MacRoberts Banking Law e-update 09/07/10

CORPORATE GOVERNANCE IN UK FINANCIAL INSTITUTIONS

Sir David Walker was commissioned to carry out a review of the corporate governance of UK banks and other financial institutions. His final recommendations have now been published and include the following:

Board Functioning:

• Non-executive directors must increase their time commitment to the role to 30-36 days per year; and
• The FSA should pay greater attention to the overall make-up of the board in relation to risk strategy.

Board Performance:

• The chairmen of major banks should commit around two thirds of his or her time to the role;
• Chairmen should have financial industry experience and a record of successful leadership skills;
• Chairmen should be elected annually; and
• The board should undertake a formal and rigorous annual evaluation of its performance.

Institutional Shareholders:

• The remit of the Financial Reporting Council ("FRC") should be extended to cover a best practice code in stewardship of UK listed companies for institutional investors, with the aim of helping companies understand the approach and expectations of their major shareholders.

Governance of Risk:

• FTSE 100-listed banks and life assurance companies should have a separate board risk committee, responsible for advice to the board on current risk exposures and future risk strategy;
• A chief risk officer should be appointed to report to the board and the board risk committee; and
• A separate risk report should be included in the annual report.

Remuneration:

• FTSE 100-listed banks and comparable unlisted entities (eg large building societies) must disclose the remuneration of employees earning over £1m including the breakdown between salary, bonus, long-term award and pension;
• Deferral of incentive payments should be undertaken to align rewards with sustainable performance; and
• A requirement for the chairman of the remuneration committee to stand for re-election if the directors' remuneration report is not approved by at least 75% of the shareholders.

Implementation:

• The first UK Stewardship Code has now been published by the FRC. It is considered that this will improve corporate governance and performance of listed companies.
• Following a review of the Combined Code on Corporate Governance, the FRC has also published the UK Corporate Governance Code which implements those of Walker's recommendations applicable to all companies.
• The FSA’s consultation on its Remuneration Code of Practice closed on 18 May 2010 and a policy statement outlining proposed changes will be issued over the summer.

For further information, please contact Frances Sim on 0131 229 5046 or Johanne Watson on
0141 303 1100.

© MacRoberts 2010

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