Connected Research

The Treasury-backed Walker Review has published its first consultation document today.

The Walker Review was set up in February under the control of ex-City figure Sir David Walker to examine corporate governance in the UK banking industry (extended to other institutions in the financial sector), with a particular perspective on banks’ boards and pay policies given public anger at bankers over the crisis in the financial system and the extent of taxpayer support for keeping banks solvent. The Review thus far is a product of Walker’s discussions with industry figures and corporate governance experts so – at least to some extent – its suggestions are ones that the industry may have indicated it can accept: it is something of a last chance for self-regulation. Political support has already been forthcoming, with Gordon Brown telling the Commons Liaison Committee that he thought the recommendations would be adopted, while the Financial Services Authority would be issuing a revised code on standards of remuneration. So, even though the final report is not due out until November, the first statements appear to have a fairly concrete look about them.

Walker’s 39 recommendations designed to improve accountability of banking boards include, among them:

– board level risk committees to be chaired by a non-executive, with these to have the power to scrutinise and block big transactions

– remuneration committees to have the power to scrutinise firm-wide pay, including of high-paid staff not on the board

– bonus schemes for all highly-paid executives to have a significant deferred element

– the pay of highly-paid executives to be subject to greater scrutiny

– the chair of the remuneration committee to face re-election if the report receives less than 75% approval

– non-executive directors to spend up to 50% more time on the job and to face tougher scrutiny under the Financial Services Authority process

Tom at labour and capital‘s first sight of the report was to identify some good bits and some areas where Walker had ‘bottled it’; on closer inspection, ‘This does not look like the sort of document that reform-minded investors would have been hoping for.’ Perhaps no surprise there, given the processes involved in the production of the report.

Evidently, the aspects of the Review to have attracted most comment are those on board pay and bonuses. Here, a compelled greater deferred element ought to contribute to the central aim of not subjecting banking stability to the risks of executives chasing risky projects on the back of short-termist bonuses, although it seems that the proposals don’t disallow these; they merely only ensure pay-out once the distance of time has ensured that there has been no medium-term impact of whatever projects have been instigated.

Remuneration committees reviewing firm-wide pay would also seem to have something to offer although, if it is to prove genuinely firm-wide, and to have a chance of achieving genuine change, the presence of genuinely independent voices – like those of employee representatives, for example – would be required.

However, it is beefing up the role of non-executives that is perhaps the most interesting aspect. Here, Walker starts from the laudable aim of ensuring that the proposals are:

‘Designed to improve the professionalism and diligence of bank boards, increasing the importance of challenge in the board environment. If this means that boards operate in a somewhat less collegial way than in the past, that will be a small price to pay for better governance.’

Actually achieving that is key in the corporate environment and it has general applicability, not just to the banking sector. But, Walker is right: the corporate world is too collegiate. That means (at least) two things: breaking up the ‘cosy club’ aspects of the corporate world, so as to allow an atmosphere of greater independence and challenge; and ensuring greater actual accountability to and control by shareholders.

Breaking up the clubs means ensuring that executives are drawn from a wider pool so that they are both more representative of opinion from outside the usual executive circle but also less incestuous in terms of directors accepting responsibilities for supervising, and being supervised by, each other. The problem essentially is that exectives think like each other not only because they tend to mix only in each other’s company but because they are drawn from the same backgrounds and have a consequently consensual world view – what the TUC accurately calls in its response ‘groupthink’. The notion of independence, of challenge, in this atmosphere is a difficult one to sustain.

This seems to me to mean thinking again about the potential of having different structures at board level, moving away from the Anglo-Saxon model towards structures which assume a greater supervisory authority over executives, and which could have a greater social construction starting (of course) in banks where the state has control. Greater accountability would certainly be aided by representatives from different backgrounds asking tough questions to which the answers cannot be taken for granted. It should also improve the quality of corporate decision-making.

Walker has also proposed increasing the time commitment of non-executives by 50% – a reflection of a view that non-executives have too little authority since they have too little time to get to grips with issues. However, I think Walker needs to go much further, as well, and place greater controls on the number of directorships that directors can assume. This would also achieve his aim of ensuring directors are qualified by an understanding of the industry in which they work: a welcome end to the practice of believing that retail executives, for example, can run a bank.

Neither of these things, I would imagine, are likely to be achieved voluntarily, on a self-regulated basis, or within anything like an acceptable timeframe.

Ensuring greater accountability by increasing shareholder power (my words, not Walker’s) is also problematic. The TUC’s most recent survey of fund managers’ voting patterns revealed just one institution which had voted against the acquisition by Royal Bank of Scotland of ABN Amro, together with a rather patchy record on remuneration reports. Breaking up the executive clubs has a contribution to make to the extent to which institutional shareholders can genuinely influence corporate policy-making but greater diligence, as well as a greater ear to the notes of independent research consultants in this area, would also seem to be required. Developing the ability to challenge poor corporate practice would also require a greater exhibition of distance and independence amongst institutional shareholders than we are used to seeing and, perhaps, a more diverse representation for the same reasons as expressed above.