue to be independent up to the date of the 2021 AGM when she will retire from the Board.

The Committee also has oversight of the composition of the boards of the Group's regional principal subsidiaries and approves the appointment of Directors and senior management in those subsidiaries.

 

 

 

Matters considered during 2020

 

 

 

Jan

Feb

Apr

May

Jul

Sep

Dec

Board composition and succession

 

 

 

 

 

 

 

Board composition, including succession planning and skills matrices

Approval of diversity and inclusion policy

Approval of conflicts of interest policy

Executive talent and development

 

 

 

 

 

 

 

Senior executive succession

Approval of executive succession plans

Talent programmes

Governance

 

 

 

 

 

 

 

Board and committee evaluation

Subsidiary governance

Subsidiary and executive appointments

 

Appointment process - assessment of new non-executive Directors

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Committee agreed the desired criteria sought in the candidates for appointment to the Board. An external search partner was engaged.

 

The Committee considered a long-list of candidates and agreed which should be prioritised. Relevant candidates were approached by the external search partner to understand their interest.

 

Meetings were arranged between members of the Committee and priority non-executive Director candidates. Feedback from the non-executive Directors was discussed alongside consideration of potential conflicts and other matters identified through due diligence.

 

The Committee recommended the appointment of the non-executive Director to the Holdings Board for approval, subject to completion of outstanding due diligence.

 

Outstanding due diligence and associated procedures completed prior to announcement of appointment. Director onboarding and induction pack issued and completed.

 

Group Audit Committee

 

" The Committee spent substantial time in understanding and assessing the effect of the Covid-19 outbreak on expected credit losses, the Group-wide transformation programme and other related accounting judgements and disclosures."

Dear Shareholder

I am pleased to present my first report to you as Chair of the Group Audit Committee ('GAC'). The Committee had a busy year, holding 13 meetings. This report sets out some of the issues considered during 2020.

The Committee has strong, but diverse, financial services experience. To strengthen our skill set further, we welcomed Pauline van der Meer Mohr, James Forese and Eileen Murray as new members. Sir Jonathan Symonds and Kathleen Casey stepped down during the year and I would like to thank them for their insightful and significant contributions to the work of the GAC.

The Committee spent substantial time in understanding and assessing the effect of the Covid-19 outbreak on expected credit losses, the Group-wide transformation programme, the impact of regulatory change on the control environment, and other related accounting judgements and disclosures.

Given the Committee's role in relation to whistleblowing I regularly met with the Group Chief Compliance Officer and the Group Head of Whistleblowing Oversight to discuss material whistleblowing cases, enhancements to whistleblowing arrangements and plans for periodic updates to the Committee.

To develop a better understanding of the key issues and challenges at the local level, I attended a number of principal subsidiary audit committee meetings throughout the Group. These meetings were complemented by regular Audit and Risk Committee Chairs' Forums throughout the year to ensure alignment of priorities and to strengthen our relationship with the principal subsidiaries.

The Committee received regular updates from the Group Head of Audit on the progress against the audit plan. During the year the audit plan was adjusted in response to new risks arising from the Covid-19 outbreak and assurance work in relation to major change programmes throughout the Group.

Our external auditor, PricewaterhouseCoopers LLP ('PwC'), has now completed its sixth audit. PwC continues to provide robust challenge to management and provide sound independent advice to the Committee on specific financial reporting judgements and the control environment.

An internal evaluation concluded that the Committee continued to operate effectively in 2020, and made certain recommendations for continual improvement.

 

 

David Nish

Chair, Group Audit Committee, 23 February 2021

Membership

 

Member since

Meeting attendance
 in 2020

David Nish (Chair)

May 2016

13/13

Kathleen Casey1

Mar 2014

5/5

James Forese

May 2020

7/7

Eileen Murray2

Jul 2020

5/6

Sir Jonathan Symonds1

Sep 2014

3/3

Jackson Tai

Dec 2018

13/13

Pauline van der Meer Mohr

Apr 2020

10/10

1  Sir Jonathan Symonds stepped down from the Board on 18 February 2020. Kathleen Casey stepped down from the Board on 24 April 2020.

2  Eileen Murray was unable to attend a meeting in July 2020 due to a prior commitment made before her appointment.

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 oversees its appointment, tenure, rotation, remuneration, independence and engagement for non-audit services; 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.

The Group Chief Executive, Group Chief Financial Officer, Group Head of Finance, Group Chief Accounting Officer, Group Head of Audit, Group Chief Risk 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 Group Chief Legal Officer, 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.

Meetings of the Committee usually take place a couple of days before the Board meeting 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 and the Board receives copies of the Committee agenda and minutes of meetings.

Matters considered during 2020

 

 

 

 

Jan

Feb

Apr

Jun

Jul

Sep

Oct

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 and the ESG Update

Regulatory reporting-related matters

Certificates from principal subsidiary audit committees

Control environment

 

 

 

 

 

 

 

 

Review of deficiencies and effectiveness of internal financial controls

Internal audit

 

 

 

 

 

 

 

 

Reports from Global Internal Audit

Annual audit plan, independence and effectiveness

External audit

 

 

 

 

 

 

 

 

Reports from external audit, including external audit plan

Appointment, remuneration, non-audit services and effectiveness

Compliance

 

 

 

 

 

 

 

 

Accounting standards and critical accounting policies

Corporate governance codes and listing rules

Whistleblowing

 

 

 

 

 

 

 

 

Whistleblowing arrangements and effectiveness

 

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, Jackson Tai and Eileen Murray are all '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 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.

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

How the Committee discharged its responsibilities

Connectivity with principal subsidiary audit committees

During the year the GAC Chair regularly met with the chairs of the principal subsidiary audit committees and attended meetings to enable closer links and deeper understanding on judgements around key issues. In addition, there was regular interaction with committee chairs across the Group through the Audit and Risk Committee Chairs' Forum ('ARCC').

Appointments to the audit committees of the principal subsidiary audit committees were reviewed and endorsed by the GAC. The GAC Chair met with proposed new chairs prior to their appointment. 

On a half-yearly basis, principal subsidiary audit committees provided certifications to the GAC regarding the preparation of their financial statements, adherence to Group policies and escalation of any issues that required the attention of the GAC.

Financial reporting

The Committee's review of financial reporting during the year included the Annual Report and Accounts, Interim Report, quarterly earnings releases, analyst presentations and Pillar 3 disclosures.

As part of its review, the GAC evaluated management's application of critical accounting policies, significant accounting judgements and compliance with disclosure requirements to ensure these were consistent, appropriate and acceptable under the relevant financial reporting requirements. The Committee 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. 

During the year, the Committee received regular updates from management on the additional guidance and disclosures made in relation to the Covid-19 outbreak. The Committee considered and was satisfied with the management response to the Financial Reporting Council's ('FRC') comments on HSBC's Annual Report and Accounts 2019 regarding goodwill impairment disclosures, and the industry-wide FRC publications, including the letter to audit committee chairs. 

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.

The Committee's review of the long-term viability statement and the adoption of the going concern basis factored in additional guidance issued by the FRC on financial reporting in light of the Covid-19 outbreak.

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.

Covid-19 impact on accounting judgements

The Committee devoted significant time, including additional meetings, to the review and challenge of management's approach and analysis of IFRS 9 expected credit losses ('ECL') in light of the Covid-19 outbreak and other geopolitical events. In its review, the GAC gave due regard to the interpretation and application of additional guidelines in relation to the Covid-19 outbreak and estimating ECL that were issued by various regulators.

