Back in the summer, when Sir David Walker published the draft version of his review of corporate governance at financial services companies, hard-nosed bankers laid into the bureaucracy and populism that they said underpinned his recommendations.
With a few tweaks, those reforms are today being toughened into formal proposals – with a plan for some guidelines to be backed up with legislative powers.
The “dead hand of bureaucracy” that one senior banker said he feared in July would be the result of the proposals may still be a danger, as Sir David beats no retreat on the principle that banks should have board-level risk and remuneration committees, which should probe all bankers’ pay structures.
But most senior figures on Wednesday applauded the proposals. Colin Grassie, chief executive of Deutsche Bank in the UK, says: “The quality and depth of knowledge on bank boards needs to be better than has been the case in the past. And the Walker recommendations are a significant step towards that,”.
A senior non-executive director at another bank agrees. “There are a lot of good things in it. Walker’s fundamental analysis is that the financial crisis was not a failure of regulation but a failure of behaviour.”
John Liver, a partner in regulation and risk management at Ernst & Young, praises a change in tone between the draft and final reports. “It is less prescriptive and that is helpful. He has listened to feedback.”
The greater flexibility applies, in particular, to Sir David’s stance on the number of days – originally 30 to 36 – that he said bank non-executives should devote to their role. For chief executives of other companies, the requirement could now be less, he says.
There was relief, too, that the report does not extend its recommendations on pay disclosure – particularly that banks will not be required to identify top earners by name, as is the case for US boards. Instead Sir David sticks with his view that banks should publish the numbers of staff earning above certain pay bands. “Naming and shaming was a big concern,” says one US banker. “But disclosure in bands is fine.”
Jon Terry, head of remuneration practices at PwC, also supports Sir David’s recommendation. “With named disclosure there could be unintended consequences such as the racheting up of pay. Banded disclosure will provide information to stakeholders that is useful.”
However, one senior banker argues that even banding poses problems. “This is a political distraction. Our willingness to comply will depend on how far the principle is applied to other industries.”
As a measure of how controversial the pay requirements are likely to be, Sir David says he has asked the government to include the pay disclosures requirement in its legislative proposals to ensure that all UK banks and UK subsidiaries of
global banks follow his strictures.
However, branch offices of European institutions, such as BNP, Société Générale and Deutsche Bank, will not be covered.
If banks were offered the ordinary option of being required to “comply or explain” why they were not following the rules, “they would all want to explain that the recommendation is too broad and makes them uncompetitive,” Sir David says, adding that he expects the rules to “cause howls of outrage” from bankers.
Industry groups and practitioners largely praise the plan to elevate risk to board level. “I think it might have helped boards avoid mistakes,” says Mark Wippell, senior corporate partner at Allen & Overy.
But William Lawes, partner at Freshfields, warns that a separate risk committee could change the focus of board members. “While managing risk is what banks do, and some have to do it better, Walker has to be careful his risk committee recommendations don’t split boards,” he says.
Some bankers worry that the very elevation of risk committees could paradoxically de-prioritise the issue.
“The real danger is if a chief executive or a board thinks risk is an issue only for a risk committee,” says one risk committee chairman. “Risk has to be a fundamental part of any board’s view of life.”