Review raises the bar for board of financial institutions

The Walker Review was largely welcomed by the industry this week including the Financial Services Authority, Ernst & Young and the Association of British Insurers (ABI). The review released this week brings about substantial changes to the way in which the boards of major financial institutions function (see below an outline of the specific proposals). Essentially the review looks to increase the standards set for board members.

The ABI welcomed the review saying it should improve corporate governance. “It represents the first stage in the process of improving governance. We support non-executive directors devoting more time to their role, having better induction and training, and being subject to rigorous performance evaluation. We also agree that more needs to be done on board accountability, for example, as Sir David suggests, through the annual re-election of the chairman,” said Peter Montagnon, the ABI’s director of investment affairs.

But the ABI said more still needed to be done. “Some areas need further consideration and clarification. In particular, we do not believe that the remit of non-executive directors should be extended into areas that should be performed by management. And care should be taken that in strengthening the chairman's role and requiring greater day-to-day involvement, it does not become too dominant. Therefore further consideration should be given to the role of the Senior Independent Director," said Montagnon.

Specific proposals include:

1. Board level risk committees chaired by a non-executive

2. Risk committees to have power to scrutinize and if necessary block big transactions

3. More power for remuneration committees to scrutinize firm-wide pay

4. Remuneration committee to oversee pay of high-paid executives not on the board

5. Significant deferred element in bonus schemes for all high-paid executives

6. Increased public disclosure about pay of high-paid executives

7. Chairman of remuneration committee to face re-election if report gets less than 75% approval

8. Non-executives to spend up to 50% more time on the job

9. Non-executives to face tougher scrutiny under FSA authorization process

10. Chairman of board to face annual re-election

11. Financial Reporting Council to sponsor institutional shareholder code

12. FSA to monitor conformity and disclosure by fund managers

13. Institutional shareholders to agree MOU on collective action

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