The Committee gave careful consideration to the measurement of ECL, in particular the key judgements and management adjustments made in relation to the forward economic guidance, underlying economic scenarios, reasonableness of the weightings and the impact on financial statements and disclosures.

There was detailed discussion on the risks to ECL models as the unprecedented nature of the pandemic meant that the severity of the economic conditions was outside the bounds of historical data and experience used to develop IFRS 9 models. The Committee challenged management on the approach to modelling ECL, specifically the use of Credit Risk judgements and invited HSBC's credit experts to present their views to the Committee.

At the request of the GAC Chair, Global Internal Audit carried out additional verification and assurance regarding the disclosures made in quarterly reporting on the range of ECL outlook and consistency of the ECL disclosures. The Group's external auditor regularly shared its views with the Committee on the reasonableness of management assumptions, given the significant changes made to the estimation of ECL due to the impact of the Covid-19 outbreak on the design, implementation and operation of ECL controls.

Other areas of significant accounting judgements requiring in-depth review due to the Covid-19 pandemic included valuation of financial instruments, goodwill impairment, hedge accounting and investment in associates. Further details can be found in the 'Principal activities and significant issues considered during 2020' table on page 220.

Internal controls

The GAC assessed the effectiveness of the internal control system for financial reporting and any developments affecting it. This was in support of the Board's assessment of internal control over financial reporting, in accordance with section 404 of the Sarbanes-Oxley Act.

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. Further details of how the Board reviewed the effectiveness of key aspects of internal control can be found on page 260.

In 2020 the updates provided to the Committee included the potential impacts on internal control from the Covid-19 outbreak. These impacts included both those directly relevant to operational processes and controls, such as where new or amended controls were required to administer government relief packages, and more indirect impacts such as from colleagues working under contingency arrangements. A number of additional assurance procedures were performed across the lines of defence to monitor, assess and mitigate these impacts, with results regularly reported to the Committee.

External auditor

The Group's external auditor is PwC, which has held the role for six years, and 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 impact on the control environment from the Covid-19 outbreak and the Group transformation programme. Principal matters discussed with PwC are set out in its report on page 267.

PwC discussed the impact from the Covid-19 outbreak on the execution and delivery of the audit and the plans to deliver the audit through remote working and mitigating actions being taken. These included accelerating aspects of planning and performing a number of areas of audit earlier to factor in expected delays due to remote working. There was also discussion on additional relevant work in relation to significant accounting judgements, such as expected credit losses, and the impact of the Covid-19 outbreak on the basis for determining materiality.

During the year, 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. The Committee gave particular focus to the actions being taken by PwC in response to the findings from the HSBC effectiveness review and the PwC firm-wide Audit Quality Review by the Financial Reporting Council. PwC highlighted the continuing investment in both additional resources and new technologies to improve the quality and consistency of the audit. The Committee Chair also met the PwC engagement quality control partner for HSBC privately to discuss the continuous audit improvement actions.

The GAC received an update on the partner rotation and succession for the Group and its principal subsidiaries and the steps taken to ensure effective transitions.

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.

The Committee also 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, provided the GAC with written confirmation of its independence for the duration of 2020.

The Committee confirms it has complied with the provisions of the Competition and Markets Authority Order for the financial statements. The Committee acknowledges the provisions contained in the 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 as a change in auditor would have a significant impact on the organisation, including on the Global Finance function. A change would lead to disruption and an increase in operational risk given the ongoing impact from the Covid-19 pandemic and the significant strategic change underway through the Group transformation programme. In addition, the Committee is closely monitoring the consultations and proposals arising from the Competition and Market Authority's statutory audit market study, the Kingman Review of the Financial Reporting Council and the Brydon Review on the quality and effectiveness of audit on the future of the UK external audit market. The Committee will consider its audit tendering strategy in line with the outcomes of the UK audit reform and well in advance of re-tendering in 2025.

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 2021 will be proposed to shareholders at the 2021 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. During the year, GAC reviewed changes made to the Group's policy resulting from the implementation of 'The Financial Reporting Council Revised Ethical Standard 2019' (effective in 2020) and changes to internal governance. The key change in the revised standard is the introduction of a 'whitelist of services' that the principal accountant can provide. All services not prescribed in the whitelist are prohibited. 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.

The non-audit services carried out by PwC included 45 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.

Eight 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. 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.

 

2020

2019

Auditors' remuneration

$m

$m

Total fees payable

130.2 

 

110.7 

 

Fees for non-audit services

37.3 

 

25.5 

 

 

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 Audit reports to the Chair of the GAC and there are frequent 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, business and regulatory developments, and provides an independent view of emerging and horizon risk, together with details of audit coverage.

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 2020 audit coverage were strategy, governance and culture, financial crime, conduct and compliance, financial resilience and operational resilience. In April 2020, in response to the Covid-19 outbreak, Global Internal Audit completed a risk-based review to revise the 2020 annual audit plan to create capacity for real-time audits targeted at key risks arising from the pandemic. Real-time audits provide real-time, independent ongoing observations to management responding to the Covid-19 outbreak. Issues are raised for significant observations that are not addressed in a timely manner. In addition, in response to the business update in February 2020, Global Internal Audit focused on governance over the transformation programme and performed project audit activity for selected complex and high-priority business cases.

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 2021 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 plan. Risk theme categories for the 2021 audit work continue to be strategy, governance and culture, financial crime, conduct and compliance, financial resilience, and operational resilience. During 2021, a quarterly assessment of key risk themes will form the basis of thematic reporting and plan updates and will ultimately drive the 2022 planning process. The annual audit plan and material plan updates are approved by the GAC. Based on regular internal audit reporting to the GAC, private sessions with the Group Head of 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 2020

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. This is further complemented with significant overlap in membership of the GAC and GRC to ensure deeper understanding and informed challenge at both meetings.

During 2020, the GAC and GRC Chairs reviewed and challenged management's proposals to transition the responsibility for oversight of entity level controls from the GAC to the GRC. The Chairs considered whether there was the suitable level of management seniority for ownership of entity level controls and whether there was regular and appropriate reporting to both committees to fulfil their oversight responsibilities.

In 2020, five ARCC Forums were held with the chairs of principal and regional subsidiaries' audit and risk committees, together with senior management from these subsidiaries. The purpose of these ARCC Forums was to discuss mutual priorities, improvement and remediation programmes and forward-looking issues in relation to the management of risk and the internal control framework. The topics discussed at the ARCC Forums can be found in the GRC report on page 226.

Three areas of joint focus for the GAC and GRC during 2020 were:

Sustainable control environment

With oversight from the GAC, the Group Executive Committee continued a programme to ensure there is clear understanding, accountability and ownership for internal controls and end-to-end processes to deliver operational quality and consistent outcomes for customers and simpler operation of controls for colleagues.

The GAC provided constructive challenge to management proposals and received regular progress updates on the work streams. Improvements were measured and tracked through a new enterprise-wide non-financial risk forum with escalation paths into the GAC and GRC.

Financial reporting

The GAC reviewed and provided feedback on the assurance work and management's opinion on internal controls over financial reporting, as required by the Sarbanes-Oxley Act. In conjunction with the GRC, the GAC monitored the remediation of significant deficiencies and weaknesses in entity level 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.

