Walker Review

Sir David Walker published his final review of corporate governance in banks and other financial institutions on 26 November 2009 (the Review). This followed a period of consultation based on initial draft recommendations that were announced in July 2009.

While the Review’s final recommendations do not depart hugely from the July draft proposals, the consultation process has resulted in some notable changes, particularly in relation to the range of companies affected by certain recommendations. Just as importantly, attention will now turn to how the recommendations are implemented, by whom and when. Banks and other financial institutions should be aware of the scope of the final recommendations and the way in which they are likely to be put into practice.


While the Review focused on larger listed banks and other financial institutions (BOFIs), certain recommendations may, on implementation, filter down and affect other institutions, including life assurance companies and fund managers.1

All listed companies will be affected. A key theme of the Review (as well as the earlier draft) is that the Combined Code on Corporate Governance (the Combined Code) remains fit for purpose. The Combined Code sets out standards of good practice in corporate governance, including board composition, accountability and remuneration, and adopts a ‘comply or explain’ framework for adherence with its provisions. In December 2009 the Financial Reporting Council (the FRC) released a review of the Combined Code for consultation (see further details about implementation on p9) to allow the incorporation of Walker’s proposals.

Other recommendations, particularly in relation to institutional shareholder engagement, are likely to have a wider impact, affecting all asset managers and firms with Financial Services Authority (FSA) authorisation to undertake investment business.


HM Treasury commissioned Walker to conduct a review of and recommend measures to improve the corporate governance of UK banks, particularly with regard to risk management. The Review makes recommendations grouped into five themes:

  1. board composition and size;
  2. board function and evaluation of performance;
  3. engagement of institutional shareholders;
  4. governance of risk; and
  5. remuneration.

The Review recommends the following in relation to the key themes of risk management, investor engagement and the high-profile issue of transparency in banking sector pay.


Walker recommends that board risk committees are established in addition to the existing audit committees (for listed companies under the Combined Code). This committee would report to and advise the board on risk strategy and management issues, without there being any conflict with the other demands already placed on audit committees. It would also prepare a report on risk strategy to be included in the annual report and accounts.

A chief risk officer (CRO) should be appointed, who would be independent of individual business units, and would report both to the risk committee and the chief executive or financial director.

The draft proposals had envisaged that normally the risk committee would use external advisers ‘in challenging its analysis and assessment’, although this has been toned down to a recommendation that the committee at least consider the potential benefit of external input to its work.

Despite acknowledging in the draft review that half of FTSE 100 companies have already implemented risk committees, Walker’s recommendation to establish board risk committees remains limited in scope. It is directed only to FTSE 100 banks and life assurance companies. It is left to the FSA to consider whether other listed banks and financial insitutions should also establish board risk committees.


Walker has stressed the need for institutional investors to engage with investee companies to support long-term improvement in performance. He recommends that the Combined Code should be split into a Corporate Governance Code and a Stewardship Code. The latter would be created from the code on the responsibilities of institutional investors published by the Institutional Shareholders Committee (ISC) since the July recommendations. This code sets out best practice for institutional shareholders (including pension funds, investment trusts and other collective investment vehicles). The intention is for the Stewardship Code to be reviewed and approved by the FRC, rather than the ISC as had been anticipated in the draft recommendations.

Much wider in scope is Walker’s recommendation that all fund managers and other institutions authorised by the FSA to undertake investment business should indicate on their websites whether they commit to the Stewardship Code. In addition, they should indicate whether their mandates from major clients normally include provisions in support of engagement activity. If any fund manager or institutional investor is unable to do this, they must instead explain their alternative business model and the reasons for the position taken.

Walker does, however, stress that the Review is not saying that the stewardship model is the only form of best practice for fund managers: this was a particular concern raised in the consultation process. Instead, the emphasis is intended to be disclosure of the fund managers’ business model. If it involves active engagement, then the Stewardship Code will represent best practice. Walker appears to have abandoned the earlier suggestion that commitment to principles of stewardship might form part of the FSA authorisation process for asset managing firms.


