Non-executive directors at the City’s top banks should be forced to do a much better job of keeping the top brass in line, according to the Treasury review on corporate governance by Sir David Walker. The ex-Morgan Stanley chairman reckons the financial crisis proved that many non-execs didn’t really understand the risks they were supposed to be managing, and even if they did, they were too scared to take the CEO to task. So boards need to be beefed up, he says. He also wants directors to play a much bigger role in scrutinising pay and bonus awards – which could extend to publishing some of the juicy details...
The report by Walker (or ‘City grandee Sir David Walker’, as his name appears to have been changed by deed poll), contains no fewer than 39 recommendations about how City governance needs to be improved. The main thrust is that he wants boardrooms to become less of an old boys’ club – a place where the CEO is held up to serious scrutiny, as opposed to a cushy retirement gig for his old golf buddies. Potential non-execs should be interviewed by the FSA rather than just rubber-stamped, to make sure they know what they’re doing, and then provided with regular training and support – as well as working 50% more days than they do currently. Equally, the chairman should be a specialist with excellent leadership skills, who’s willing to devote at least two-thirds of their time to the job. And big shareholders should also be encouraged to raise their game.
As for day-to-day operational changes, he wants banks have a separate risk committee staffed with NEDs, who will be able to call the exec team to account and, if necessary, block any big deals (the ‘Fred Goodwin Rule’, as it’s already being called). And the remuneration committee should have a much broader remit, looking at pay and bonuses across the firm. As well as introducing more of a deferred element to bonus awards, Walker also wants the banks to publish the details of any packages that ‘exceed the median’, broken into bands. Technically there’ll be no names attached, though it might not be that hard to work out who the top earners are. This is a controversial point: some will argue that this unwanted publicity will drive the best people out of the UK, or that it might put banks at a competitive disadvantage.
But breaking the City’s vow of silence on bonuses doesn’t sound to us like too much to ask, given recent events – and we’re all for City boardrooms becoming slightly less cosy environments for the likes of Sir Fred. Indeed, most of Walker’s ideas seem pretty sensible. Arguably, the most obvious conclusion you reach when ploughing through the full document is that it’s amazing the City doesn’t do all this stuff already (Hire NEDs who know what they’re doing? What a ground-breaking idea!).
On the other hand, no amount of governance reform can insulate banks against bad decisions, or pushing too hard for growth. So we shouldn’t expect Walker’s report to be a cure-all, even if it makes it through the consultation phase...
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