In 2020, the GAC and the GRC reviewed the risks arising from models used for the estimation of expected credit losses under IFRS 9, particularly given the economic backdrop of the Covid-19 outbreak. 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.

Monitoring changes to regulatory requirements

The GAC approved an annual priorities plan to review management's response to current and future changes in regulatory requirements affecting financial reporting. In 2020, this included interpretation of new accounting standards, industry-wide regulatory reform programmes and their impact on accounting judgements. The GAC will continue to monitor specific accounting issues identified during the year and future regulatory items that will impact the integrity of financial reporting, the Group and its relationships with regulators.

There continues to be an increased focus on the quality of regulatory reporting by the PRA and other regulators globally. The GAC will review the steps taken by management to strengthen the controls over regulatory reporting and as we strengthen our processes and controls, there may be impacts on some of our regulatory ratios. 

In conjunction with the GRC, the GAC continued to oversee the progress of management's proposals and implementation of the Basel III Reforms and the Ibor transition. The GAC focused on the operational and control environment impacts from Basel III Reforms and Ibor transition on HSBC's financial reporting and interdependencies with other Group transformation programmes.

Whistleblowing and 'speak up' culture

Whistleblowing is a key element of 'speak up' culture, with the Group's whistleblowing channel, HSBC Confidential, offering a variety of ways for our people to raise whistleblowing concerns (see page 68 for further information). The GAC is responsible for the oversight of the effectiveness of the Group's whistleblowing arrangements. The Group's Chief Compliance Officer 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 Whistleblowing Oversight 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 2020, including an assessment of the timeliness of whistleblowing investigations. The arrangements were subject to an internal audit review during 2020, which rated the design, control and management oversight of the arrangements as satisfactory. As part of the ongoing assessment of the end-to-end arrangements, the Committee has requested a deeper review in key markets of the employee investigation function in which the whistleblowing arrangements have a dependency. An external benchmarking assessment was presented to the GAC in December 2020. This provided an overview of the overall effectiveness of whistleblowing arrangements and investigations processes against a number of industry peers, and best practice guidance issued by external consultancy and legal firms as well as the UK charity, Protect. The assessment reflected the significant progress made during 2020 such as the implementation of a new whistleblowing platform (Navex), the enhanced global minimum standards and improvements observed in the 'speak up' culture. In addition, governance was improved with a particular focus on key emerging conduct themes to enable timely management action, and a mechanism was introduced for whistleblowers to provide feedback post-investigation. The assessment also identified further opportunities for 2021 as part of the Group's fit for the future programme with updates to be provided to the whistleblowing champion and the GAC throughout 2021.

 

 

Principal activities and significant issues considered during 2020

 

Areas of focus

Key issues

Conclusions and actions

 

Environmental, social and governance ('ESG') reporting

The Committee considered management's efforts to embed and enhance ESG reporting to demonstrate strong controls, operation and governance, including key performance indicators and assurance plans.

The GAC reviewed the approach to combining the ESG Update into the Annual Report and Accounts for the 2020 reporting period. This included consideration of the steps taken by management to address findings from Global Internal Audit regarding the controls and assurance processes for ESG content. The Committee will review the steps taken by management in developing the target operating model to deliver integrated reporting in 2021.

 

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. There remains an elevated degree of uncertainty over ECL estimation under current macroeconomic, political and epidemiological uncertainties. Further details are provided in the 'Covid-19 impact on accounting judgements' section of this report.

The actions taken are summarised above in the 'Covid-19 impact on accounting judgements' section of this report.

 

 

Long-term viability and going concern statement

During the year, 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 outbreak has had 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.

 
 

Goodwill and other non-financial assets impairment

During the year, management tested for impairment goodwill and other non-financial assets. 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 $1.3bn impairment in relation to non-financial assets, following which a detailed analysis of various balance sheet amounts was initiated.

The GAC received reports on management's approach to goodwill and other non-financial assets impairment testing and challenged the approach and models 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. The GAC reviewed the results of management's detailed analysis of the balance sheet and agreed with the conclusions.

 
 

Associates (Bank of Communications Co., Limited and The Saudi British Bank)

During the year, management performed the impairment review of HSBC's investment in Bank of Communications Co., Ltd ('BoCom') and The Saudi British Bank ('SABB'). 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 reviews of HSBC's investment in BoCom and SABB, 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 models' sensitivity to long-term assumptions including the continued appropriateness of the discount rates.

 

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 agree 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 volatile market conditions in 2020, management refined its approach to valuing 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 IFRS.

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.

 

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 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.

 

UK customer remediation

Management's judgement is used in determining the assumptions used to calculate the Group's remediation provisions, of which the most material are PPI and a programme in relation to the collections and recoveries operations of the bank.

The GAC considered and challenged management's assumptions and the approach for estimating potential outflows relating to the calculations of the customer remediation provisions.

 

 

Long-term asset return assumptions in PVIF

Market volatility during 2020 resulted in further review of the long-term investment assumptions used in the measurement of the present value of in-force business ('PVIF') intangible assets recorded on the balance sheet in relation to shareholder returns expected from long-term insurance contracts.

The GAC reviewed the assumptions determined by management under existing insurance governance processes, which involve significant expert judgement, and concluded that they were supportable given internal and external benchmarks and information reviewed.

 

Hedge accounting

Significant judgements relating to hedge accounting matters under current economic conditions include the impact of Covid-19 payment deferrals on the highly probable cash flow forecasts required by macro cash flow programmes; and whether hedge accounting relationships, where hedged items include interest rate floors and the hedging instrument does not, would be highly effective over the hedged horizon.

The GAC noted that the effect of Covid-19 payment deferrals on hedge accounting was limited and no additional actions were required. Additionally the GAC was informed about the mitigation actions management has taken to reduce the risk associated with floored hedged items, such as designating new hedge accounting relationships.

 

 

 

 

 

 

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 to review the impact on the risk and control environment and to oversee progress of the Group transformation programme.
In these updates the Committee monitored the development of management's approach to structuring and governing the Group transformation programme and risk management processes. This oversight helped satisfy the Committee of the appropriateness of these processes and associated benefits delivery. Management kept the Committee apprised of the changes and adjustments made to the Group transformation programme in response to Covid-19, and associated impact on the financial performance.
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 2020, 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 leverage 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 reviewed and challenged the key change programmes and delivery milestones and tracked the progress of the deliverables. In particular, the Committee considered the impact from the Global Finance transformation on the Group transformation programme, regulatory change programmes and where there were interdependencies and concentrations risks through key programmes such as Finance on the Cloud. There were frequent discussions with management with input from Global Internal Audit on the impact on key risks and controls, including steps taken to mitigate these risks. Management regularly updated the Committee on the approach and plans for regulatory engagement, including follow-up on the outcomes and actions to be taken post-meetings with regulators.
The Group Chief Financial Officer had private sessions with the Committee to share his perspectives on the progress of the Global Finance transformation, areas of strategic priorities and where additional focus was required. The private sessions included discussion on succession planning and resourcing and areas where GAC members could support and guide management by leveraging members' experience.

 

 

 

 

 

 

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.

Management provided an update on the final standard amendments that were issued in June 2020 and discussed the impact on the transition programme necessitated by the one-year delay to the effective date, both from a policy implementation and model build perspective. The discussions highlighted the significant uncertainty that remained in the interpretation of key areas and the working assumptions adopted by management to enable design solutions, investment in technology and data infrastructure to proceed.

