Walker calls for a dramatic overhaul at the top of banks

Hugo Duncan
16.07.09

City grandee Sir David Walker today called for a dramatic “culture change” at the top of UK banks to prevent a repeat of the financial hurricane that plunged the economy into recession.

The former Morgan Stanley chairman said “the days of the old boys' club” were over and proposed sweeping reforms to the way banks are run including training for non-executive directors and annual elections or re-elections of the chairman.

He also proposed a clampdown on pay and bonuses and called on major shareholders and fund managers to engage more productively with firms to support long-term performance rather than short-term gain.

Sir David said: “Failures in governance in banks and other financial institutions made the financial crisis much worse.

Many boards inadequately understood the type and scale of risks they were running and failed to hold the executive to high standards of sustainable performance.

“Bonus schemes contributed to excessive risk-taking by rewarding short-term performance. And shareholders failed to exercise proper stewardship.”

The Walker Review, ordered by the Treasury to look at corporate governance in UK banks and other financial institutions, proposed:

* A beefed-up role for non-executive directors capable of challenging an autocratic chief executive, already dubbed “the Sir Fred Goodwin rule” after the disgraced former Royal Bank of Scotland chief executive but equally applicable to Dick Fuld at Lehman Brothers.

* A greater emphasis on the role of chairman, including “exceptional board leadership skills”. The chairman should spend two thirds of his or her time working for the bank, “a commitment that will leave little time for other business activity”.

* The creation of a powerful risk committee of non-executive directors to curb risk-taking by ambitious executives.

* An enhanced role for fund managers and major shareholders, who should declare their long-term intentions as investors or explain their motives for short-selling.

* A clampdown on bonuses “against a background of defective control and serious excess”. Remuneration committees should scrutinise pay across the firm, not just the board, and performance conditions “should be materially more demanding” with clawbacks. At least half of bonuses should be in the form of long-term incentives, with half the shares available after three years and half after five depending on performance.

Sir David said: “The most critical need is for an environment in which effective challenge of the executive is expected and achieved in the boardroom before decisions are taken on major risk and strategic issues.

“These proposals are designed to improve the professionalism and diligence of bank boards, increasing the importance of challenge in the board environment. If this means that boards operate in a somewhat less collegial way than in the past, that will be a small price to pay for better governance.”

Sir David said potential non-executive directors should be interviewed by the FSA rather than just approved.

He proposed a pool of interviewers be set up, which City commentators said could include heavy-hitters such as former chairman and chief executive of Lloyds Sir Brian Pitman.

He said non-executives should spend a minimum of 30 to 36 days at the bank, 50% more than the current level, and be “ready, able and encouraged” to challenge the executive, particularly relating to risk.