The UK Walker review of financials’ governance and pay one more input into the Australian Productivity Commission’s final report
27/11/2009
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On Thursday 26 November Sir David Walker published his final recommendations (see HERE) on his review of UK banks’ and other financial institutions’ pay and governance (see HERE).

Amongst Sir David’s 38 recommendations are the following:

  • Institutional shareholders to sign up to a Stewardship Code, with compliance monitored by the UK’s Financial Services Authority (FSA)
  • Annual re-election for the chairman of the board
  • The chairman of a major bank should be expected to commit a substantial proportion of his or her time, probably around two-thirds, to the business, while other non-executive directors should commit a minimum of “30 to 36 days” a year
  • An expanded role for the remuneration committee with regard to firm wide remuneration policy and “high end” employees
  • Disclosure, within remuneration bands, of the number of “high end” employees (including executive directors)
  • Deferral of incentive payments for 3 to 5 years should provide the primary risk adjustment mechanism to align rewards with sustainable performance for executive board members and “high end” employees
  • If the remuneration report receives less than 75% of the votes cast the remuneration committee chair should stand for re-election in the following year
  • Greater expectations placed on non-executive directors regarding time commitment and tougher scrutiny by the FSA
  • Banks should have a board level risk committee chaired by a non-executive director
  • The chief risk officer should have a reporting line to the risk committee and his or her removal should require board approval

Some recommendations will impact directly and significantly on Australian banks regulated by the Financial Services Authority for operations in the UK.  FSA-authorised banks that are UK-domiciled subsidiaries of non-resident entities will be required to disclose from the 2010 year of account and thereafter details of total remuneration bands (including remuneration received outside the UK) and the principal elements (that is, bonuses and deferred shares) within such remuneration for their “high end” employees on a comparable basis and timescale to that required for UK-listed banks.

Bonus deferral should be in shares, and, in an echo of APRA regulations and Productivity Commission recommendations, cessation of employment should not result in acceleration of vesting for these deferred shares. 

Sir David proposes that most of his recommendations should be enforced through inclusion in the UK’s combined code on corporate governance (similar to the ASX Governance Council Principles) or a separate Stewardship Code for institutional investors, both of which operate on a ‘comply or explain’ basis.

The recommendations on pay disclosure will be included in the legislation currently before the UK’s parliament.

A video of Sir David’s appearance before the UK parliamentary Treasury Committee, where he was questioned on his review, appears HERE.

It is difficult to understate the impact of the Walker review on British financial services pay and governance practices, where the impact of the GFC has been most severe, and banker pay has been pushed to the forefront of the blame game by politicians, away from poor capital adequacy and liquidity risk regulation, enforcement and oversight.

While there is no doubt executive pay issues in Australia have been subject to political populism (as well as genuine ideological differences with the status quo in some cases), the review processes through the Productivity Commission and APRA have a greater chance of more rational resolution than the UK processes.  APRA have effectively completed their thorough consultation process, with the final make up of regulations known. 

But the Walker review recommendations are likely to be noted by the Productivity Commission, in particular in reference to the “two strikes” rule. 

Sir David recommended that the remuneration committee chair be required to stand for re-election if the remuneration report gets less than a 75% affirmative vote.  This sort of requirement if applied in Australia can take the heat off the rest of the board so that they can focus on other, probably more material, matters and would respond to critics’ suggestions that the Commission’s draft two strikes rule could be abused.  Lastly, institutional investors who do not like a company’s remuneration policy would be less likely to abstain the second time around if only the remco chair position is spilled rather than the whole board. 

But such a requirement should still be based on at least a majority of votes (not just 25%), with the opportunity to respond to shareholders after the first “strike”.

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