Boards of banks and other financial institutions need to make substantial changes to the way they function, particularly when it comes to boosting the role of non-executives in the risk and remuneration process, says Sir David Walker's Review.

The Walker Review of Corporate Governance of UK banks and other financial institutions recommends that the boards strengthen and make rigorous challenge in the boardroom a feature of risk decisions. Institutional shareholders should also play a more active role as engaged owners of banks and other financial institutions.

Amongst the recommendations, which Walker said are "designed to improve the professionalism and diligence of bank boards", are the proposals to chair board level risk committees with non-executives, to give more power for remuneration committees to scrutinise firm-wide pay, and for increased public disclosure regarding the pay of high-paid executives.

"Failures in governance in banks and other financial institutions made the financial crisis much worse," Walker added. "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."

Walker added that the proposals on remuneration, along with those made by the Financial Services Authority (FSA), are as tough as or tougher than any found in the world. "These recommendations should bring substantial improvement in the governance of banks. They will not guarantee that failure will be avoided in future but will greatly mitigate the risk," he concluded.

The Investment Management Association (IMA) has welcomed the document, but questions the report's recommendation that 'the Institutional Shareholders' Committee (ISC), the FRC and the FSA should play a larger role in promoting such enhanced engagement by owners on the basis of principles of stewardship with which fund managers should be expected to conform on a "comply or explain" basis". Richard Saunders, chief executive of the IMA, explained: "We question, however, the recommendation that the FSA should encourage commitment to the Principle s of Stewardship as best practice. This is not an appropriate part of the process of FSA authorisation. An investment manager's duties are to the client. Managers take a wide range of different approaches to managing money, some involving active engagement with the companies in which they invest, some not. We do not believe the regulator should get involved in what is the best way to manage money. That should be between the manager and the client, and the authorities should not become involved.

- Pensions Age July 2009

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