UK: the FSA's annual report 2009/10

The Financial Services Authority has published its 2009/10 annual report: see here (pdf). Whether this will be the last report from the FSA as it is currently organised should become clear (or clearer) this month. The emergency budget on June 22 provides a good opportunity for plans to be published but the Financial Times newspaper suggests (here) that proposals may be published next week.

Meanwhile, the report provides an overview of the FSA's actions in the past year. There is a section titled "Corporate governance and Significant Influence Functions" which states:

As part of our supervisory enhancement programme,we now place much greater emphasis on the role of senior management at firms ... in 2009/10 we completed 377 cases involving a significant influence function (SIF) interview where 27 were withdrawn by the firms concerned ...

On governance more widely, in November 2009 Sir David Walker completed his Treasury-commissioned review of corporate governance in banks and other financial industry entities; our proposals in the January [Consultation Paper] cover the FSA-specific recommendations in the review. Sir David’s recommendations address many current governance concerns and, as we have said publicly, we intend to play our part in supporting their delivery alongside the Financial Reporting Council (FRC) and work in relation to the Corporate Governance Code (formerly the Combined Code)".

UK: annual election for directors?

Ahead of the publication of the UK's revised Corporate Governance Code next week, today's Daily Telegraph newspaper reports - see here - that the Financial Reporting Council has decided that the Code should require the entire board to face annual election by shareholders.

The newspaper also reports that in a lecture given last night, Sir David Walker stated that he now supported the annual election of the whole board. In his recent report concerning bank governance (here, pdf), Sir David recommended that the chairman should face annual election, with the board keeping "under review the possibility of transitioning to annual election of all board members".

Europe: Governance Forum publications

Last week the European Corporate Governance Forum published two documents: its 2009 annual report (here, pdf) and the minutes of its meeting on 19 February 2010 (here, pdf). Sir David Walker attended the February meeting and spoke about his review of bank and financial institution governance; the minutes record his answers to questions from Forum members.

The minutes also provide an insight into the European Commission's forthcoming green paper on corporate governance, due to be published this month. To quote from the minutes:

As with the Walker report, some of the planned recommendations are specific for the financial services industry, others are also relevant for listed companies in general, for instance the recommendations with regard to shareholders. At this stage some recommendations are further developed than others, such as the recommendations on risk. No choices have been made yet as to whether and to what extent the recommendations should take the form of legislative measures. This will depend on the Commissioner's decision".

UK: the Financial Services Bill - second reading

The Financial Services Bill received its second reading on Monday and now proceeds to Committee stage: read the debate here. In the course of debate, the Chancellor referred to the recommendations within Sir David Walker's report on bank governance concerning the disclosure of pay within banks and stated (Hansard, 30 Nov, col 883):

Sir David made a number of recommendations, but I think that we go further than he suggested. We want to consult on regulations for narrower disclosure bands than he proposed, starting with salary packages below the £1 million floor that he suggested. We will consult on that idea, but most people are convinced that far more disclosure is important, because they will then be able to see precise remuneration practices".

UK: the Walker Review of bank governance - final recommendations published

Sir David Walker has this morning published his final recommendations following his review of the governance of banks and other financial institutions. An overview is available in the accompanying press release. Amongst Sir David's 38 recommendations are the following:

• Institutional shareholders to sign up to a Stewardship Code, sponsored by the Financial Reporting Council with compliance monitored by the Financial Services Authority (the Code on the Responsibilities of Institutional Investors prepared by the Institutional Shareholders’ Committee will become the Stewardship Code)
• Annual re-election for the chairman of the board
• The chairman of a major bank should be expected to commit a substantial proportion of his or her time, probably around two-thirds, to the business
• An expanded role for the remuneration committee with regard to firm wide remuneration policy and "high end" employees
• Disclosure, within remuneration bands, of the number of "high end" employees (including executive directors)
• Deferral of incentive payments should provide the primary risk adjustment mechanism to align rewards with sustainable performance for executive board members and “high end” employees
• If the remuneration report receives less than 75% of the votes cast the remuneration committee chair should stand for re-election in the following year
• Greater expectations placed on non-executive directors regarding time commitment and tougher scrutiny by the Financial Services Authority
• Banks should have a board level risk committee chaired by a non-executive director
• The chief risk officer should have a reporting line to the risk committee and his or her removal should require board approval

Sir David proposes that most of his recommendations should be enforced through inclusion in the Combined Code on Corporate Governance or a separate Stewardship Code for institutional investors, both of which operate on a 'comply or explain' basis. The recommendations on pay disclosure will be included in the Financial Services Bill currently before Parliament.

