The long-awaited review of UK corporate governance by Sir David Walker, former chairman of Morgan Stanley, has proposed a raft of recommendations including a requirement for fund managers to reveal whether they have a policy on engagement with investee companies under a set of Principles of Stewardship. The review says the Principles would also oblige fund managers to vote their shares and then disclose their voting record. Commissioned by UK Prime Minister Gordon Brown in February this year in response to the UK banking crisis, the review also proposes to reach out to foreign long-only investors with significant UK investment holdings such as sovereign wealth funds to commit to the Principles and to a further memorandum of understanding outlining best practice for any collective investor lobbying of corporates. Walker said the financial services industry and other stakeholders would have a three-month response period to comment before the review is prepared for legislation. Stretching the UK’s governance comply-or-explain regime, Walker said fund managers without a governance policy would have to make it clear to investors if and why they don’t. When they do, fund managers should confirm that mandates from life assurance, pension fund and other major clients include provisions in support of engagement activity and how they will fulfill their commitment to the Principles.In another major initiative, Walker proposed that oversight of UK institutional investor governance issues should be handled as a separate entity from that of corporates by the independent Financial Reporting Council (FRC), and not as at present by investors themselves through the Institutional Shareholders Committee, jointly run by the Association of British Insurers, the Association of Investment Companies, the Investment Management Association and the National Association of Pension Funds. He said this new dual role of the FRC should be clarified by differentiating between the new Principles of Stewardships and the existing Combined Code, which he said should now be described as the Corporate Governance Code.
Walker said the recommendations reflected a need for fund managers and other major shareholders to engage more productively with investee companies to support long-term improvement in performance. In the event that investors are involved in wholesale selling of a company’s shares, Walker also said that company boards should ensure they are made aware of material changes in the share register, understand as far as possible the reasons for changes to the register and satisfy themselves that they have taken steps, if any are required, to respond. The wide-ranging Walker Report has 39 recommendations, of which 12 are dedicated to
board and employee pay, notably in banks. He was initially asked to focus his attention on the banking sector before his remit was broadened to corporate governance more generally by the UK Treasury. Other proposals aim to clarify the responsibility of boards and non-executive directors, especially in their relationships with shareholders. On remuneration, Walker says he wants to see a broadening of the remit of the remuneration committee to look at pay policies across the whole bank rather just the board, in particular staff such as traders whose pay exceeds the median level of executive directors. Another proposal isthat pay should be clearly linked to performance and bonuses staggered over five years. The report also outlines the creation of a new role of chief risk officer and a risk committee at banks. In addition, it says the chair of the remuneration committee should automatically stand for re-election if more than 25% of investors vote against the annual remuneration report.
Link to Walker review