The dust may be beginning to settle following the shocks to the banking system over the past 18 months or so, but the appetite for analysis shows no sign of abating.
The latest addition is Sir David Walker’s report ‘A Review of Corporate Governance in UK Banks and Other Financial Industry Entities’, published on 16 July. This is Walker’s interim report – the consultation period extends until 1 October and he intends to publish the final version of the report and its recommendations in November.
As anticipated, the key focus is on risk and remuneration. Walker starts off on a positive note, his first theme being that the Combined Code of Corporate Governance is still fit for purpose. Indeed, there are no proposals for new primary legislation in the review – it is envisaged that most of the recommendations will be incorporated into the code. Walker has also coined a new term for ‘banks and other financial institutions’, the almost cosy acronym of ‘Bofi’.
Red-top critics may see this review as another example of Bofis ‘getting off lightly’, but the reality is different. Walker makes some extensive, even radical, proposals about how Bofis should run themselves in the future, particularly in relation to how they assess and manage risk.
If you are a non-executive director (NED) life is going to become harder. Walker wants to see NEDs in major banks committing a minimum of 30-36 days a year as well as taking part in induction and development programmes. Crucially, he also addresses the fact that the pool from which NEDs can be drawn is not bottomless and says that “a combination of financial industry experience and independence of mind will be much more relevant than a combination of lesser experience and formal independence”.
He also proposes each institution set up a board-level risk committee chaired by a non-executive, including a totally independent chief risk officer. Walker wants to see the executive challenged in the boardroom before decisions are taken on major risk and strategic issues. All of this is to feed into a new “culture of challenge”.
You may be forgiven for thinking that if these proposals are adopted Bofis will have their work cut out sourcing NEDs with the full range of these qualities and adapting their existing governance arrangements to meet the requirements of the proposed regime.
It remains to be seen how institutional shareholders will react to Walker’s plans to expand their role in controlling risk within Bofis. It is said that some are concerned that their role as investors is misunderstood and think that the policymakers have lost sight of commercial demands on such institutions to produce a return for their investors. On this view, if shareholders think that a Bofi is a bad risk, they owe it to their beneficiaries to sell their stock and move on, not hang in there and try to reform the Bofi’s corporate governance arrangements. The bottom line for shareholders is profit. More risk equals more profit, at least in the short term. Many institutional shareholders are concerned that they should not be seen as surrogate regulators.
Although proposals on NEDs and shareholders might get regulatory hearts beating faster, it is Walker’s proposals on remuneration that are likely to hit the headlines, especially after recent bumper bonus stories in the press. Among other proposals, the review talks of deferred remuneration, disclosure of the pay of stellar earners and increased powers for remuneration committees. Walker says the proposals are “as tough or tougher than anything to be found anywhere in the world”, but few will be surprised by them.