The Committee discussed the impact from IFRS 17 on HSBC's reported numbers in the financial statements and management will continue to consider how to appropriately apply the standard to HSBC's insurance business, as well as monitoring insurance industry developments on disclosures. Management will continue to keep the Committee updated on plans for the investor narrative, taking into account the relevant disclosure requirements applicable to HSBC, and ongoing presentation of insurance results up to the time of the transition.

 

 

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 Covid-19.

 
 

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 readiness to migrate and 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 2020. Overall the review concluded that the GAC continued to operate effectively, and highlighted improvements made in 2020 in relation to Committee structure and focus. The review also made certain recommendations for continuous improvement, including in relation to further enhancing the quality of information presented to the meeting through revised executive governance oversight. The Committee has considered and discussed the outcomes of the evaluation and accepts the findings.

The outcomes of the evaluation have been reported to the Board and the Committee will track progress on the recommendations during 2021.

 

 

Focus of future activities

At the beginning of each year the Committee discusses its key priorities for the year ahead. In 2021, the Committee will continue to monitor execution of the Group transformation programme and its impact on the risk and control environment. In monitoring the Group transformation programme, the Committee will consider the interdependencies between the Group transformation programme and implementation of large-scale regulatory change programmes such as Basel III Reforms, the Ibor transition and IFRS 17 'Insurance Contracts'. A major area of focus is also expected to be the GAC's engagement with the UK Government's consultation and proposals for the future of the UK external audit market.

Group Risk Committee

 

 

"Geopolitical developments, civil unrest, the UK's trade negotiation with the EU and the Covid-19 outbreak introduced new challenges for our organisation, customers and people. The Group Risk Committee responded by working closely with management to understand and appropriately challenge scenario stress testing, early warning indicators and management of information."

 

 

Dear Shareholder

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

Geopolitical developments, civil unrest in Hong Kong, the UK's trade negotiations with the EU and the Covid-19 outbreak introduced new challenges for our organisation, customers and people. The GRC responded by working closely with management to understand and appropriately challenge scenario stress testing results, early warning indicators and key management metrics. Importantly, we monitored heightened capital and liquidity risks against the prospect of greater market volatility, large customer financing needs, rapid credit deterioration and lapses in fair outcomes for our customers. We reviewed and challenged the impact of forward economic growth assumptions on our markets and credit exposures. We maintained close watch over people and operational risks arising from fatigue, the health impact of the virus, and government-imposed restrictions.

The GRC continued to strengthen its composition and skills to promote proactive risk governance. During the year we welcomed seasoned technology and operations experts Steven Guggenheimer and Eileen Murray to the GRC. We also extended deep appreciation to Sir Jonathan Symonds and Kathleen Casey for their valuable insight and contribution upon their retirement from the GRC and the Board.

The GRC convened eight formal meetings plus seven special sessions to review and challenge our most important responsibilities, including Group internal stress testing, internal liquidity adequacy assessment process ('ILAAP'), and internal capital adequacy assessment process ('ICAAP'). We also organised timely education sessions, including a full-day training on sanctions in Hong Kong for non-executive Directors and management in Asia-Pacific.

Throughout 2020, the GRC and GAC coordinated closely our respective agendas, as evident in our five jointly organised regional Audit and Risk Committee Chairs' Forums, which featured discussion on key audit and risk issues with our principal subsidiaries, ensuring alignment of priorities between the Group and its subsidiaries.

 

Jackson Tai

Chair

Group Risk Committee

23 February 2021

Membership

 

Member since

Meeting attendance in 2020

Jackson Tai (Chair)

Sep 2016

8/8

Kathleen Casey1

Jan 2020

3/3

Steven Guggenheimer

May 2020

4/4

José Antonio Meade Kuribreña

May 2019

8/8

Heidi Miller

Sep 2014

8/8

Eileen Murray

Jul 2020

3/3

David Nish

Feb 2020

7/7

Sir Jonathan Symonds1

Apr 2018

2/2

Pauline van der Meer Mohr

Apr 2018

8/8

1  Sir Jonathan Symonds stepped down from the Board on 18 February 2020. Kathleen Casey stepped down from the Board on 24 April 2020.

Key responsibilities

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

advising the Board on risk appetite-related matters, and key regulatory submissions, including the ICAAP and ILAAP, as well as recovery and resolution planning;

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;

undertaking a review and challenge of the Group's stress testing exercises; and

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

Committee governance

In carrying out its responsibilities, the GRC is supported by the participation of senior management, including Noel Quinn who attended six GRC meetings in 2020.

The Group Chief Risk Officer, Group Chief Financial Officer, Group Head of Audit, Group Chief Compliance Officer and Global Head of Risk Strategy are standing attendees and regularly attend GRC meetings to contribute their subject matter expertise and insight. They facilitate GRC members' review and challenge of current and forward-looking risk issues, working together with business, functional and regional leaders across all three lines of defence. The Chair also regularly meets with the Group Chief Risk Officer, the Group Head of Audit and external auditor, PwC, without management present.

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 consults regularly with the Committee Secretary to ensure the GRC meets its governance responsibilities and to consider input from stakeholders when finalising meeting agendas, tracking progress on actions and Committee priorities.

Matters considered by the GRC in 2020

 

Jan

Feb

Mar

Apr

May

Jun

Jul

Sep

Oct

Nov

Dec

Financial risk

Credit risk

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

Model risk 

People and conduct risk

Risk appetite

Financial crime risk

Regulatory compliance

Legal risk 

 

How the GRC discharges its responsibilities

During 2020, the GRC reshaped its meeting agenda to place greater emphasis on a regular review of the Group's risk landscape and to track the management of information and desired outcomes for our most important risk areas. Each meeting now commences with a review of our enterprise risk landscape through the Group Chief Risk Officer's update of the Group risk profile followed by a comprehensive review of critical management information, led by the Group Chief Risk Officer, and supported by the Group Chief Financial Officer, Group Chief Operating Officer, Group Chief Compliance Officer and Group Human Resources Officer.

The GRC also reviewed internal and external audit reports and regular risk reports, which provided deeper reporting on the Group's risk profile and highlighted the material current and forward-looking risks and issues, such that the GRC could effectively identify any areas that required more of the GRC's attention. A summary of coverage is set out in the table above.

Throughout the year, the GRC adhered to an agenda that sought to regularly address topics and oversight responsibilities set out in the Group risk taxonomy, while being flexible to undertake informed review and appropriate challenge of timely risk issues that have economic, commercial, regulatory and reputational implications for the Group's franchise. 

Three thematic risk areas are described below to illustrate the GRC's focus during the year.

Sustainable control environment  

During 2020, the GRC undertook in-depth reviews of a number of topics relating to the Group's internal controls and the necessary culture change needed to improve the control environment. The GRC reviewed model enhancements needed as a result of changes in the economy due to the Covid-19 outbreak. The GRC also continued its review of the Group's approach to operational resilience and identified improvements from a pilot study to identify areas for further enhancements. The GRC also reviewed the effectiveness of the Group's anti-fraud controls. At the November meeting of the Committee, it was agreed the ultimate oversight for all of the Group's entity level controls move from the GAC to the GRC. This change supports the Committee's responsibility for review and oversight of the risk management culture, framework and internal control systems.