This aspect of the Review has been subject to significant press coverage, given its perception as a significant contributing factor to the financial crisis. The remit of the remuneration committee (again required under the Combined Code) is to be expanded to cover all aspects of remuneration policy on a business-wide basis, but particularly in relation to ‘high-end’ employees. To ensure consistency with the FSA’s own Remuneration Code (published in March 2009), high-end employees are defined as those who hold a ‘significant influence function’ or whose roles have a material impact on the risk profile of the firm.

Despite calls for disclosure of salaries of high-earning individuals, Walker does not require banks to name high earners. Instead, there should be anonymous disclosure of salary packages in excess of £1m. Disclosure will be by the number of high-end employees (whether board members or not) falling into bands from £1-£2.5m, £2.5-£5m, and £5m upwards, with details provided of the main elements of salary, cash and deferred bonus, performance-related long-term awards and pension contribution. The £1m benchmark represents a shift from the earlier proposal for disclosure of pay that exceeds the median of a company’s executive directors.

Significantly, the banded disclosure of high salaries is to apply only to FTSE 100-listed banks and ‘comparable unlisted entities such as the largest building societies’. This is narrower in scope than the FSA’s Remuneration Code, which applies to a wider number of large banks and broker dealers.

For firms within the scope of the FSA Remuneration Code, Walker recommends deferral of incentive payments as the ‘primary risk adjustment mechanism to align rewards with sustainable performance’. At least half of variable remuneration for a financial year should be in the form of a long-term incentive scheme subject to a performance condition, partly after at least three years and the remainder after five years. Short-term bonus awards should be paid over three years, with no more than one third in the first year. This goes beyond the FSA Remuneration Code and Walker recommends that this deferred payment structure should be incorporated into the FSA’s 2010 review of the Remuneration Code.


Responsibility for implementing the recommendations will fall to the FRC, the FSA and the government.2

The recommendations on disclosure of remuneration will be implemented by legislation under the Financial Services Bill, currently being debated by Parliament. It is yet possible that the government may consult on stricter disclosure requirements than those in the Review. Either way, the intention is that the Bill can be enacted in time for the disclosure obligations to bite in the 2010/11 financial year.

The FRC’s December 2009 review of the Combined Code states that it intends to adopt Walker’s recommendations, which it considers (after consultation) ‘to be appropriate to all listed companies’. In particular, the Code will be renamed the Corporate Governance Code and the FRC will take responsibility for a Stewardship Code. The FRC’s consultation is open until March 2010 and the revised Code is intended to apply to the accounting period of listed companies beginning after 29 June 2010.

Timescales are likely to be more fluid for implementation by the FSA. Its Remuneration Code, supported by Walker and ‘broadly consistent with his recommendations’, came into effect on 1 January 2010 and will be subject to review later in the year. As for shareholder engagement, the FSA states that, following the FRC’s consultation on the Stewardship Code, it will consult on a rule introducing the proposed ‘comply or explain’ disclosure requirement for relevant asset management firms.


While the further review and consultation processes involving the FRC, FSA and the Financial Services Bill will inevitably result in the implementation of Walker’s recommendations being somewhat piecemeal, it is almost certain that significant changes will take place in 2010, particularly in relation to disclosure of remuneration and the FRC’s changes to the Combined Code. Further consultation is also likely to define more closely the way in which recommendations will apply to companies other than the largest BOFIs. Senior managers of companies at all levels of the financial sector would be well-advised to follow developments carefully and consider how their firms might be affected.


  1. Annex 4 of the July 2009 consultation paper lists 17 banks, financial services companies and life/non-life companies (the BOFIs) as the subject of its focus.
  2. Annex 14 of the Review lists the anticipated means of implementation for each of the recommendations.