The earnings of star traders and deal-makers at British banks will have to be revealed even if they are not directors, under proposals for reforming the way banks are run in a report by a leading City figures.
Sir David Walker, former chairman of Morgan Stanley International, also proposed that every bank board should have a separate “risk committee”, with power to scrutinise “due diligence” examination of the financial condition of target companies ahead of big deals and if necessary block them.
Such a requirement would almost certainly have stalled Royal Bank of Scotland’s bid for ABN Amro in 2007 and Lloyds TSB’s almost equally disastrous, Government-backed takeover of HBOS.
Sir David stressed that his proposals need no primary legislation, so no parliamentary time, or political debate. They can all be incorporated in the existing “comply or explain” code on corporate governance.
If they are adopted, Bank chairmen will be expected to commit most of their working time to the job, leaving little scope for other business activities.
They would also face re-election by shareholders every year.
New non-executive directors would be grilled by “one or more senior advisers” at the Financial Services Authority to ensure that they have “the knowledge and understanding of the business to enable them to contribute effectively”.
They would be expected to spend much more time than at present on their bank directorships.
They would also have to be “ready, able and encouraged to challenge and test” strategic proposals by a bank’s executives. Sir David said: “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.”
He proposed that remuneration committees should focus on long-term rewards for high earning executives as well as directors.
At least half all bonuses and other variable pay should be deferred for up to five years. Directors would be expected to build up shareholdings in the banks they oversee worth about one year’s pay.
At the same time, fund managers and other institutional investors would be required to keep a much closer watch on banks whose shares they hold.
“Corporate governance failures were a major contributor to the financial crisis,” said Lord Myners, the Minister covering City affairs at the Treasury.
“The weaknesses in board practice, risk management, control of remuneration and exercise of ownership rights identified by the (Walker) review must be addressed.
“Board members in future must ask tougher questions of their chief executives. Shareholders must ensure that directors have the skills necessary to the tasks required.”
The report received a broad, if generally cautious welcome from the City.
One critic was John Liver at Ernst & Young. He said one challenge might be “finding the right individuals to take up and deliver the additional responsibilities for the board under much closer scrutiny from shareholders.”
Angela Knight, chief executive of the British Bankers’ Association, commented: “These proposals would effectively bring all firms’ governance up to the standards of the best and are therefore to be welcomed.”