Sir David Walker's 39 Steps

16 July 2009

Sarah Wilson

EU regulation

Sir David Walker's review of the governance of UK banks, commissioned by Prime Minister Gordon Brown, has published 39 recommendations aimed at improving the governance of  banks and other big financial institutions (BOFIs). The aim of the report was to find ways of minimising risky behaviour and improving the way companies and shareholder communicate and interact.

Many of the conclusions and Recommendations are likely to bring a collective sigh of relief to the City, primarily because  Walker will not be taking a legislative route. Instead it is intended to use the UK's existing corporate governance framework which is under the remit of the Financial Reporting Council (FRC). The implementation of the Recommendations is unlikely to take effect until early 2010 as the consultation will not be finalised until this November.

The Recommendations fall under 4 main headings:

  • Better Boards: selection & evaluation
  • The Role of Shareholders: communication & engagement
  • Governance of Risk
  • Risk & Reward Linkage

The key issues are as follows: 

 Better Boards: Selection & Evaluation

  1. Non-executives to spend up to 50 percent more time on the job with a minimum expected time commitment of 30 to 36 days;
  2. NEDs face tougher selection criteria as part of the Financial Services Authority (FSA) authorisation process, including an interview; and
  3. Chairman of board to devote at least two-thirds of their time to the job and face annual re-election.

The Role of Shareholders: Communications & Engagement

  1. The FRC to sponsor an updated Institutional Shareholder ownership and activism code;
  2. Fund managers to vote their shares and disclose their voting records on-line;
  3. FSA to monitor compliance with the code and associated disclosures;
  4. Fund managers to communicate negative voting intentions ahead of meetings;
  5. Institutional shareholders to agree a "Memorandum of Understanding" on collective action.

Governance of Risk

  1. BOFI boards should create a Risk Committee which is separate from the audit committee and chaired by an NED;
  2. Risk committees to have power to scrutinise due diligence and block transactions; and
  3. A chief risk officer with company-wide authority and independence, whose tenure and remuneration is determined by the board.

Risk & Reward Linkage

  1. The remit of the remuneration committees is extended to a company wide role;
  2. Code of Conduct and Professional Body for Remuneration Consultants;
  3. Not less than half of expected variable remuneration should be on a long term incentive basis with vesting, subject to performance conditions, deferred up to five years;
  4. More and public disclosure about the pay of high-paid executives outside of the board;
  5. Chairman of remuneration committee to face re-election if the remuneration report gets less than 75 percent approval;
  6. The Remuneration Report should disclose, in bands, the number of executives whose total pay exceeds the executive board average total pay;
  7. Incentive clawbacks to reclaim awards in the event of irregularities; and
  8. Foreign banks operating in the UK should also disclose pay details of their highly paid executives as well.

The Report is now open to comment and consultation until 1 October with a view to publishing a final version of the report and its recommendations in November.  Comments and feedback is being managed through the Review secretariat which can be reached at feedback@walkerreview.org or by telephone +44 207 066 0032.

Links

A complete copy of the report can be found here:  The Walker Review >>

Walker Principles to go global >>

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