Saturday, July 18, 2009

Corporate Governance : Sir David Walker's Report

Sir David Walker has submitted "A review of corporate governance in UK banks and other financial industry entities " with 39 recommendations. He has done this at the instance of prime minister of UK. The report is interim in nature and will be followed by the final version in November.

Any report on corporate governance will attract myriad eyeballs ; therefore, we can look forward to widespread support and criticism of the report in the next few weeks. There are 5 recommendations covering Board size, composition and qualification, 8 on functions of the Board and evaluation of its performance, 9 on the role of institutional shareholders, 5 on Risk Governance and the maximum of 12 recommendations on Remuneration.

Some recommendations are path-breaking and are worthy of study and early implementation . For example, it is proposed that the Board should undertake a formal and rigorous evaluation of its performance with external facilitation. A commendable idea whose time has come ! All pay should be linked to performance (who can take exception to this Biblical statement?) and the payout of bonuses for top earners , i.e. those earning more than the median pay of executive directors, should be staggered over five years. Sir David claims that the recommendations on remuneration are "as tough or tougher than anything to be found elsewhere in the world". Obviously he has not studied the Indian Companies Act as it existed a decade back.

It is strange that the report recommends creation of a new role of Chief Risk Officer (is there no such person in British banks now?) answerable only to the Board as well as a new Risk Committee (why new?). It is recommended that the Board should establish a Board Risk Committee separately from the Audit Committee. Surprising that CRO, Risk Committee etc. are not yet institutionalised in the UK.

Expectedly, there is a lot of bloodletting on the role of non-executive directors (NED). NEDs , it is recommended, should spend more time doing their jobs - between 30 and 36 days a year - and have more professional and structured support including regular " business awareness sessions". Will it solve the problem? NEDs were derelict not because they were ignorant of business but because they were "obliged" to the promoters.

Institutional shareholders should comply or explain non-compliance with Shareholders' Code. Chairman should face re-election every year. Would not facilitating recall be a better tool?

Sir David hopes that the standards and disclosures recommended will set benchmarks for initiative and emulation elsewhere. One need not be a cynic to comment that there are benchmarks aplenty already but practices are woefully falling short.

It is interesting that Sir Christopher Hogg, Chairman of Financial Reporting Council, is presently undertaking a consultation on the Combined Code on corporate governance for all listed companies. Hence, we will soon be treated to another

well-written and highly readable report.

No comments: