A review for the British government has made 39 recommendations on how banks and other big financial institutions should be governed in a bid to avoid another credit crunch which has been partly blamed on poor bank governance.
The review was conducted by David Walker, a former chairman of Morgan Stanley International bank and aims to improve the quality of boards so they challenge risky behaviour by senior bankers.
Walker said no new legislation is needed and that the recommendations could be included in the existing code on corporate governance enforced by the Financial Reporting Council.
It will be up to the UK government in whether any recommendations will be taken forward once they are finalised in November.
The review recommended:
BETTER RISK MONITORING
— the board of a bank should set up a board risk committee separately from the audit committee and chaired by a non-executive director;
— risk committees to have power to scrutinise due diligence and if necessary block big transactions;
— the chief risk officer should have a company wide authority and independence, with tenure and remuneration determined by the board;
SCRUTINY OF PAY
— more power for remuneration committees to scrutinise firm-wide pay;
— 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;
— increased public disclosure about pay of high-paid executives;
— chairman of remuneration committee to face re-election if remuneration report gets less than 75 percent approval;
— the report should disclose, in bands, the number of executives whose total pay execeeds the executive board average total pay;
— clawbacks should be used as the means to reclaim amounts in limited circumstances of misstatement and misconduct;
— operations of foreign banks in Britain should also disclose pay details of "high end" executives as well;
BETTER BOARD MEMBER SELECTION
— non-executives to spend up to 50 percent more time on the job with a minimum expected time commitment of 30 to 36 days;
— non-executives to face tougher scrutiny under Financial Services Authority (FSA) authorisation process, such as an interview, to ensure they understand a bank's complex activities;
— chairman of board to face annual re-election and at least two-thirds of his or her time should be devoted to the job;
INVOLVING BIG INVESTORS
— Financial Reporting Council to sponsor institutional shareholder code;
— FSA to monitor conformity and disclosure by fund managers;
— institutional shareholders to agree a memorandum of understanding on collective action.
