HSBC 2009 Annual Report Download - page 20

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Challenges and uncertainties / KPIs
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practices; and the conduct of companies with which
it is associated. Failure to address these issues
appropriately may give rise to additional legal and
compliance risk to HSBC, with an increase in the
number of litigation claims and the amount of
damages asserted against HSBC, or subject HSBC to
regulatory enforcement actions, fines or penalties or
reputational damage.
Operational risks are inherent in HSBC’s
business
HSBC is exposed to many types of operational risk,
including fraudulent and other criminal activities
(both internal and external), breakdowns in
processes or procedures and systems failure or
non availability. HSBC is also subject to the risk of
disruption of its business arising from events that are
wholly or partially beyond its control (for example
natural disasters, acts of terrorism, epidemics and
transport or utility failures) which may give rise to
losses in service to customers and/or economic loss
to HSBC. All of these risks are also applicable where
HSBC relies on outside suppliers or vendors to
provide services to it and its customers.
The reliability and security of HSBC’s
information and technology infrastructure and its
customer databases are crucial to maintaining the
service availability of banking applications and
processes and to protecting the HSBC brand. Critical
system failure, any prolonged loss of service
availability or any material breach of data security,
particularly involving confidential customer data,
could cause serious damage to the Group’s ability to
service its clients, could breach regulations under
which HSBC operates and could cause long-term
damage to its business and brand.
HSBC is subject to tax-related risks in the
countries in which it operates, which could
have an adverse effect on its operating
results
HSBC is subject to the substance and interpretation
of tax laws in all countries in which it operates. Tax
risk is the risk associated with changes in tax law or
the interpretation of tax law. It also includes the risk
of changes in tax rates and the risk of consequences
arising from failure to comply with procedures
required by tax authorities. Failure to manage tax
risks could lead to increased tax charges, including
financial or operating penalties.
Key performance indicators
The Board of Directors and the Group Management
Board monitor HSBC’s progress against its strategic
objectives. Progress is assessed by comparison with
the Group’s strategy, its operating plan targets and its
historical performance using both financial and
non-financial measures.
As a prerequisite for the vesting of Performance
Shares, the Remuneration Committee must satisfy
itself that HSBC Holdings’ financial performance
has shown a sustained improvement in the period
since the award date. In determining this, the
Remuneration Committee will take account of all
relevant factors but, in particular, will compare
HSBC’s financial key performance indicators
(‘KPI’s) with the equivalent measures within the
total shareholder return (‘TSR’) comparator group.
Financial KPIs
In assessing progress in delivering the Group’s
strategy and monitoring HSBC’s performance,
management reviews the financial KPIs described
below. These KPIs are complemented by a range of
secondary benchmarks which are relevant to
reviewing performance against plan and at the
business level.
HSBC has published a number of key targets
against which performance is measured. Financial
targets have been set as follows: a return on average
total shareholders’ equity over the medium term of
between 15 per cent and 19 per cent; the cost
efficiency ratio to be between 48 per cent and 52 per
cent; and HSBC’s TSR to be in the top half of that
achieved by the comparator group. The cost
efficiency ratio has been set as a range within which
the business is expected to remain in order to
accommodate both returns to stakeholders and the
need for continued investment in support of future
business growth.
In the light of market conditions and proposed
changes to capital requirements currently being
considered by various governmental and regulatory
bodies, HSBC believes return on average total
shareholders’ equity over the medium term is more
likely to be around the lower end of the target range.
Once regulatory proposals are in definitive form
HSBC intends to publish a revised target range.