CORPORATE GOVERNANCE

We are committed to high standards of corporate governance and follow the module on 'Corporate Governance of Locally Incorporated Authorised Institutions' under the Supervisory Policy Manual issued by the Hong Kong Monetary Authority in September 2001. We also operate in compliance with the provisions of the Code on Corporate Governance Practices, contained in Appendix 14 of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong.

Board of Directors
As at 31 March 2006, Hang Seng's Board consisted of 14 Directors - three executive Directors and 11 non-executive Directors. Of the 11 non-executive Directors, eight are independent.

All Directors enjoy full and timely access to all relevant information on our operations. There are established procedures for Directors to seek independent professional advice on matters relating to Hang Seng at the Bank's expense.

The roles of the Chairman, who is a non-executive Director, and the Chief Executive are separate with a clear division of responsibilities. While the Board of Directors is led by the Chairman, the Chief Executive exercises all the powers, authorities and discretions of the Executive Committee as may be delegated to him in respect of Hang Seng and its subsidiaries.

The Board is committed to the Bank's objective of consistent growth and development, increase in shareholder value and provision of world-class services. It establishes strategy and monitors the executive management. The Board held seven meetings in 2005.

The Board has established three committees:

The Executive Committee meets each month and exercises the powers, authorities and discretions of the Board in so far as they concern the management and day-to-day running of Hang Seng in accordance with its terms of reference, policies and directions. Certain matters are reserved for Board approval, including annual plans and performance targets, specified senior appointments, acquisitions and disposals above established thresholds, and any significant changes in balance sheet management policy.

The Audit Committee, which consists of three independent non-executive Directors, usually meets four times a year. The Committee assists the Board in meeting its responsibilities in ensuring an effective system of internal control and compliance and in meeting its external financial reporting obligations. It is also responsible for the selection, oversight and remuneration of external auditors. The Committee reports to the Board after each Committee meeting.

The Remuneration Committee, which consists of three independent non-executive Directors, is responsible for, among other things, the policy on remuneration of Directors and senior management. The Committee meets at least twice a year.

COMPLIANCE
Our key business values include a solid commitment to truthful and fair business dealings and to ensuring that all our employees comply with all relevant laws, rules, regulations, guidelines and codes of conduct.

Code of Conduct
To ensure the Bank operates according to the highest standards of ethical conduct and professional competence, all staff are required to strictly follow the Staff Code of Conduct. Following the relevant regulatory guidelines and other industry best practices, the Code sets out ethical standards and values to which staff are required to adhere and covers various legal, regulatory and ethical issues. These include topics such as prevention of bribery, personal benefits, outside employment and anti-discrimination policies. All staff are required to sign a declaration on an annual basis to certify their strict compliance with the Code.

Staff Awareness
The most effective way to ensure that we comply with laws and regulations, and guard against illegal activities such as money laundering and fraud, is to maintain a high level of staff awareness through training.

In this regard, we have developed a compliance education programme, 'Compliance, Yes', which aims to improve and reinforce staff awareness and adherence to both internal codes of conduct and external regulations.

The programme, which is refined and upgraded on a regular basis, includes four elements: 'Know Your Customer', 'Fair Dealing', 'Adherence to Operational Procedures' and 'Data Privacy'. The 'Know Your Customer' element of the programme trains staff on how to accurately identify customers and the correct procedure in cases of suspicious transactions.

We have stringent internal structures designed to prevent the misuse of insider information and avoid conflicts of interest. Staff working in sensitive or high-risk areas are required to undergo additional job-specific training.

We encourage the reporting of suspected internal business irregularities and provide clear channels specifically for this purpose.

Commitment to Customers
We are committed to providing clear, transparent and balanced information to our customers. Product information, including features, terms and conditions, and risks, is clearly communicated to ensure customers can make an informed decision. Where relevant, we present several product options so that customers can select the solution that best suits their requirements. It is our policy only to sell products and services according to customers' needs.


RISK MANAGEMENT
Risk management is an integral part of our business management. The main types of risks to which we are exposed are credit risk, market risk, liquidity risk and operational risk.

Our risk management policy is designed to identify and analyse risks, set appropriate limits and continually monitor these risks and limits. Our risk management policies and major control limits are approved by the Board and are monitored and regularly reviewed by the Executive and Audit committees.

A detailed discussion of our management of major risks can be found on pages 61 to 64 and 174 to 183 of our 2005 Annual Report.