HM Treasury has announced the publication of the independent Walker Review of corporate governance in UK banks and other financial industry entities (BOFIs).
The context and focus of the Review was on BOFIs which are systemically significant in regard of their influence on many parts of the economy and the fact that they tend to be more highly leveraged than non-financial businesses.
Corporate governance is currently based on a mixture of primary legislation, prescriptive rules, “comply or explain” codes of best practice, custom and market incentive. The Review asked whether the time is ripe, especially in view of the financial crisis, for a statute-based structure designed to deliver a model and outcomes closer to a corporate governance “ideal”.
The Review comprises five key themes:
- The Combined Code of the Financial Reporting Council (FRC) remains fit for purpose.
- The main shortcomings of BOFI boards of directors are related more to behavioural than to organisational issues.
- Board-level involvement with high-level risk processes should be increased, in view of the fact that the business of BOFIs is the management and exploitation of risk.
- Fund managers and other major shareholders should engage more fully with the companies in which they invest, with a view to fostering long-term improvements in performance.
- There needs to be an improvement in board-level oversight of remuneration policies.
The Review’s recommendations are set out under five key headings:
- Board size, composition and qualification.
- Functioning of the board and evaluation of performance.
- The role of institutional shareholders: communication and engagement.
- Governance of risk.
The Review is in the form of a consultation, and Sir David Walker intends to issue a final version of the report and its recommendations in November 2009 in the light of responses and further discussion between now and the end of the consultation period on 1 October 2009.