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Sir David Walker has recommended substantial changes to the way the boards of banks and other big financial institutions function in particular through boosting the role of non-executives in the risk and remuneration process.
The Walker Review of Corporate Governance of UK banks and other financial institutions recommends strengthening bank boards, making rigorous challenge in the boardroom a key ingredient in decisions on risk and measures to encourage institutional shareholders to play a more active role as engaged owners of banks and other financial institutions.
Sir David Walker said: “These proposals are designed to improve the professionalism and diligence of bank boards, increasing the importance of challenge in the board environment. If this means that boards operate in a somewhat less collegial way than in the past, that will be a small price to pay for better governance.”
Specific proposals include:
- Board level risk committees chaired by a non-executive
- Risk committees to have power to scrutinise and if necessary block big transactions
- More power for remuneration committees to scrutinise firm-wide pay
- Remuneration committee to oversee pay of high-paid executives not on the board
- Significant deferred element in bonus schemes for all high-paid executives
- Increased public disclosure about pay of high-paid executives
- Chairman of remuneration committee to face re-election if report gets less than 75% approval
- Non-executives to spend up to 50% more time on the job
- Non-executives to face tougher scrutiny under FSA authorisation process
- Chairman of board to face annual re-election
- Financial Reporting Council to sponsor institutional shareholder code
- FSA to monitor conformity and disclosure by fund managers
- Institutional shareholders to agree MOU on collective action
Sir David said:
“Failures in governance in banks and other financial institutions made the financial crisis much worse. Many boards inadequately understood the type and scale of risks they were running and failed to hold the executive to high standards of sustainable performance. Bonus schemes contributed to excessive risk-taking by rewarding short-term performance. And shareholders failed to exercise proper stewardship.”
“Taken alongside the arrangements being proposed by the FSA, the recommendations on remuneration are as tough or tougher than anything to be found elsewhere in the world. An important and urgent challenge is to promote adoption of similar approaches internationally.”
“These recommendations should bring substantial improvement in the governance of banks. They will not guarantee that failure will be avoided in future but will greatly mitigate the risk.”
The consultative document proposes that most of the recommendations are enforced through inclusion in the Combined Code on Corporate Governance, which operates on a ‘comply or explain’ basis. It would be for the Financial Reporting Council, which is currently reviewing the Combined Code, to decide exactly how this would be done.
*This Press Release and the Consultation Paper are available on the Walker Review web pages .
Background
1. The Walker Review of Corporate Governance of UK Banking Industry was announced on 9 February 2009 by the Chancellor of the Exchequer, the Secretary of State for Secretary of State for Business, Innovation & Skills, and the Financial Services Secretary to the Treasury.
2. The original Terms of Reference for the Walker Review on Corporate Governance of UK Banking Industry are to examine corporate governance in the UK banking industry and make recommendations, including in the following areas:
- the effectiveness of risk management at board level, including the incentives in remuneration policy to manage risk effectively;
- the balance of skills, experience and independence required on the boards of UK banking institutions;
- the effectiveness of board practices and the performance of audit, risk, remuneration and nomination committees;
- the role of institutional shareholders in engaging effectively with companies and monitoring of boards; and
- whether the UK approach is consistent with international practice and how national and international best practice can be promulgated.
On 21 April, the Terms of Reference were extended so that the Review shall also identify where its recommendations are applicable to other financial institutions.
3. The review started in February 2009. The second consultation period will run until 1 October 2009 and the final report will be published in November 2009.
4. Submissions are invited on the consultative document and should be sent to Sir David and the review team by 1 October 2009 through the Secretariat Office at 020 7066 0032 and the email address of feedback@walkerreview.org . Unless otherwise specified, it will be assumed that all such submissions will be made available to the public.
5. The Financial Reporting Council is currently reviewing the Combined Code (opens in new window). The FRC expects to publish a progress report on the review in July, with a final report later in the year. If the review results in any proposals to amend the Combined Code or related guidance, or to improve the effectiveness of the ‘comply or explain’ monitoring mechanism, the FRC has advised that there will be separate consultation supported by a Regulatory Impact Assessment.
6. Sir David Walker is a Senior Adviser to US bank Morgan Stanley. He is a former Executive Director of the Bank of England, former Chairman of the Securities and Investments Board and a former Chairman of Morgan Stanley International. In 2008 he chaired in independent industry working group which drew up a voluntary code to improve levels of disclosure in the private equity industry and its communication with stakeholders.
