Walker wants tougher scrutiny of boards

A broad ranging review into corporate governance at big banks and financial firms has recommended boosting the role of non executives in the risk and remuneration process.

Published today (July 16), the Walker Review of Corporate Governance recommends 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: ‘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.’

He added: ‘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.’

Walker said it was urgently important that similar approaches were adopted 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,’ he said.

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

“These recommendations...will not guarantee that failure will be avoided in future but will greatly mitigate the risk.

Sir David Walker

• 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

Most of the recommendations are enforced through inclusion in the Combined Code on Corporate Governance, which operates on a ‘comply or explain’ basis. It is for the Financial Reporting Council, which is currently reviewing the Combined Code, to decide how this is done.

In addition, following the banking crisis, Alistair Darling, the Chancellor of the Exchequer, asked Lord Turner, in his capacity as chairman of the FSA, to review and make recommendations for reforming UK and international approaches to the way banks are regulated. See also: Lessons from Turner