Call to overhaul the way banks are run
Updated on 26 November 2009
The Walker Review recommends overhauling the boards of banks and other big financial institutions by strengthening the role of non-executives and giving them new responsibilities to monitor risk and pay.
Sir David Walker recommends extensive reforms to strengthen bank governance and increased disclosure on pay.
He also recommends a stewardship duty on institutional shareholders to play a more active role as owners of businesses.
The recommendations are contained in the final report of the Walker Review of Corporate Governance of UK banks and other financial institutions, which was commissioned last February and delivered to the government this week.
Sir David Walker said: “The fundamental change needed is to make the boardroom a more challenging environment than it has often been in the past.
“This requires non-executives able to devote sufficient time to the role in order to assess risk and ask tough questions about strategy.
“Institutional investors should be less passive and prepared to engage earlier if they suspect weaknesses in governance. They enjoy the privilege of limited liability, whereas taxpayers have ended up assuming unlimited liability in respect of the big banks.
"Early preventive medicine through shareholder engagement can save everyone substantial time and money later on.
“We need to get governance back to centre stage. Of course major regulatory issues need to be addressed to assure the soundness of the financial system but there will be significant downside if the regulatory pendulum swings too far.
"It could harm the ability of banks to provide customers with the financial services they need and lead to substantial increases in fees and charges.
“Improved governance can play an important complementary role by instilling greater confidence in the way banks are being run by their boards and overseen by their owners. This should help regulators to strike the right balance.”
On pay the Walker Review recommends extending the role of the remuneration committee to cover firm-wide remuneration policy as well as giving the committee direct responsibility for the pay of all highly-paid employees.
At least half of variable pay or bonuses should be paid in the form of a long-term incentive scheme with half vesting after three years and the rest after five years.
Two-thirds of cash bonuses should also be deferred. In addition the report recommends greater pay transparency in the big banks by requiring public disclosure of the number of employees earning more than £1m, broken down by bands of pay.
The Walker Review proposes that most of the recommendations are enforced through inclusion in the Combined Code on Corporate Governance or a separate Stewardship Code for institutional investors, both operating on a ‘comply or explain’ basis.
It would be for the Financial Reporting Council, which has been closely consulted and is currently reviewing the Combined Code, to decide exactly how this would be done.
The FSA will consider how to take forward the recommendations applying principally to financial institutions. It is proposed that the recommendations on pay disclosure should be enforced through legislation in the forthcoming Financial Services Bill.
