Mr. Stephen Green, Group Chairman,
Mr. Simon Robertson, Senior Independent Director
HSBC Holdings Plc
8 Canada Square
London E14 5HQ
United Kingdom

25 January, 2008

Dear Mr. Green and Mr. Robertson,

The undersigned are amongst the largest institutional investors in North America and Australia and each is a long term owner of HSBC Holdings plc shares. We are writing to express continuing concerns that we and other long term owners of HSBC shares have over certain aspects of the Company’s governance, strategy and stock market performance, notwithstanding the fact that some shareholders (including some of the undersigned) have already corresponded with you on these matters over the past few months. We would be grateful if you would forward a copy of this letter to the other members of the Board of Directors.

First of all, we were encouraged by the Strategy Update which took place on 23 November in that it contained initial signs of responsiveness to shareholders’ concerns about HSBC’s strategy and direction. We note, for example, that the Board is no longer contesting the fact that HSBC has underperformed the majority of its peers for many years in terms of total shareholder return and that, for the first time in many years, the presentation made no mention of the benefits of diversification but focused instead on the importance of comparative advantage (or the "right to win", as you put it). We also note the commitment made to invest only in markets where HSBC "has or can build scale" and to take the "logical" steps with respect to businesses which do not earn an adequate return on capital. Although these commitments represent a significant step in the right direction, we will be looking for communication of a detailed plan of action, emphasizing the need to refocus on areas of comparative advantage, and concrete signs of their implementation in the coming months. We will also be looking for publication of objective and challenging targets against which to measure performance in the future.

Secondly, a number of serious concerns remain to be addressed, including in particular, what measures the Board proposes to take to ensure that the profits of HSBC’s emerging markets businesses are not used to subsidise losses arising directly and indirectly in the U.S. sub-prime mortgage area. It is possible (and indeed likely) that the problems in the sub-prime business may extend to other parts of the consumer credit market in the U.S., particularly if the widely anticipated economic downturn turns out to be as severe as some respected analysts predict.

The Board needs to reassure us and other HSBC shareholders that there are defined limits as to how much of the Group’s capital and liquidity will be put at risk in an attempt to keep Household afloat throughout the coming downturn. HSBC is not making it clear publicly whether, or in what amounts, it has imposed limits on such risk or whether it has calculated the full extent of the exposure.

Thirdly, we continue to have serious concerns about HSBC’s corporate governance and the impact of this on long-term performance.

The institutions we represent are all strong advocates of good corporate governance. As a matter of principle, we believe that this is critical to achieving superior long-term investment performance. Whilst it is not necessary that every company should have the same governance arrangements, there are several principles of good governance that are undeniably universal and must be asserted -- particularly where there is systematic underperformance as in the case of HSBC. Chief amongst these are the principles of independent and effective oversight of management by the Board and proper alignment of shareholder and management interests through "pay-for-performance" over an appropriate period.

In considering what makes for an effective and independent Board, we believe that it is desirable that the Chairman be independent, as required by the U.K. Combined Code. The fact that HSBC’s Board has chosen to be led by a Group Chairman who does not meet the Code’s independence criteria (Stephen Green having formerly been Group Chief Executive, just like Sir John Bond before him) continues to be of concern to us .

As you know, some shareholders have already written to you about this matter and the response they received was that the Board thought that HSBC needed a full time Chairman. This entirely misses the point that was being made, namely that the Chairman must be in a position to take the lead in deciding whether the Company’s strategy should be reconsidered and/or whether management should be changed following strategic failure. This role cannot credibly be carried out by the Chairman if he is also the person responsible for setting the Group’s strategy and the resulting conflict of interest may have contributed to HSBC’s underperformance in the past.

Conflicts of interest of this kind can, in most cases, be dealt with by ensuring that the Company is led by a strong and truly independent Board. While 9 out of 16 Board members at HSBC are formally independent, we note that some of these sit together on other boards and that the Swire Group has had two representatives on the Board of HSBC (or the Hong Kong and Shanghai Banking Corporation) for over 25 years.

HSBC has argued in response to this issue that the roles of Chairman and Chief Executive are combined in many companies in the U.S. but we would argue that the separation of the two roles that is prevalent amongst large cap companies in the U.K. is one of the features that makes the London market a model for others to aspire to. As a global blue chip company, HSBC should adopt the highest possible standards of corporate governance and seek to be an example for other companies, wherever they may be incorporated.

Furthermore, as far as we are aware, the independent and other non-executive Board members of HSBC have no on-going arrangements to receive independent financial and strategic advice to help them to be effective in their oversight of the strategy and performance of the Group. Therefore, whilst we are aware that the Board met early last year to consider HSBC’s strategy (and that HSBC insists that it routinely does so), we question whether the non-executives have had access to independently-sourced information and analysis (i.e. other than that which was provided by the Company) of a kind that would permit an objective and comprehensive assessment of HSBC’s competitive position in each market, its true strategic options and the consequences of each in terms of value creation and risk for shareholders. We wonder if the Board would have approved the Household acquisition if such independently sourced advice had been obtained.

As you know, Knight Vinke Asset Management has raised some important issues about HSBC’s 2005 Share Plan and has pointed out that the EPS vesting targets currently being implemented (as described in the 2005 and 2006 Annual Reports) appear to be materially less challenging than those set out in the Chairman’s Letter and other documents published when the Plan was submitted to shareholders for approval in May 2005. We have seen Lord Grabiner’s note of advice prepared on the instructions of Knight Vinke on this issue and we are concerned that the Share Plan may, in fact, be void due to the fact that the information provided to the vast majority of your shareholders was insufficient for those shareholders to make an informed decision on what we believe is a material and very relevant matter. The fact that HSBC says that it consulted some shareholders about the Plan, including the ABI, does not make the position any better: in fact it may make it worse since the UKLA listing rules make it clear that all shareholders must be treated equally with regards to information and in this case that principle is not observed. The fact that the Remuneration Committee has the discretion to override the vesting conditions, as HSBC has also indicated in response to this question, does not alleviate our concerns.

HSBC’s shareholders ought to be able to rely on the accuracy and completeness of proxy materials to make informed voting decisions and it is of great concern to us that something as fundamental as HSBC’s executive compensation scheme may have been inaccurately explained to shareholders in seeking their approval.

Notwithstanding the above, at this juncture we are most concerned with ensuring proper alignment of management and shareholder interests, a significantly more independent Board, and greater strategic focus going forward. We believe that the Board should take immediate steps to publicly recognize the failures of the existing Share Plan, including the way it was described in the 2005 Chairman’s Statement, and either introduce a new Plan or amend the existing one at the next Annual General Meeting after engaging with shareholders in an open and transparent manner. We would also encourage you to consider restructuring the Board and engaging more convincingly in a reassessment of HSBC’s strategy at the same time.

We wish to stay involved in this process and, if the opportunity arises, would be pleased to provide you with further thoughts on the matters raised in this letter. Please consider our engagement in this regard as being consistent with the efforts of Knight Vinke.

Yours sincerely,

Eric Knight
Chief Executive
Knight Vinke Asset Management, LLC

Co-signatories: Redacted

CC: Redacted