Related video and audio resources: Sir David discussed his recommendations on the Radio 4 Today programme this morning: listen here. The BBC News website has a short video of Sir David discussing remuneration here. A video of Sir David's appearance before the Treasury Committee, where he was questioned on his review, appears here. 

Other materials: FSA statement | FRC statement | Government statement | 

UK: Budget 2010 - financial regulation and governance

The Chancellor delivered his annual budget today and in his speech expressed support for an international systemic tax on banks. Elsewhere in the budget report there is more of interest to note. Chapter 3 of the report - titled "Reforming financial services" - mentions several company law and governance matters, many of which are likely to remain if there is a change of Government later this year. To quote directly from the report (para. 3.24-3.25 and 3.65):

Sir David Walker was commissioned by the Government in 2009 to review governance practices in the financial services sector. The Government, in collaboration with other bodies with a governance remit, will implement Sir David’s recommendations throughout 2010. Consequently, the FSA is consulting on changes to its ‘significant influence controlled functions’ regime. The Financial Reporting Council (FRC) is consulting on revisions to the Corporate Governance Code, and separately on the adoption and coverage of a Stewardship Code for investors. As part of the development of the Stewardship Code on which the FRC is currently consulting, the Government will also consider whether the existing institutional investor voting disclosure regime should become mandatory as provided for in section 1277 of the Companies Act 2006.

On 10 March 2010 the Government published draft Regulations to require enhanced disclosure of remuneration in the financial services sector. After the Financial Services Bill gains Royal Assent, the Government will formally consult on those Regulations. As part of that process, and given the key role that owners should play in managing remuneration contracts, the Government will consult on whether further practical measures can be identified to facilitate the consent, by owners, of executive remuneration in the financial services sector.

The Government proposed in the 2009 Pre-Budget Report the introduction of a specific governance code for building societies and other financial mutuals. It also announced that it would consider the introduction of a regular independent review of financial mutuals’ adherence to the code. HM Treasury has commissioned a working group to take this work forward and to make recommendations to Ministers. The objectives are to ensure that an appropriate code is there for those that need it; the Walker recommendations are appropriately reflected in guidance for mutuals; there is independent input into this process; the governance and ownership characteristics of the mutual model are fully reflected in governance guidance; and the guidance provides a useful resource in promoting good governance among financial mutuals. The Government will update on the group’s work in the Pre-Budget Report".

UK: Sir David Walker appears before the Treasury Committee

Sir David Walker, who later this month will publish a final report following his review of the corporate governance of banks and other financial institutions, appears before the Treasury Committee this morning. Sir David will be answering questions about his review, as part of the Committee's broader enquiry into financial regulation. The proceedings can be watched here (the default media player is Microsoft Silverlight but the proceedings can also be watched using Windows Media Player). 

UK: submissions to the Walker Review

Submissions to the Walker Review on the governance of banks and other financial institutions have been published: see here.

UK: ICSA responds to FRC Combined Code and Walker reviews

The Institute of Chartered Secretaries and Administrators has published its response to the FRC's review of the effectiveness of the Combined Code and Sir David Walker's review of bank governance. Whilst welcoming in broad terms the work of the FRC and Sir David, ICSA makes clear that some of Sir David's recommendations should not be applied to all listed companies. For example, Sir David's seventh recommendation - the chairman should be expected to commit a substantial proportion of his or her time, probably not less than two-thirds, to the business - is described by ICSA as "too prescriptive" to apply to all listed companies.

