The final report on UK corporate governance in banks and financial institutions by Sir David Walker, former chairman of Morgan Stanley was released at the end of November. The review was commissioned by Gordon Brown to examine corporate governance in the UK banking industry. Recommendations from the review:
The main recommendation in the area of shareholder engagement is the creation of the Stewardship Code. The code, put together by the Institutional Shareholders Committee (IRC) sets out a series of best practices for engagement. The report also recommends that the ISC stewardship code should be ‘ratified’ by the independent Financial Reporting Council (FRC) so that it’s status should be akin to that of the Combined Code that governs corporate best practice, with observance on a similar “comply or explain” basis.
The report also recommends overhauling the boards of banks and other big financial institutions by strengthening the role of non-executives and giving them new responsibilities to monitor risk and remuneration. It also recommends a stewardship duty on institutional shareholders to play a more active role as owners of businesses.
Regarding pay, the Review recommends extending the role of the remuneration committee to cover firm-wide remuneration policy as well as giving the committee direct responsibility for the pay of all highly-paid employees. At least half of variable pay or bonuses should be paid in the form of a long-term incentive scheme with half vesting after three years and the rest after five years. Two-thirds of cash bonuses should also be deferred. There should also be greater pay transparency in the big banks by requiring public disclosure of the number of employees earning more than £1m, broken down by bands of pay.
Other specific recommendations in the report include:
- Chairman of board to face annual re-election
- Chairman of remuneration committee to face re-election if report gets less than 75% approval
- Most non-executives to spend substantially more time on the job
- Induction process for all non-executives and regular training
- Non-executives to face tougher scrutiny under FSA authorisation process
- Banks should have board level risk committees chaired by non-executive
- Risk committees to scrutinise and if necessary block big transactions
- Chief Risk Officer to have reporting line to risk committee
- Chief Risk Officer can only be sacked with agreement of board
- Remuneration committees should disclose right of high-paid employees to receive enhanced benefits
Click here to read the report