Financial risk

The GRC provided informed review and constructive challenge to the Group's regulatory submissions of ICAAP and ILAAP. It also monitored progress on the Group's liquidity risk management improvement plan, including the development of the internal liquidity metric. It reviewed work by the Global Finance function on strengthening recovery planning.

The GRC continued to maintain oversight of the Group's regulatory and internal stress testing programmes, particularly in light of the impact of the Covid-19 outbreak with specific review and challenge of the key assumptions, strategic management actions and outcomes of the principal tests conducted. Through these reviews, the GRC assessed risks facing the Group to determine the principal risks to its long-term viability, including those that would threaten its solvency and liquidity.

Monitoring changes to regulatory requirements  

During 2020, the GRC undertook review and challenge of a number of risk areas for which the Group has regulatory obligations or is facing regulatory change. These included operational resilience, climate risk and sanctions. The Committee received updates on regulators' rules and guidance relating to operational resilience, which is designed to protect customers and maintain economic stability by preventing incidents leading to intolerable consumer harm, market disruption, and impact to the safety and soundness of firms. To reinforce continued emphasis and visibility on financial crime and sanctions compliance, the GRC organised a full-day training session on international sanctions early in the year in Hong Kong for our Asia-Pacific non-executive Directors and management.

The GRC also considered the PRA's latest requirements and expectations relating to evidencing of the embedding of climate risk management capabilities within regulated firms.

Activities outside formal meetings

The GRC organised a number of activities outside of its regular meeting cycle to facilitate more effective oversight of the risks impacting the Group. In particular, the GRC's formal meetings continue to be supported by training and 'walk-through' sessions to raise the GRC's understanding of the underlying domain issues, ensuring the GRC is well prepared in its informed review and constructive challenge. The chairs of principal subsidiary risk committees were also invited. Activities included, among others:

a Directors' education session, held in October 2020, focusing on the increasingly complex international sanctions and export control landscape, including key sanctions challenges facing the Group with the imposition of new US sanctions following the US Hong Kong Autonomy Act. This education session was attended by 27 non-executive Directors from across the Group;

a Directors' education session, held in November 2020, led by senior leaders in Group Treasury on the implementation of the internal liquidity metric, which is designed to provide an internal view of liquidity risk and to ensure the Group holds enough liquidity to meet and recover from a defined stress;

GRC Chair's Working Sessions on a range of topics including financial crime developments, progress on FCA conduct remediation matters (May 2020), the Wealth and Personal Banking conduct programme (May 2020), progress on regulatory remediation programmes (January and December 2020), the outcomes and implications of the 2020 Group internal stress test (November 2020), and progress on the 2020 ICAAP and ILAAP submissions (November 2020); and

three cybersecurity consultation sessions and regular updates on cyber developments such as cyber-crime, legislation and technology led by the GRC's independent cybersecurity adviser.

Connectivity with principal subsidiary risk committees  

The risk committees of principal subsidiaries provided half-yearly confirmations to the GRC. These 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 or trends and that the risk management and internal control systems in place were operating effectively.

Throughout 2020, the GRC proactively encouraged principal subsidiary risk committee chairs to participate in regular GRC meetings and special review or learning sessions, leading to improved connectivity between the Group and principal subsidiary risk committees. In addition the GRC Chair participated in the meetings of principal subsidiary risk committees for Asia, the UK, Europe, the US, Latin America, Canada and the Middle East, with the aim of ensuring strong alignment, information sharing and connectivity between the GRC and principal subsidiaries.

Collaboration between the GRC and GAC

The GRC worked closely with the GAC to ensure that there are no gaps in risk oversight, and that any areas of significant overlap are appropriately addressed by inter-committee coordination or joint meetings where appropriate. The GRC and GAC Chairs are members of both committees to further enhance connectivity, coordination and flow of information.

Audit and Risk Committee Chairs' Forum

The Audit and Risk Committee Chairs' ('ARCC') Forum meetings continue to be one of the more collaborative GRC and GAC exercises. The forum meetings promote shared risk and audit subject matter expertise, align Group and subsidiary priorities, support the subsidiary accountability framework and promote two-way connectivity between the Group and principal subsidiary risk and audit committees. The meetings are jointly hosted by the GAC and GRC Chairs and attended by members of the GAC and GRC, the Group Executive Committee (more than half of whom attended at least one meeting), several Group non-executive Directors, the chairs of principal and regional subsidiary audit and risk committees, together with non-executive Directors and senior management from those subsidiaries.

In May, the ARCC Forum provided updates through video calls with the Asia-Pacific region and a combined call with the Europe, Middle East and Americas regions. This was followed by three ARCC Forum calls for each of the Asia-Pacific, UK, Europe and Middle East, and Americas regions in September and November.

The ARCC Forums provided an important opportunity for the GRC to understand locally-specific issues and priorities with potential read-across to other areas and regions of the Group. They also served to help the GRC hear the observations, concerns and achievements from subsidiary risk and audit chairs, with a particular focus on pressing issues or concerns (such as the Covid-19 outbreak, business restructuring, or macroeconomic issues); where Group initiatives need to be recalibrated to reflect regional constraints; cross-regional dependencies; and where the Group can progress faster. In light of the Covid-19 pandemic and highly uncertain macroeconomic environment, the ARCC Forum meetings included discussion on:

reinforcing the control environment and embedding of non-financial risk management;

sustaining operational integrity and resilience during a Covid-19 and restructuring environment;

need for even stronger risk appetite, credit, counterparty and conduct risk management during a Covid-19 and macroeconomic-sensitive environment;

strengthening model risk management and our portfolio of models at the Group level and in the regions;

subsidiaries' role and responsibilities in our Group recovery and resolvability planning in a more macroeconomic-sensitive environment; and

understanding the perspectives and feedback from regional subsidiaries.

 

 

Focus of future activities

The GRC's focus for 2021 will include the following activities. It will:

provide oversight of the execution risk arising from the Group transformation programme;

oversee enhancements to our risk appetite statement so that it is more regular, forward-looking and risk responsive;

ensure the risk appetite statement is closely linked to our strategic goals, our annual operating plan, stress testing, ILAAP and ICAAP exercises, and our recovery and resolution planning;

monitor and appropriately challenge management's plans to manage and mitigate the impacts of geopolitical risks on our operations and portfolios in Asia, the Middle East and the rest of the world;

monitor the impact of the Covid-19 outbreak on the Group's customer franchise as well as on the capital and liquidity risk, credit risk, market risk, people and operational risk for the Group;

monitor continued progress in financial crime compliance, including enhancements in our transaction monitoring programme and the application of new analytical tools and applications to improve our fraud detection and prevention;

continue to monitor developments and enhancements in the Group's management of conduct and culture, as well as people risk management;

continue to review and challenge management's progress in developing and implementing our operational resilience strategy;

oversee the Group's approach to climate risk management and climate risk appetite;

review plans, jointly with the GAC, to strengthen the Group's data strategy and management so that we can better serve our customers, protect customer data as well as strengthen model risk management, credit risk management and risk appetite, including climate risk appetite; and

track progress regularly in remediating outstanding, unresolved regulatory actions across the Group and principal subsidiaries, including progress in closing-out any regulatory consent orders or matters requiring attention.

Committee evaluation

The GRC is committed to regular, independent evaluation of its own effectiveness. During 2020, the GRC undertook an internal GRC effectiveness exercise, which concluded that the GRC continued to operate effectively and in line with regulatory requirements.

