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Walker Review puts brake on pay?

The Treasury-sponsored Walker Review, which has been five months in the making, has finally been published and it is recommending major changes to the way the boards of banks and other big financial institutions function in particular through strengthening the role of non-executives in the risk and remuneration process

The Walker Review of Corporate Governance of UK banks and other financial institutions recommends strengthening bank boards, with the aim of making rigorous challenge in the boardroom a key ingredient in decisions about risk. It also intends to introduce measures to encourage institutional shareholders to play a more active role as engaged owners of banks and other financial institutions. The Review follows on from the Treasury's earlier wider-ranging proposals published under the title of Reforming financial markets.

Commenting on his own Review, Sir David Walker, who is a senior adviser to Morgan Stanley and a former director of the Bank of England, said: “These proposals are designed to improve the professionalism and diligence of bank boards, increasing the importance of challenge in the boardroom environment. If this means that boards operate in a somewhat less collegial way than in the past, then that will be a small price to pay for better governance.”

Specific proposals include:
• Board level risk committees chaired by a non-executive
• Risk committees to have power to scrutinise and if necessary block big transactions
• More power for remuneration committees to scrutinise firm-wide pay
• Remuneration committee to oversee pay of high-paid executives not on the board
• Significant deferred element in bonus schemes for all high-paid executives
• Increased public disclosure about pay of high-paid executives
• Chairman of remuneration committee to face re-election if report gets less than 75% approval
• Non-executives to spend up to 50% more time on the job
• Non-executives to face tougher scrutiny under FSA authorisation process
• Chairman of board to face annual re-election
• Financial Reporting Council to sponsor institutional shareholder code
• FSA to monitor conformity and disclosure by fund managers
• Institutional shareholders to agree MOU on collective action

“Failures in governance in banks and other financial institutions made the financial crisis much worse,” said Walker. “Many boards inadequately understood the type and scale of risks they were running and failed to hold the executive to high standards of sustainable performance. Bonus schemes contributed to excessive risk-taking by rewarding short-term performance. And shareholders failed to exercise proper stewardship.”

“Taken alongside the arrangements being proposed by the FSA, the recommendations on remuneration are as tough or tougher than anything to be found elsewhere in the world. An important and urgent challenge is to promote adoption of similar approaches internationally.”

“These recommendations should bring substantial improvement in the governance of banks. They will not guarantee that failure will be avoided in future but will greatly mitigate the risk.”

The consultative document proposes that most of the recommendations are enforced through inclusion in the Combined Code on Corporate Governance, which operates on a ‘comply or explain’ basis. It would be for the Financial Reporting Council, which is currently reviewing the Combined Code, to decide exactly how this would be done.

Commenting on the Review, Fiona Raistrick, head of the financial services regulatory practice, at public accounting firm, BDO Stoy Hayward, said: “There has been a significant level of hype about the effect the Walker Review will have on the UK’s banks, however, the reality is that the Review will only apply to listed Banks and other Financial Institutions (BOFIs), which effectively means only five UK banks need to meet the requirements.”

“Whilst the Review’s scope could be widened at a later date, the immediate effect for the remaining banks will be minimal,” points out Raistrick.

“The Review states that there will be no primary legislation as a result of the report, but we would question if guidance and provisions will be enough. As the Combined Code works on a ‘comply or explain’ principle, unless someone independently reviews the effectiveness of the board or the guidelines are robustly managed, will they be strict enough?” questions Raistrick.

“We wait with anticipation for the details of how the review will be implemented in November,” concludes Raistrick.

See here for more info: http://www.hm-treasury.gov.uk/walker_review_information.htm.

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