Consultation on the Walker report on corporate governance started on 16 July. The consultation document proposes fundamental changes to the way banks’ boards are run, giving much more power to NEDs, in particular as part of the risk and remuneration process. The major changes Walker suggests are:  

Board composition

  • FSA should pay more attention to balance of bank board composition including the training given to NEDs;  
  • a chairman must have knowledge and experience of the industry and of leading a business and be prepared to spend at least two thirds of his time on that post, and give it priority over other jobs;  
  • the chairman should face annual re-election;
  • there should be a Senior Independent Director (SID) to be the chairman’s “sounding board”, to help NEDs and be available to help shareholders;  

Risk committees

  • an NED should chair Board level risk committees, which should be separate from the audit committee and able to block big transactions;  
  • a CFO should participate in the risk management and oversight process across the institution at the highest level and should have complete independence;  
  • the board risk committee should have access to, and use, external advice;  
  • the board risk committee should make a separate report within the annual report;  

Remuneration  

  • remuneration committees should look at pay across the institution and oversee pay of high-paid executives not on the board: what is a high-paid executive depends on the median pay of the institution’s executive;  
  • bonus schemes for all high-paid executives should have a significant deferred element. Even short-term bonus schemes should last three years with no more than one-third of the bonus payable in the first year;  
  • there should be increased public disclosure about pay of high-paid executives;  
  • the chairman of the remuneration committee should face reelection if the committee report gets less than 75% approval;  
  • the committee’s report should include detail on enhanced pension benefits and discretions the committee has exercised; NEDs  
  • NEDs should spend up to 50% more time on the job (at least 30 – 36 days). Institutions should provide appropriate training and support to NEDs;  
  • FSA’s approval process should be stricter on NEDs, including interviewing them to assess their knowledge and ability to participate in risk management of businesses;  

Role of institutional shareholders

  • institutional shareholders should agree an MOU on collective action on key issues;  
  • shareholders should exercise their voting rights and keep records of what they have done;  

Other key recommendations

  • boards and FSA should be ready to question large changes in shareholdings;  
  • Financial Reporting Council should sponsor the institutional shareholder code; the “Statement of Principles – the Responsibilities of Institutional Shareholders and Agents” should be called the “Principles of Stewardship”; and  
  • FSA should monitor conformity and disclosure by fund managers, who should commit publicly to following the Principles of Stewardship.

Walker thinks most recommendations could be enforced using the Combined Code, with the Financial Reporting Council deciding the best way to enforce. Although he used as his base UK-listed banks, he thinks many of the principles should apply, proportionately, to UK subsidiaries of overseas banks and other financial institutions. The consultation closes on 1 October and Walker will issue his final report in November.