The effectiveness exercise highlighted improvements made in 2020 to anchor meetings with the regular review of the Group's risk landscape and management information. Progress made in relation to the Committee's operation and engagement with principal subsidiaries was acknowledged. The review also made certain recommendations for enhancement, including in relation to rebalancing the breadth of the GRC agenda, and increasing the use of alternative mechanisms to allow the GRC to efficiently exercise oversight of risk matters through additional education and supplementary sessions. The Committee has considered and discussed the outcomes of the evaluation and accepts the findings.

The outcomes of the evaluation have been reported to the Board and the Committee will track progress on the recommendations during 2020.

Principal activities and significant issues considered during 2020

 

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, our capacity and capabilities to support our customers, and the pursuit of the Group's strategic goals

The GRC undertook its biannual risk appetite review and recommended the Group's 2020 risk appetite statement to the Board with enhancements to both financial and non-financial risk metrics. It then continued to work closely with Group Risk Strategy to enhance the 2021 risk appetite statement including a climate risk qualitative statement and quantitative measures that focus on the Group's exposure and risk profile to high transition risk sectors, as well as improvements to the suite of resilience risk metrics. The GRC also raised the importance of strengthening the granularity risk appetite statements to be forward-looking and risk-responsive at GRC meetings and at regional ARCC Forums. In the process, the GRC has reinforced the importance of stronger linkage of the risk appetite statements to the Group's annual operating plan, strategic planning, stress testing exercises, annual capital adequacy and liquidity management exercises, and to the Group's recovery and resolution planning. 

 
 

 

 

 

 

 

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

The GRC reviewed the Group's readiness to address major geopolitical developments, including the short- and longer-term impact of civil unrest in Hong Kong and heightened trade tensions between the US and China on our Asia and global franchise, as well as our ability to maintain our high service levels in our multi-channels to serve our customers. The GRC also monitored the Group's preparedness for financial market, operational and commercial disruptions arising out of protracted UK trade negotiations with the EU.

 
 

 

 

 

 

 

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 outbreak.

The GRC reviewed how the Group leveraged its capital and liquidity strength, robust credit standards, and digital capabilities to assist customers during the Covid-19 outbreak and to maintain market strength. In doing so, the Committee closely assessed credit trends, economic outlook and the impact on portfolio credit quality. The GRC also reviewed the operational, reputational and conduct challenges in implementing government support schemes across different geographies and regulatory jurisdictions, including associated risks, controls and oversight.

 

 

 

 

 

 

Management's operational resilience programme is being redesigned to enable our priority business services to continue to serve our customers in the event of unforeseen disruptions in our key markets.

The GRC maintained its focus on the Group's policies, programmes and practices for strengthening and prioritising our ability to test, detect, resolve and recover from unforeseen operational disruptions in our key markets. With the goal of minimising harm to our customers and to the local financial markets, the GRC continued its review of the Group's approach to operational resilience, which incorporates learnings from the Group's response to the Covid-19 outbreak across our franchise. The GRC's oversight activities included:

the review and challenge of progress on the formulation of a comprehensive operational resilience strategy including working with the Group Chief Control Officer on the programme to comply with regulatory standards for operational resilience;

the planned 'operationalisation' of critical business services and impact tolerances, and risk and control mapping to strengthen the ability to prevent, respond to, recover, and learn from operational disruptions, such as Covid-19;

the embedding of ownership with first line business and function leaders to deliver operational resilience outcomes for customers, for the Group's own safety and soundness, and to avoid disruptions to market integrity and financial stability; and

the review and challenge of management's progress in managing third-party risk in the context of an increasing reliance on technology services provided by third parties and growing regulatory scrutiny.

 
 

 

 

 

 

 

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 the Committee's approach to governance of technology risk and Cloud adoption, which was a high priority area under regulatory scrutiny. The GRC also continued its oversight and challenge of the Group's cybersecurity strategy and management of cyber risks.

 

 

 

 

 

 

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 adverse impact due to not having the right people with  the right skills doing the right thing, including risks associated with employment practices and relations.

The GRC continued to exercise oversight in the area of people risk and employee conduct, supported by the Group Chief Human Resources Officer and Group business heads, including:

regular monitoring of the Group's progress in remediating the market conduct issues underlying the 2018 deferred prosecution agreement with the US Department of Justice and the related 2017 Federal Reserve Bank Consent Order;

informed review and challenge of the alignment of risk and reward, satisfying itself that risk and compliance objectives and outcomes were reflected in the Group variable pay pool;

discussion of the people risk issues arising due to the impact of the Covid-19 outbreak; and

the review of workplace harassment data and insights, action taken and 2020 focus areas.

 

 

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

The GRC recognises the Group's regulatory commitments due in 2021 and the Group's own publicly stated climate risk targets, as well as the need to manage climate risk of the Group's existing portfolios and future business. The GRC reviewed the Group's approach to climate risk management and climate risk appetite including associated stress testing and scenario analysis.

 

 

 

 

 

 

The GRC oversees the Group's management of its financial risk, particularly in the context of the challenges of the Covid-19 outbreak.

The GRC reviewed the Group's capability to track environmental and macroeconomic headwinds through early warning indicators and scenario stress testing. It also oversaw the Group's progress in developing a range of strategic management actions capable of timely execution and the development of recovery and resolution capabilities that meet PRA and local regulatory expectations. The GRC also maintained oversight of the Group's liquidity risk management with particular emphasis on the outlook, lessons learned from the Covid-19 outbreak, metric development, systems and controls, and regulatory feedback.
 
The GRC reviewed and challenged the assessment of the Group ICAAP and ILAAP programmes and engaged with Group management in overseeing and evaluating the Group's forward-looking capital and liquidity strategies and capabilities, including the Group's liquidity risk management improvement programme. Additionally, the GRC Chairs participated in several subsidiary risk committees' review of ICAAP, leading up to final GRC review, challenge and recommendation of ICAAP to the Board.

 

 

 

 

 

 

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.

Throughout 2020, the GRC reviewed the Group's approach to managing its financial crime risk across a number of important areas. This included:

the Group's progress in enhancing its transaction monitoring framework;

the fraud landscape, particularly against heightened Covid-19 conditions, the Group's fraud risk profile and the impact of regulatory developments; and

the nature and scale of insider risk and the Group's strategies for managing insider 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 held a full-day training session on sanctions in Hong Kong in January for our Asia-Pacific non-executive Directors and management. A further education session on sanctions was held for Group-wide non-executive Directors in October to address the US government imposition of sanctions in connection with its Hong Kong Autonomy Act.

Following the organisational restructuring of Financial Crime Compliance, the GRC requested the Committee's independent financial crime advisers to examine the effectiveness of the financial crime function in the Group's subsidiaries.

 
 

 

 

 

 

 

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 raised awareness of progress and importance of models at a number of its meetings and at the regional Audit and Risk Committee Chairs' Forums. It reviewed progress under the Group's model risk transformation programme. The Committee oversaw the development and embedding of improved model risk management controls and oversight in the first line of defence, as well as enhancements to model risk governance. The GRC also considered the adverse impact of the Covid-19 outbreak on model uncertainty including the need for enhancements as necessary.

