2009-07-016

By Editor, CIR

A consultation paper on corporate governance in the UK banking industry should mean better risk control for financial institutions. Among the key recommendations in industry veteran Sir David Walker's consultation paper, published today, is that a risk committee have explicit input to remuneration policies.

Commenting on the proposals, John Liver, regulatory and risk management partner at Ernst & Young, says: "Remuneration policy was just one of a number of contributory factors, rather than a driving factor, of the financial crisis. However, involving a risk committee in evaluating and measuring of the performance of boards, in relation to the financial and reputational impact on an organisation, is a necessary and logical progression in the debate on remunerating senior executives -- this as a positive step forward in corporate governance.

"The challenge will be around placing an unambiguous definition on those risks that should be measured and then quantifying the tangible metrics by which the executive will be incentivised and assessed."

Additional board responsibilities seem inevitable under the review as the credit crunch has brought about much closer scrutiny on the part of shareholders. Good practice, indeed, but finding the right people for the job may be the challenge.

Says Liver: "For non-executives to undertake their role effectively, they will need to commit more time and either bring or access substantial financial and risk expertise and capability to assess and understand often highly complex financial risk information. In the absence of up-to-date, insightful and forward-looking risk information, it is hard to see how the non-executives could make a suitable contribution in the forum, or challenge to the Executive. For many financial institutions, the need to furnish the non-executives with such information could drive a step-change, or even a major overhaul, to their risk reporting and monitoring systems."

The remit of the review, which began in February 2009, is to examine:

-the effectiveness of risk management at board level, including the incentives in remuneration policy to manage risk effectively;
-the balance of skills, experience and independence required on the boards of UK banking institutions;
-the effectiveness of board practices and the performance of audit, risk, remuneration and nomination committees;
-the role of institutional shareholders in engaging effectively with companies and monitoring of boards; and
-whether the UK approach is consistent with international practice and how national and international best practice can be promulgated.

It will also identify where its recommendations are applicable to other financial institutions.

The second consultation period will run until 1 October, with conclusions in November 2009.

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