Facelift for Corporate Governance in U.K.
“The time has come,” the Walrus said,
“To talk of many things:
Of shoes–and ships–and sealing-wax–
Of cabbages–and kings–
And why the sea is boiling hot–
And whether pigs have wings.”
- From The Walrus and the Carpenter by Lewis Carroll.
Hopefully, the ongoing discussion and consequent recommendations by U.K. City Banker Sir David Walker will not dissolve into a hypothetical discussion like the one by Lewis Carroll’s The Walrus and the Carpenter.
The final recommendations by Sir David Walker on the state of corporate governance, particularly for banks in the U.K. was made public yesterday.
The big focus was on Board Committees and particularly the role that the board should play in the risk assessment and management process of the company. As the report puts it, boards have been discharging their risk related duties with a sense of ‘disclosure fatigue’ –full disclosure is the best way to fulfill risk related obligations by the board. In reality, boards should ensure that risks are identified in a timely manner, assessed and controlled effectively. Suitability and relevance of experience of such Board level Risk Committee members has also been examined in this report.
In addition, the Board Risk Committee should file a separate Risk Report, within the Annual Report. The report should describe thematically the strategy of the entity in a risk management context, including
1. information on the key risk exposures inherent in the strategy,
2. the associated risk appetite and tolerance and
3. how the actual risk appetite is assessed over time covering both banking and trading book exposures and
4. effectiveness of the risk management process over such exposures.
The report should also provide at least high-level information on the scope and outcome of the stress-testing program. An indication should be given of the membership of the committee, of the
frequency of its meetings, whether external advice was taken and, if so, its source.
This Risk Report recommendation while good in theory may not necessarily achieve the objective. If you look at the kind of information that a typical Audit Committee report discloses, you will see what I am talking about. Other than 98% being ‘CYA’ statements, there is barely any useful information.
Sir Walker’s report also comments on other broader corporate governance measures such as stock ownership requirements for executive management.
As far as pay related regulation goes, deferral of incentive payments was the primary ‘form of attack’ with one half of variable remuneration being offered in the form of performance based long term incentives.
As per the recommendations, half of this award should be handed out only after 3 years and the remainder after 5 years. Short term bonus awards to be paid over a three year period.
At InvesGuard, we have been actively mining information on exactly this type of information. For all the banking companies in our database, we have gathered information on the presence of Board level risk committees, suitability and relevance of experience for these Committee members. We also track changes to Chief Risk Officers at Banking companies.
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