 
 

 

 

 

 

 

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 monitored the Group's progress in demonstrating that it has developed capabilities to support its own resolution, in line with the Group's resolution strategy in order to meet new requirements from the Bank of England under its resolvability assessment framework by 1 January 2022, including the requirement to comply with the valuation in resolution requirement by 1 April 2021, to submit a self-assessment to the PRA/Bank of England by 1 October 2021 and to publicly disclose HSBC's resolvability in June 2022. Together with the Group Chief Financial Officer, the GRC and GAC programmed our five regional Audit and Risk Committee Chairs' Forums to raise the importance of Boards and management of principal subsidiaries in upgrading their awareness and compliance with new regulatory standards for recovery and resolution.

 

 

 

 

 

 

 

 

 

Directors' remuneration report

 

Page

Group Remuneration Committee

236

Workforce remuneration

238

Our approach to Directors' remuneration

241

Annual report on remuneration

245

Additional remuneration disclosures

265

All disclosures in the Directors' remuneration report are unaudited unless otherwise stated. Disclosures marked as audited should be considered audited in the context of financial statements taken as a whole.

 

 

 

 

'The remuneration outcomes for 2020 strike the right balance between rewarding our employees for their exceptional efforts this year and being equitable in the broader context.'

 

Dear Shareholder

I am pleased to present our 2020 Directors' remuneration report on behalf of the members of the Group Remuneration Committee.

Making remuneration decisions in the face of the challenges presented by the Covid-19 pandemic required a delicate balancing of factors. Recognising our people for their performance is a key element of our reward strategy and helps to drive ongoing engagement, which is critically important as we navigate through the Covid-19 outbreak and the Group's transformation. However, we must also recognise the impact of these circumstances on our stakeholders and the wider community.

Actions taken in response to Covid-19

In determining the remuneration outcomes, the Committee noted the following:

We did not apply for government support packages for our employees across the countries and territories in which we operate, and put employee well-being, customer experience, and supporting the economy at the centre of our response to the pandemic.

Our front-line employees continued to serve customers in challenging circumstances. Our customer contact centres were fully operational during the period, and between 70% and 90% of branches remained open, as we continued to enhance our digital capabilities.

We worked with governments to support national schemes, granting over 720,000 payment holidays to our personal customers and 237,000 loans to our wholesale customers. We provided more than $26bn in customer relief to our personal customers during the initial stages of the pandemic and more than $52bn in lending to wholesale customers, many of whom still require our support.

In line with all other large UK-based banks and at the direct request of the Group's lead regulator, the UK's PRA, we cancelled the fourth interim dividend of 2019 and suspended dividend payments until the end of 2020. In December 2020, the PRA announced a temporary approach to shareholder distributions for 2020. After considering the requirements of the temporary approach, the Board announced an interim dividend for 2020 of $0.15 per ordinary share.

Membership

 

Member since

Meeting attendance in 2020

Pauline van der Meer Mohr (Chair)

Jan 2016

5/5

Henri de Castries

May 2017

5/5

James Forese

May 2020

4/4

Irene Lee

Apr 2018

5/5

David Nish

May 2017

5/5

 

Reflecting on these actions, the Committee concluded that the 2020 remuneration outcomes should strike the right balance between rewarding our employees for their exceptional efforts this year and being equitable in the broader context.

Performance and pay for 2020

Financial performance

The Group's financial performance deteriorated in 2020, reflecting the impact of the Covid-19 outbreak on the global economy. Adjusted profit before tax of $12bn was down 45% due to lower revenue and a higher expected credit loss charge directly linked to the impact of the pandemic.

However, the Group continued to make good progress on its strategic plan, demonstrated by a $51.5bn reduction of RWAs in 2020 in low-return franchises and a 3% reduction in adjusted costs. Economic activity in Asia has proven to be resilient and is rebounding. We continue to elevate our ambition in the region by stepping up our investment.

Non-financial performance

We made progress in creating a simpler, more efficient organisation by combining our wholesale back office operations, and bringing our retail, wealth and private banking businesses together into a single global business. We also continue to increase investment in technology to drive improved customer experience and operational efficiency. Technology enhancements introduced in 2020 included automated lending processes for Covid-19 relief programmes, upgraded global payment systems, transformed customer onboarding processes, and use of Cloud technology for risk analytics systems.

Remuneration funding approach

While events such as those seen in 2020 are rare, our remuneration framework was designed with the entire economic cycle in mind, including the possibility of exceptional years. We use a countercyclical funding methodology, with both a floor and a ceiling, to recognise that there will be times when profitability is exceptionally low or exceptionally high as a result of factors not directly linked to employee performance. In such years, factors such as applying franchise protection and limiting the risk of inappropriate behaviour need to be considered when setting the variable pay pool. Nonetheless, financial performance and affordability remain central tenets in determining the appropriateness of the variable pay pool.

Group variable pay pool

For 2020, the Committee reviewed and agreed the Group variable pay pool of $2,659m, taking into account performance against financial and non-financial metrics set out in the Group risk appetite statement, including conduct, and targets set out in our operating plan. This represents a 20.4% reduction in the pool compared with 2019, with the variable pay pool down approximately 15% in Global Banking and Markets, asset management and private banking, and approximately 22.5% in other areas of the Group. We also differentiated by market, with a better year-on-year outcome in Asia, reflecting the region's strategic importance and consistent contribution towards Group performance.

In determining the size of the pool, the Committee took into account the fact that overall financial performance was lower than what we had targeted at the start of the year, and certain non-financial risk metrics were outside of our risk appetite. We also took into account the exceptional circumstances faced by our shareholders, including the impact of the regulatory request to cancel the final 2019 dividend and suspend dividend payments until the end of 2020.

While it is appropriate that the pool is significantly lower this year, the Committee was cognisant of the extraordinary effort and performance of many of our colleagues in 2020. Equally, it is critical we retain talent for the long-term interests of our stakeholders. This is of particular importance in growth markets and our areas of strategic focus, and is most acute for our high performers who are helping us restore the business to our expected performance levels. As a result, the variable pay accrual was increased in the fourth quarter in response to financial performance and market pay challenges.

Review of workforce remuneration

Remuneration outcomes

In allocating the pool, the Committee decided that while the variable pay outcomes for junior colleagues should reflect Group performance, they should receive better outcomes with less differentiation relative to our senior employees. Overall, total compensation for our junior members of staff was broadly flat, which we felt was important given their significant efforts in a challenging year. Higher paid employees had an overall decrease in total compensation. We also made limited fixed pay increases for 2021 and targeted these towards our junior colleagues. As part of the year-end pay review, the Committee reviewed results of remuneration outcomes to ensure they were in line with our pay principles and the approach decided by the Committee for 2020.

Support for our employees

Throughout 2020, the well-being of our people was our paramount concern. Many employees had to juggle personal and professional priorities, while adapting to new and unfamiliar ways of working. In March 2020, we temporarily paused the redundancy programme intended to deliver the reduction in headcount that we set out in the transformation programme announced in February 2020. The Board was conscious of the impact of proceeding with redundancies, particularly at the outset of the crisis given the significant stress for our people and communities, and the need to protect our capacity to serve our customers. The Board lifted the pause on the redundancy programme in June 2020 while continuing the freeze on the vast majority of external recruitment to make every effort to fill vacancies internally. We maintained a regular flow of communication and listened closely to our colleagues' needs, providing the support and flexibility required to help them manage their lives during the pandemic, and maintained their full pay without applying for government support packages.

