16 Jul 2009, David Benyon, Operational Risk & Regulation
LONDON - The UK Treasury has released the consultation document for David Walker's review of corporate governance standards at UK banks and other financial services entities.
The report is tasked with looking at weaknesses in corporate governance standards, risk management, board-level competence, internal audit, and incentivisation through remuneration structures.
Included is a crackdown on non-executive board members, who should have relevant expertise, according to the report, as many were exposed as being poorly qualified to predict or deal with the fallout from the financial crisis.
"The role played by boards and senior executives in relation to risk management and the recommendations for the governance of risk are vital to ensuring banks and other financial entities improve the status of risk management," says Phil Rivett, financial services assurance practice leader at PricewaterhouseCoopers, based in London.
"We are also pleased to see the proposals for more board time to be devoted to risk governance and the increased independence of risk management functions. This can only improve the focus on the risks to which banks and other financial entities are exposed and help make the decision-making process more effective," says Rivett.
The report also recommends bank bonuses be more closely controlled and that there be far greater disclosure of pay and bonus structures for all top-earning employees, beyond board level. This suggests salaries of traders and other high earners will form part of transparency requirements, which expands on the executive compensation debate and is sure to attract criticism from firms.
"The requirement for disclosure of pay bands for individuals paid more than the board is a response to a longstanding demand for further information in this area from certain shareholder bodies," says Jon Terry, reward practice leader at PricewaterhouseCoopers.
"Arguably, this information could give more insight into the culture of the Bofi [banks and other financial entities]. However, as identified in the review, in our experience, new rules on disclosure tend to be closely followed by the unintended consequences of their introduction.
"It is possible that this will simply lead to an upward ratchet in pay levels below board in the same way that the widespread availability of data at board level is perceived to have had an inflationary impact over the last decade or so. It is also not clear whether the requirement for foreign-owned subsidiaries to disclose this information publicly would be enforceable, which could potentially result in an un-level playing field for UK institutions," says Terry.
The Financial Services Authority (FSA) has issued a statement in response to the Walker Review, saying it complimented the regulator's own work, with particular reference to its Remuneration Code of Practice, released for consultation on May 18 and scheduled for inclusion in its handbook later this summer.
The FSA says it will contribute to the consultation process and will issue a paper in the autumn, outlining its proposed response to the final recommendations of the Walker Review due in November.
Click here to read the Walker Review consultation.