Odgers Berndtson Response to the Walker Review

9 October 2009 by Virginia Bottomley, Kit Bingham

We welcome Sir David Walker’s comprehensive and thoughtful Review of the governance of banks and other financial institutions (BOFIs), and believe that it will make a material contribution to restoring confidence in the financial services sector and enabling it to recover.

The Review’s emphasis on preserving the UK’s flexible governance regime is welcome. Good governance ultimately depends on well-composed boards, high quality directors and a boardroom environment that both supports and challenges the executive team. Creating such an environment cannot be achieved by prescription or legislative fiat, and nor can compliance ever be an effective substitute for good judgement.

While good governance plainly failed in large parts of the banking and financial services sector, it would be wrong to conclude that an entirely new approach to governance is required. The system alone was not at fault – what was missing among many BOFIs was the drive and commitment to implement effective governance.

We also note, as does the Review, that the financial crisis was not solely the result of failures in the boardroom. To lay the blame only at the door of chairmen and non-executive directors would be a mistake. Policy makers, regulators, owners and the media all played a part.

The ‘comply or explain’ regime has served the UK well. The Financial Reporting Council’s ongoing consultation on the effectiveness of the Combined Code has found that there is widespread respect for the Code and strong support for the ‘soft law’ approach that it represents. We strongly support the Review’s determination to preserve this approach, and to build upon it.

Against that background, our specific observations and recommendations are spelled out below.

Executive Summary

• We support the recommendations that boards need additional support, training and resources. (Recommendations 1 and 2).
• We are concerned that a time commitment of 36 days per year for BOFI non-executive directors may rule out existing executives from taking non-executivepositions, especially on the audit committee. (Recommendation 3).
• We do not support the annual election of chairman, which has the potential to encourage short-term thinking; there are also more appropriate routes for removing an underperforming chairman. (Recommendation 10).
• We recommend the formation of a stand-alone committee of enquiry, similar to the Turnbull or Smith reviews, to develop in-depth, non-binding guidance on board evaluation. (Recommendations 12 and 13).
• We support the proposals to encourage long-term owners to engage and intervene more effectively with portfolio companies, and recommend a follow-up study in two years time to assess progress. (Recommendations 14-22).
• We support the creation of a risk committee in principle, although we are concerned that BOFI boards, already larger than the FTSE 100 median, should not become too large to be effective. We agree that the risk committee’s remit should be narrowly drawn to ensure its workload remains manageable. (Recommendation 23).
• We endorse the recommendation that the remuneration and risk committeeswork closely together. (Recommendation 35).
• We agree that the Remuneration Committee should oversee any substantialremuneration packages being paid to executives below board level, and should approve the policies used to set these packages. (Recommendations 28 and 29).

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