The Walker Review on corporate governance in UK banks and other financial institutions (which it calls "BOFIs") has been published today. The report recommends strengthening boards and making challenge in the boardroom a fundamental part of the decision making process on risk matters. It also recommends measures to encourage institutional shareholders to play a more active role.
The recommendations, if adopted, are likely to bring about a substantial cultural and organisational change in the governance of financial institutions. As such, the review will be of great interest to a wide range of financial institutions, not just major financial institutions. Affected entities could include all FSA regulated institutions, including listed companies, insurance companies, asset managers, institutional investors and hedge funds, as well as banks.
There are five key themes in the review:
- The Financial Reporting Council (FRC) Combined Code on Corporate Governance is fit for purpose. Although the Code needs amplification and better observance, there are no proposals for primary legislation.
- Principal deficiencies in the boards of financial institutions have related to patterns of behaviour rather than to organisation.
- Board level engagement in the high-level risk process should be materially increased, with particular attention to the monitoring of risk and discussion leading to decisions on risk appetite and tolerance.
- There is a need for fund managers and other major shareholders to engage more productively with their investee companies. Boards should be more receptive to such initiative.
- Substantial enhancement is needed in board level oversight of remuneration policies, in particular in respect to variable pay and disclosures.
The report makes 39 recommendations. Specific proposals include:
- Board level risk committees to be chaired by a non-executive director
- Risk committees to have the power to scrutinise and if necessary block big transactions
- Non-executives to dedicate up to 50% more time to their role and face tougher scrutiny under the FSA authorisation process
- Remuneration committees to be given more power to scrutinise firm-wide pay and oversee the remuneration of highly paid non-board member executives
- Significant deferred element in bonus schemes for all highly paid executives
- Increased public disclosure of the remuneration of highly paid executives (although not on the basis of naming individuals)
- Increased engagement and communication for institutional shareholders
- FRC to sponsor institutional shareholder code
- FSA to monitor conformity and disclosure by fund managers
- Institutional shareholders to agree Memorandum of Understanding on collective action
Many of the recommendations complement the work the FSA is already undertaking in respect of risk management, remuneration policies and strengthening the approval process for significant influence functions. The FSA has stated that it will contribute to the consultation process and issue a paper in the autumn, which will outline the FSA's proposed response to any final recommendations.
The FRC has welcomed the publication of the review, and has stated that it shares the objective of improving the effectiveness of the Combined Code through better engagement. Significantly, it will consider the extent to which the recommendations in the review should be extended to other listed companies, not just to BOFI's. The FRC will issue a progress report on its own review of the Combined Code before the end of July, with a final report before the end of the year.
The consultation period for the Walker Review ends on 1 October, and a final report and recommendations will be published in November.