[No. 87] Heads Up on Review of Corporate Governance in UK Banks

In post No. 60, I wrote about recommendations (in English: "Restoring Trust") that were published in April this year by the Dutch Committee Maas (named after its chairman), aimed at drawing lessons in the Netherlands from the credit crunch for financial institutions in terms of corporate governance. The outcome is, in short, that the interests of the client should be leading, that the system of internal risk management should be enhanced, that the role of the supervisory board should be strengthened and that the renumeration policy should be renewed. This requires a fundamental change in mentality and refocus in the banking industry. So basically less excessive risk-taking and less 'perverse' short-term incentives through director renumeration. The recommendations are subject of discussion, as they should be (for some further thoughts on this blog, see post No. 61).

Now how are things in the UK progressing? Sir David Walker (pictured) is leading an independent review of corporate governance in the UK banking industry in the UK, upon request of the Prime Minister. The original Terms of Reference for the review are to examine corporate governance in the UK banking industry and make recommendations, including in the following five areas:

1. the effectiveness of risk management at board level, including the incentives in remuneration policy to manage risk effectively;
2. the balance of skills, experience and independence required on the boards of UK banking institutions;
3. the effectiveness of board practices and the performance of audit, risk, remuneration and nomination committees;
4. the role of institutional shareholders in engaging effectively with companies and monitoring of boards; and
5. whether the UK approach is consistent with international practice and how national and international best practice can be promulgated.

Yesterday, Walker published a consultation document called A Review of Corporate Governance in UK Banks and Other Financial Institutions. Walker seeks to boost the role of non-executives in the risk and remuneration process and encourage institutional shareholders to play a more active role as engaged owners of banks and other financial institutions. Key issues are qualifications of the board, the functioning of the board, investor monitoring and communications, risk management and renumeration management. Specific proposals include the following:

• board level risk committees are to be chaired by a non-executive;
• risk committees should have the power to scrutinise, and if necessary block, big transactions;
• more power for remuneration committees to scrutinise firm-wide pay;
• remuneration committee should oversee pay of high-paid executives that are not on the board;
• significant deferred element in bonus schemes for all high-paid executives;
• increased public disclosure about pay of high-paid executives;
• the chairman of the remuneration committee is to face re-election if the report gets less than 75% approval;
• non-executives are to spend up to 50% more time on the job;
• non-executives are to face tougher scrutiny under FSA authorisation process; and
• the chairman of board should face annual re-election.

The consultative document proposes that most of the recommendations are enforced through inclusion in the UK Combined Code on Corporate Governance, which operates on a ‘comply or explain’ basis. The second consultation period will run until 1 October, with conclusions in November 2009. This second phase is used to generate comments and reaction. See here and here for some first reactions, including one from an institutional shareholder commenting

"The recommendations look pretty similar to the countless others before it. We need radical thinking - but we got tinkering."

It will be quite interesting to see how this unfolds in the course of the year.