HSBC 2010 Annual Report Download - page 202

HSBC HOLDINGS PLC
Report of the Directors: Governance (continued)
Board committees > Group Risk Committee / Remuneration Committee / Nomination Committee
200
Stress testing
HSBC’s scenario analysis and stress testing
programme is central to the identification and
monitoring of top and emerging risks. It highlights
the vulnerabilities of our business and capital plans
to the adverse effects of extreme but plausible
events. The GRC reviews the outcome of the stress
tests performed.
There are three main classifications of scenario
and stress tests: regulatory scenarios; Group level
business scenarios; and local business scenarios. The
GRC uses the outcome of the programme to assess
the potential impact of the relevant scenarios on the
demand for regulatory capital compared with its
supply. Management develops action plans to
mitigate the risks identified. The extent to which
those action plans are implemented depends on
management’s evaluation of the risks and their
potential consequences, taking into account HSBC’s
risk appetite.
Committee activities
The Committee held four meetings in 2010 – see
page 190 for details of Directors’ attendance.
Following each meeting the Committee reports to
the Board on its activities.
John Trueman, a non-executive director of
HSBC Bank plc and chairman of its risk and audit
committees has been invited by the Committee to
attend its meetings. His experience of risk related
matters in the financial services industry is valued by
the Committee.
The GRC undertook the following key activities
in the discharge of its responsibilities:
• the Committee provided oversight of executive
risk management through regular reports from
the Group Chief Risk Officer and the Risk
Management Meeting of the GMB; review of
minutes of meetings of the GMB, the Risk
Management Meeting, the Remuneration
Committee and the Group Reputational Risk
Committee; reports from the Group General
Counsel on substantial litigation; a report from
the Remuneration Committee on risk related
matters; and updates on the Swiss data theft
referred to on page 83. The Group Finance
Director and the Group Chief Accounting
Officer regularly attended committee meetings
and other senior financial, risk, internal audit,
legal and compliance executives attended as
appropriate;
• the Committee reviewed the effectiveness of
internal controls through a cycle of
presentations from the Group Chief Risk Officer
and other business and functional heads on the
risk control framework; reports from the Group
Head of Internal Audit on the internal audit
process and weaknesses identified in internal
controls and reports of the external auditor and
regulators relating to the internal control system;
updates from the Group Head of Compliance;
and reports from the Group General Counsel
and other senior executives on US compliance
matters. The Committee undertook an annual
review of the effectiveness of HSBC’s system of
internal control, which is described on page 202.
The Committee had regular dialogue with the
external auditor and the Group Head of Internal
Audit, with opportunities at each meeting for
dialogue to take place without management
present;
• the Committee considered the Group’s risk
appetite and the alignment of strategy with risk
appetite through reviewing the Group’s risk
appetite statement and reports on liquidity and
capital management; receiving reports from the
Chief Risk Officer; and considering the
outcomes of the scenario and stress testing
programme;
• the Committee considered the alignment of
reward structures with the Group’s risk appetite
through a report from the Group Head of HR on
procedures to be used when determining an
individual’s variable pay award for the 2010
performance period. These procedures include
making assessments of the profitability of the
business area in which an individual works and
the performance of that business area when
compared to the approved risk appetite in
respect of that business. The performance of the
individual is also assessed taking into account
the extent to which that individual has adhered
to the Group’s policies and procedures for risk
related matters and has achieved specified
performance targets or objectives (such as a
revenue or profit target). These procedures were
considered by the Remuneration Committee in
early 2011. An update was also provided on a
review of variable pay plans throughout the
Group;
• in monitoring top and emerging risks the
Committee satisfied itself that it understood
and took into account the views of senior
management; reviewed minutes of executive
committee meetings including meetings of the
GMB, the Risk Management Meeting and
Group Reputational Risk Committee; received
reports from the Group Chief Risk Officer and