Sir David Walker called for a "fundamental change in the culture of bank boardrooms" yesterday as he unveiled a far-reaching shake-up of governance and a crackdown on pay.
Sir David's independent interim report, commissioned from the City grandee by the Treasury, contained 39 recommendations on changing how banks are run. They are aimed at preventing a repeat of the financial crisis that has plunged the country's economy into the worst recession in a generation.
The former Morgan Stanley Europe chairman and Bank of England director wants half of bankers' bonuses to be deferred, with 25 per cent payable after three years and the rest after five. The measures are aimed at deterring high-earning bankers from embarking on excessively risky short-term strategies to boost bonuses.
Banks will also be required to publish details on how much they pay bankers who earn more than the median in salary, pension, bonuses and other benefits, although they will not have to identify them. High earners will be placed in bands with the number of employees in each band illustrated, while board members will have to maintain a shareholding equal to their total historic compensation. They will further be discouraged from making quick sales when they depart. Sir David wants each bank to set up an independent risk committee at board level chaired by a non-executive director and involving chief risk officers, who are expected to be given greatly enhanced powers and who will be appointed by the board rather than the chief executive.
Sir David said: "Before a chief executive embarks on an acquisition I want boards to sit down and think. I want them to ask, 'Should we really be doing this?' before they mandate a CEO and an investment banker to go out and do the deal. I am worried that in some of the transactions we have seen, this has not happened."
He pointed to Royal Bank of Scotland's disastrous acquisition of ABN Amro as a potential example. Sir David added: "What I want is for boards to become less comfortable places. I want to see non-executive directors who will challenge the chief executive."
To do that, non-executives must be prepared to devote 50 per cent more time to their roles and face grillings from senior former bank directors before the Financial Services Authority green-lights their appointments.
The beefed-up role for non-executive directors has been dubbed the "Sir Fred Goodwin" rule, after the disgraced former Royal Bank of Scotland boss, who was seen as utterly dominating the bank's board.
Sir David, however, also had hard words for institutional shareholders, accusing them of behaving too much like "short-term traders" rather than long-term holders.
Fund managers will in future be required to sign up to a statement of principles requiring them to behave as "responsible stewards", to publish details of their votes and to explain themselves if they do not comply.
They have been told to sign memoranda of understanding and work together where there are disputes with boards over the way companies are being run.
Sir David said there could be further recommendations added to the report when the final version is published in November. It is likely that the recommendations will be accepted in full by the Chancellor, Alistair Darling. "There is lots I have been thinking about that I have left out. It may be that I have to come back with more," Sir David said.
To those who suggested that some of the recommendations could damage Britain's competitiveness, he said: "We had as bad a problem as anyone on the planet. If you put together all the measures to support banks, they have cost the taxpayer £1.2 trillion. That is equivalent to 90 per cent of GDP. I have tried to strike a balance, but what we should do is adopt these recommendations and then proselytise around the world. We need to get Europe and the US on board. I believe these reforms will ultimately be to Britain's advantage."
Angela Knight, chief executive of the British Bankers' Association, said: "The Walker review is about strong governance: It is about ensuring leadership by boards and proper risk controls across the business in both banks and other financial institutions."
The Walker report: A shake-up for the City
Who is Sir David Walker?
Sir David is one of the grandest of City grandees. As well as a former chairman of Morgan Stanley and director of the Bank of England, he has also been chairman of the London Investment Banking Association, and from 1988 to 1992 was chairman of the Securities and Investment board, the forerunner of the Financial Services Authority. He has also been deputy chairman of Lloyds Bank, and wrote an independent review of the private equity industry in 2007, including a code of conduct.
Is his report proposing meaningful change, or is it just a lot of hot air?
Meaningful change. Banks will have to disclose the pay of senior executives who are not on the board, their non-executive directors will have to commit to working much longer hours and face tough interviews before being appointed, and banks will have a statutory risk committee at board level. It will be able and required to say no if it thinks a bank's strategy is dangerous, and advisory votes on remuneration reports will have teeth – if enough shareholders vote against, the committee chairman will have to stand for re-election the next year. The bank's chairman will have to devote two-thirds of his time to his job, and will face yearly re-election.
How will it be policed?
Sir David says legislation is a bad idea. About a third of the recommendations will be down to the Financial Services Authority to enforce. The remainder will largely come under the remit of the Financial Reporting Council. Sir David does not want to see prescriptive legislation, citing the example of the Sarbannes-Oxley Act in the US, which was seen as little more than onerous box-ticking and caused many non-US companies to flee the market.
What will be the impact on pay?
The pay of non-executive directors will probably rise sharply given the new responsibilities they face. As for the bankers themselves, there is a concern that the measures suggested by Sir David may actually increase pay. That is because bankers will look at rivals' pay bandings and judge their own remuneration against them. If it falls short, they may well ask for more. Royal Bank of Scotland has already been causing controversy, paying some high fliers as much as it did before the financial crisis, and offering lucrative packages for people filling a dozen of its top positions.
What does the City think?
The banks are more or less on board, although that may change when they have considered the details. City lawyers and pay consultants have suggested that the lengthy delay to bonuses is pointless because few people think that far in the future. Pirc, the corporate governance consultant, is concerned that the report lacks teeth. Vince Cable, Liberal Democrat Treasury spokesman, wants the code to be obligatory through the FSA rather than voluntary.
Will it affect London as a financial centre?
That remains to be seen. The reforms will only apply in Britain (although foreign banks may have to publish details of their top earners if the FSA can find a way to enforce it). Other countries tend to have their own ideas about needed reforms, and Britain's reputation for good regulation has taken a serious knock as a result of the crisis.Reuse content