Note: Sir David will be publishing final recommendations on November 26th. 

UK: NAPF responds to the Walker Review

The National Association of Pension Funds has published its response to Sir David Walker's review of the governance of banks and other financial institutions. NAPF comments on each of Sir David's proposals and makes this general point:

... all of the changes and innovations proposed should be designed with the object of changing the behaviour of companies and investors so that they focus more on the creation of value over the longer term. This is a complex issue and there will be many views on definition as well as the route to achieving that goal, but pension funds and their members have not been well served by the concentration in the financial sector on short term gains which have been made at the obvious expense of the longer term and at significant cost to shareholders".

Note: see here for further NAPF corporate governance publications.

UK: walker review of bank governance - PIRC response to consultation paper

Pensions Investment Research Consultants Ltd. (PIRC) has published its response to the consultation paper published by Sir David Walker as part of his review of the governance of banks and other financial institutions. 

PIRC finds the the review's recommendations, overall, to be "a useful contribution to the improvement of corporate governance in the financial sector" but adds that some recommendations would not, as they stand, change behaviour. PIRC's response reveals a preference for greater reliance on compulsory provisions as well universal principles. For example, with regard to recommendation 36 - the remuneration committee chair should stand for re-election a year after a company's remuneration report receives less than 75% of the votes cast - PIRC suggests that it would be simpler to adopt the principle of annual election for all directors. This would permit concerned shareholders to vote against the remuneration committee chair in the same year as opposing the remuneration report. 

PIRC also suggests that a limit should be set on the number of directorships that can be held: a non-executive director holding an executive directorship elsewhere should not be permitted to hold any further non-executive directorships; a non-executive director without executive responsibilities elsewhere should be permitted to hold a maximum of four non-executive directorships.

UK: IoD responds to Walker Review consultation paper

The Institute of Directors has published its response to the consultation paper published by Sir David Walker as part of his review of the governance of banks and other financial institutions. The IoD comments on each of Sir David's recommendations in its response and observes: 

Our overall observation is that the Review provides an informed and reasoned response to a number of important corporate governance issues. To its credit, it has not been unduly influenced by populist demands to overthrow the overall UK model of corporate governance (which is based on a distinctive mixture of hard and soft law) in favour of a heavily regulated approach. Equally, the Review has recognised – given the magnitude of recent governance failures – that an unthinking defence of the status quo is untenable. Reflecting this, it has made a number of significant recommendations for reform.

... In our view, a number of the Review’s recommendations – although potentially relevant to systemically important financial institutions – would not be desirable governance standards for non-financial companies (or for smaller listed and unlisted companies). Consequently, incorporation of the Review’s recommendations into the Combined Code would imply a split of the Code between provisions that apply to financial firms alone, and those that apply to all companies. This is not a step that we would support. In our view, the Combined Code should consist of high level best practice principles for all listed companies. It should not be carved-up on a sectoral basis. A move towards incorporating sectoral provisions into the Code would represent an excessively prescriptive approach to the overall corporate governance framework, and an unwarranted presumption on behalf of regulators regarding how specific industries and sectors should structure their activities".

UK: Lord Mandelson on institutional shareholders and the long-term

Lord Mandelson, the Secretary of State for the Department of Business, Innovation and Skills, has contributed a short comment article to the FT.com website titled "Britain needs investors for the long-term". In his article, Lord Mandelson states:

[Today] I am holding a roundtable discussion with senior investors, fund managers, company chairmen and chief executives to ask if London can set a new standard for high-quality, long term engagement between investors and company directors.

... In recent years the UK government has carried out a number of significant reforms to the corporate governance regime to encourage the right kind of long-termism among company directors. We need an equivalent focus on the long term among company owners, especially those represented by institutional shareholders, who should naturally take a long-term view.

... Reviews of corporate governance by Sir Christopher Hogg and Sir David Walker have started to pose the right questions about getting the right balance between the short and long term. The UK’s new Stewardship Code, on which the Financial Reporting Council is about to consult, must address them".