We ran a mid-year employee survey to determine how the Covid-19 outbreak was impacting our colleagues and how we could support them through this period. More than 50% of our total employee population responded, of which more than 89% said they were getting the information they needed from the organisation, 86% reported that they were getting the support they needed from their line manager and 86% of the respondents reported they felt confident in leadership. In addition, 75% of employees that participated in our 2020 Snapshot survey said they believed HSBC values their well-being.

For our departing colleagues, we took steps to offer them support on searching and applying for jobs and preparing for interviews. We also maintained a dedicated advice website, offered virtual workshops and provided access to career development tools to set them up for success outside HSBC.

Key remuneration decisions for Directors  

Voluntary decisions made by executive Directors

Reflecting on the severity of the impact of Covid-19 at the outset, our two executive Directors made personal contributions to the fight against the pandemic by donating to charity a quarter of their base salaries for six months, and our Group Chairman donated his entire fee for 12 months to charity. Additionally, as an organisation, we provided $25m in charitable donations, which went toward immediate medical relief, access to food, and care for the most vulnerable people. Our executive Directors also decided to voluntarily forgo any annual cash bonus for 2020 due to the impact of the suspension of dividends on our shareholders.

Executive Director annual performance assessment

With regard to performance-based pay for 2020, the financial measures in the executive Directors' annual scorecards were aligned to the delivery of profit before tax, our strategic priority of reducing RWAs in low-return franchises and, for the Group Chief Financial Officer, effective management of Group costs. Following careful consideration, these targets were not revised for the significant economic impact of the Covid-19 outbreak to reflect the Committee's view that reward for our executive Directors should align with the experience of our shareholders. 

Non-financial performance measures were linked to customer satisfaction, employee engagement and diversity, environmental stewardship, risk and compliance, and organisational simplification. The Committee noted strong non-financial performance as our commitment to delivering responsibly for our stakeholders remained unchanged throughout the pandemic. In addition to the actions noted to support our customers and the wider economy, customer and digital satisfaction scores increased in some of our scale markets, employee engagement scores improved, we met our diversity goal of having at least 30% women in senior management roles, and we achieved carbon reduction and sustainable finance and investment targets. We were also recognised by Euromoney for 'Global Excellence in Leadership during the Covid-19 pandemic' in its Awards for Excellence 2020.

Executive Director annual incentive scorecard outcome

The above resulted in an overall outcome of 64.50% for the Group Chief Executive and 63.75% for the Group Chief Financial Officer (further details of performance are provided on page 240). The Committee reviewed this outcome in the context of a number of internal and external considerations to determine whether it should exercise its discretion to reduce the outcome, including:

overall share price performance in the year, which was significantly impacted by both the Covid-19 outbreak and the impact of the PRA's request to suspend dividend payments;

the impact of the bonus pool reduction on the total compensation for our wider workforce;

profit before tax and return on tangible equity ('RoTE') performance; and

the positive actions taken by the Board to support our customers, colleagues and communities in these uncertain times.

The Committee determined the 2020 formulaic scorecard outcomes appropriately reward the executive Directors for their performance within the context of overall stakeholder experience. With the voluntary waiver of cash bonuses by executive Directors, the Group Chief Executive's effective payout was reduced to 32.25% of its maximum, and the Group Chief Financial Officer's was reduced to 31.88%. The effective payouts are 51.43% and 58.86% below their respective outcomes compared with 2019.

2020 long-term incentive ('LTI') for executive Directors

To reflect the Group's strategy, and after listening to our shareholders, the Committee has agreed that the 2020 LTI will be based on four equally weighted measures.

RoTE: We have retained a key measure of our financial performance and how we generate returns that deliver value for our shareholders.

Capital reallocation to Asia: We have set a new metric to assess a key lever of our strategy and business transformation plan.

Environment and sustainability: We have set a new measure to align with the Group's climate ambition to bring our own operations to net zero by 2030 and support our customers in their transition to a more sustainable future.

Relative total shareholder return: We have retained this metric, which rewards executive Directors based on comparison of the total shareholder return performance of the Group and a relevant peer group.

2020 LTI grant size

The Committee is aware of shareholders' expectations on the need to adjust the size of LTI awards to ensure they do not result in 'windfall gains' in the event that the share price falls significantly due to the impact of the Covid-19 outbreak. While this does not impact outstanding LTI awards, the Committee agreed, in line with investor expectations, that the 2020 LTI awards should be subject to a 'windfall gain' adjustment at grant if the share price falls significantly relative to the grant price of the 2019 LTI. This is to ensure that the reward for our executive Directors aligns with the experience of our shareholders and is reflective of management performance over the performance period.

While the share price to be used for the 2020 LTI award is not known at this stage, the Committee has agreed, in line with investor expectations, if the 2020 LTI grant share price experiences a greater than 30% decline since the previous grant, this would be considered a material share price fall, and an adjustment percentage equal to half the share price percentage decline would be applied to the awards to mitigate the potential for 'windfall gains'.

Executive Directors' fixed pay for 2021

We have increased the base salary of our executive Directors by 1.6% in line with the average increase for our Group employees. Additionally, in an expansion to his current remit, the Group Chief Financial Officer will assume responsibility for the Group's transformation programme, effective immediately, and its mergers and acquisitions agenda, from April. In acknowledgement of the expanded remit and responsibilities, the Committee has decided to adjust his fixed pay allowance from £950,000 to £1,085,000 in accordance with the terms of the Directors' remuneration policy approved at the 2019 AGM. The executive Directors have made the personal decision to donate 100% of their salary and fixed pay allowance increases for 2021 to charity given the ongoing challenging external environment.

Investor consultation

The Committee considers that regular dialogue with our shareholders, including outside of our policy vote years and especially during these uncertain times, is important to ensure our remuneration policy operates as intended and in line with shareholder expectations. In 2020, we met with a number of our significant shareholders and proxy voting agencies to hear their views on executive and wider workforce remuneration. As ever, we found this engagement to be very helpful as we considered the implementation of our remuneration policy, including the 'windfall gain' adjustment for the 2020 LTI award, and use of ESG measures in the forward-looking scorecards. Further details of the 2020 LTI measures and targets are on page 243. The 2021 annual incentive scorecard is provided on page 249.

On behalf of the Committee, I would like to thank investors for their time during the consultations and their support for the direction of travel.

The Group's Directors' remuneration policy is due to expire at the 2022 AGM. During the course of 2021, we will be reviewing our current approach to Directors' remuneration and will consult with our large shareholders and proxy advisory bodies with the aim of introducing a new policy in 2022. The review will continue to be based on our following key principles:

The policy should be simple and transparent.

There should be a strong alignment between rewards and the interests of our stakeholders, including shareholders, customers and employees.

The policy should maintain a focus on long-term performance.

The total compensation package should be competitive to ensure we can retain and attract talent.

The structure should meet the expectations of investors and our regulators.

The Committee is concerned that over time, HSBC's overall remuneration opportunity has fallen behind desired levels to reflect the calibre of the executives and market positioning. While conscious of external sentiment, one of the areas of focus for the Committee will therefore be ensuring that overall remuneration levels remain appropriate in the context of the above and support delivery of our strategic priorities. Any proposed changes would be discussed with shareholders and the proxy advisory bodies as part of the wider consultation on the remuneration policy in 2021.

Our annual report on remuneration

As Chair of the Committee, I hope you will support the 2020 Directors' remuneration report.

 

Pauline van der Meer Mohr

Chair

Group Remuneration Committee

23 February 2021

 

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