Walker Review final report: Potential significant changes for all listed companies

8 December 2009 

Overview

The final report of the independent review undertaken in the UK by Sir David Walker in relation to corporate governance in UK banks and other financial institutions was published on 26 November 2009 (the Walker Review). The Walker Review attempts to highlight improvements which could be made to reduce the likelihood of another banking crisis and proposes significant changes to the governance of banks and other financial institutions.

Although the terms of reference of the Walker Review relate specifically to banks and other financial institutions, the report envisages that many of these recommendations are relevant for all companies and not just those in the banking sector. As a result it is anticipated that many of the recommendations may become part of the ever-evolving codes of practice with which all listed companies find themselves having to comply. 

Recommendations of Particular Interest to All Listed Companies (not just Banks)

In particular, the following aspects of the Walker Review recommendations will be of wider interest to all listed companies and not just UK banks and other financial institutions.

• The Combined Code on Corporate Governance is likely to be revised to include a number of new provisions.  As listed companies in both Ireland and the UK must either comply with the provisions of the Combined Code or explain any non-compliance in their annual report, it is likely that these Walker Review's recommendations will be of interest to them.  It is anticipated that a revised Combined Code will apply for financial years beginning on or after June 2010. 
  
  The report recommends in particular that the following be included in the Combined Code:
  
  Provisions requiring an increased time commitment from non-executive directors: The report comments that the overall time commitment of non-executive directors should be greater than has been normal in the past.  The report goes on to say "How this is achieved in particular board situations will depend on the composition of the [non-executive director] group on the board.  For several [non-executive directors], a minimum expected time commitment of 30 to 36 days in a major bank board should be clearly indicated in letters of appointment and will in some cases limit the capacity of an individual [non-executive director] to retain or assume board responsibilities elsewhere.  For any prospective director where so substantial a time commitment is not envisaged or practicable, the letter of appointment should specify the time commitment agreed between the individual and the board.  The terms of letters of appointment should be available to shareholders on request."
  
  Provisions ensuring that the chairman of the board commits an appropriate time to the role and is re-elected annually: The report says "The chairman of a major bank should be expected to commit a substantial proportion of his or her time, probably around 2/3, to the business of the entity....The required time commitment should be proportionately less for the chairman of a less complex or smaller bank, insurance or fund management entity."
  
  A requirement for the chairman of the remuneration committee to stand for re-election if the directors' remuneration report is not approved by at least 75% of the shareholders:  In the UK, a non-binding resolution in relation to the remuneration report is required to be put each year to the members of listed companies, which differs from the Irish position.  How this recommendation will be adopted in Ireland is unclear.
  
  Improvements to director induction and training: For example, the report says that "An appropriately intensive induction and continuing business awareness programme should be provided for the chairman to ensure that he or she is kept well informed and abreast of significant new developments in the business".
  
  Provisions aimed at enhancing reporting of board evaluation: The report contains a number of recommendations on evaluation of the board, including the external facilitation of the process every second or third year. An evaluation statement should also either be included as a dedicated section of the chairman's statement or as a separate section of the annual report. 
  
  A requirement for a board risk committee and the appointment of a chief risk officer: The report recommends that the chief risk officer should report to the CEO or CFO and also to the board risk committee with direct access to the chairman of the committee.  The removal of the chief risk officer should require the prior agreement of the board.  The board risk committee report should be included as a separate report with the annual report and accounts.
  
  
• The report of the Walker Review also proposes a number of recommendations in relation to institutional shareholders.  In particular, it proposes that a new stewardship code be established and developed by the UK Financial Reporting Council for institutional investors and fund managers. The FRC has agreed to take responsibility for this new code.  Its status should be akin to that of the Combined Code as a statement of best practice, applying a similar "comply or explain" basis.  Fund managers and other institutions authorised by the FSA to undertake investment business should signify on their websites or in other accessible form whether they commit to the Stewardship Code.  The report also recommends that fund managers and other institutional investors should be required to disclose their voting records and that their policies in respect of voting should be described in statements on their websites or in other publicly accessible form.  It is possible that Ireland will follow suit in relation to this Stewardship Code and related principles.

Banks and Other Financial Institutions 

The report of the Walker Review of course also contains a host of recommendations specifically in relation to banks and other financial institutions, relating in particular to the internal regulation, structure and disclosure of the remuneration of bank directors and key employees.

For example, the report recommends that:

• the terms of reference of the remuneration committees of banks and other financial institutions should be extended so that they have oversight of all senior staff remuneration;
• the remuneration committee should seek advice from the board risk committee on specific risk adjustments to be applied to performance objectives in incentive packages;
• there should be increased disclosure in relation to remuneration of board members and "high
  end" employees, and, for example, that the remuneration report for banks and other financial institutions should disclose, in bands, the number of executive board members and "high end" employees whose total expected remuneration in respect of the reported year is in a range of Stg£1 million to Stg£2.5 million, in a range of Stg£2.5 million to Stg£5 million and in Stg£5 million bands thereafter, and, within each band, the main elements of salary, cash bonus, deferred shares, performance-related awards and pension contributions.
  

Further Information

Interested parties will need to continue to monitor the situation so that they will be aware of when these recommendations are implemented.  In the meantime, it may be advisable for companies, where possible, to prepare in advance for this by incorporating into current practice the substance of the recommendations.

For the press release issued by the Financial Reporting Council on 26 November 2009 in relation to the Walker Review please see www.frc.org.uk/press/pub2174.html.  For the full text of the final recommendations of the Walker Review please see: www.hm-treasury.gov.uk/d/walker_review_261109.pdf.

On a related matter, the Financial Regulator in Ireland has, on the 2 December 2009, requested comments on the European Commission's Recommendation (C(2009) 3159) of 29 April 2009 regarding remuneration policies in the financial services sector.  The Recommendation applies to a wide range of financial services firms and concerns the remuneration of staff whose professional activities have a material impact on the risk profile of the firm.  The Financial Regulator will be considering, early in 2010, how practically to apply the Recommendation in Ireland and is in the meantime seeking comments, to be received by 31 December 2009.

If you require any information, clarification or advice regarding any aspect of this note, please do not hesitate to contact Jack O'Farrell, Miriam Kelly or Sinead Kelly, or your usual contact in A&L Goodbody.