The man charged with shaking up the boardrooms of Britain's banks faced down his City critics telling them to back him or face nationalisation.
Sir David Walker, a former chairman of Morgan Stanley and director of the Bank of England, said his reform plans – to be published today – could prevent a repeat of the financial crisis that has shaken the world's financial system by forcing directors of banks to work properly. He said they must be capable of challenging power-hungry chief executives and preventing them from leading their banks to ruin.
Speaking to The Independent he said: "The review will improve corporate governance very significantly. If you don't do that the pendulum will swing into the regulatory space. That would create banks that are safe and sound, but devoid of initiative and much more expensive. Shareholders have limited liability when they invest in banks. They only lose their investment if things go wrong. But the taxpayer has been shown to have unlimited liability in practice so it is not surprising that the Government regulators are on the backs of the banks.
"But the danger is if you do this all through regulation you have a situation in which banks are effectively nationalised and the world's history with nationalised banks is not glorious."
Sir David hopes his reforms will stave this off and help prevent a repeat of the financial crisis by changing the behaviour of boards. "What matters most is leadership. If the chairman is not a strong leader you will have problems."
Banks' chairmen will no longer be allowed to be part-timers and will have to devote at least two-thirds of their time to the institutions they head. Sir David, whose review was commissioned by the Chancellor, Alistair Darling, has backed down on a proposal to force all other non-executives to work at least 36 days a year. Critics said this would prevent them from hiring busy executives from other companies who could provide valuable input.
But most will have to commit between 30 and 36 days to a bank and that will have to be spelled out in letters of appointment. They will also face tougher interviews and boards will be required to monitor their performance ever two to three years, using external agencies. Asked if these reforms would lead to higher pay for non-executive directors of banks and their chairmen, Sir David said "absolutely".
He has also watered down the idea of shareholders signing "memoranda of understanding" to force change where they are unhappy with the way banks are being run. However, he still expects them to take collective action where there are problems, and said there was no reason for them to hide behind rules banning shareholders from acting as "concert parties" in takeover situations. "Shareholders should act as owners rather than traders," Sir David said.
On the ever-contentious issue of pay, Sir David said the Chancellor, Alistair Darling, had agreed to introduce legislation to force banks to detail the number of staff in particular "pay bands".However, the people in those bands will not be named.
Yesterday's final review was published after more than 180 submissions to the interim version earlier this year. Its provisions will also apply to life insurers and other financial institutions although smaller and less risky organisations can look forward to an easier ride. It will be largely up to the Financial Reporting Council and the Financial Services Authority to enforce the provisions.
The Association of British Insurers said: "Shareholders did not cause the crisis but they recognise that they could be more effective in their dealing with companies. We remain concerned at any automatic read-across to non-banking firms such as insurers, whose business models are different from those of banks and who do not represent the same systemic risk."
The Walker Review: Sir David's key reforms
* Numbers of staff in 'pay bands' of over £5m, £2.5m to £5m, £1m to £2.5m published but no names.
* FSA to call in experts to interview new directors and to monitor a board's level of financial experience.
* Boards told to call in outside consultants to assess the quality of their work every two or three years.
* Most banks' non-executive directors to commit up to 36 days a year to the firms they are hired to oversee.
* Shareholders are told to act together to where they see problems with banks in which they have holdings.Reuse content