On 16 July 2009, HM Treasury published a consultative review by Sir David Walker on corporate governance in UK banks and other financial industry entities (BOFIs).
The review, which was undertaken at the request of the Prime Minister following the banking crisis, finds that the Combined Code on Corporate Governance remains fit for purpose. The review goes on to make 39 recommendations, most of which it is envisaged will be incorporated by the Financial Reporting Council (FRC) into the next edition of the Combined Code.
The recommendations include the following:
Board size, composition and qualification
In order to seek to improve the contribution of non-executive directors (NEDs), NEDs should: (i) receive a substantive personalised approach to induction and training (to be reviewed annually); (ii) attend regular thematic business awareness sessions; and (iii) be provided with dedicated support. NEDs on BOFI boards will also be expected to commit more time than has been normal in the past (with a suggested minimum commitment of 30 to 36 days for NEDs on the boards of major banks).
The FSA, in supervising BOFIs, should give closer attention to overall board balance in relation to risk strategy and should take into account not only the relevant experience of directors and their other qualities but also their access to an induction and development programme to equip them to deliberate on risk strategy.
Functioning of the board and evaluation of performance
As part of a unitary board, NEDs should be ready, able and encouraged to challenge and test proposals on strategy put forward by the executive.
The chairman, who should bring a combination of relevant financial industry experience and a track record of successful leadership capability in a significant board position, should be expected to commit a substantial proportion of his or her time, probably not less than two-thirds, to the business of the BOFI. In addition, the chairman of a BOFI should stand for re-election on an annual basis.
The board of a BOFI should undertake a formal and rigorous evaluation of its performance with external facilitation of the process every second or third year. A statement on this evaluation should be included as a separate section in the annual report and should include such meaningful, high-level information as the board considers necessary to assist shareholder understanding of the main features of the evaluation process. The statement should also indicate the nature and extent of communication by the chairman with major shareholders.
The role of institutional shareholders
BOFI boards should have a greater awareness and understanding of the reasons for changes to their share registers. If a share register changes substantially in a short period, the FSA should contact major selling shareholders to find out their respective motivations and should also seek a response from the relevant BOFI board.
The FRC's role should be extended to cover principles of best practice/stewardship for institutional investors and the current best practice, as set out in the "Statement of Principles – the Responsibilities of Institutional Shareholders and Agents", should be endorsed as such by the FRC in its proposed extended role. Institutional investors should adopt a "comply or explain" approach to those principles of best practice/stewardship. Major long-only investors should prepare guidelines setting out their agreed approach to collective engagement with the BOFI.
Governance of risk
To manage risk more effectively, BOFIs should establish board risk committees. In addition, a chief risk officer should oversee risk management and report to the board and to the board risk committee. The work of the board risk committee should include overseeing transaction due diligence, providing advice to the board and consulting with the remuneration committee on risk adjustments to performance objectives in the context of incentive packages. The board risk committee should also report annually on its activities and the BOFI's risk management strategy as part of the annual report.
The remuneration committee's remit should be expanded firm-wide with emphasis on the risk dimension, oversight of the remuneration policy and remuneration packages for "high end" executives. In the BOFI's annual report, the remuneration committee should disclose certain details for "high end" executives. Deferral of incentive awards should be the main risk adjustment mechanism to align rewards with sustainable performance for "high end" executives. At least half of variable remuneration should be in the form of a long-term incentive scheme. "High end" executives should be expected to maintain a shareholding or retain a portion of vested incentive awards equivalent to their total compensation.
If shareholders vote against the remuneration report at the annual general meeting, the chairman of the remuneration committee should stand for re-election regardless of his or her normal appointment term.
A professional body of remuneration consultants should be formed with a code of conduct to be published on the FRC website. Remuneration committees should employ consultants who have committed to that code.
The consultation period ends on 1 October 2009. The final version of the report is expected to be issued in November 2009.
View the Walker Report (142 page pdf).