Published for consultation on 16 July 2009, Sir David Walker’s review (the Review) of corporate governance in UK banks and other financial institutions (BOFIs) makes 39 specific recommendations to improve corporate governance. These fall into five areas:

Although the thrust of the recommendations is not a great surprise, the Review aims fundamentally to change behaviour, and has received a mixed response in the City and among commentators. It is clearly intended to be a ban on box-ticking (see box "Key proposals”). One of the main messages in the Review is the need for far greater engagement in the governance of a BOFI between the board (including in particular its non-executive directors (NEDs)) and institutional shareholders.

A number of the recommendations might be taken forward by amendments to the Combined Code on corporate governance, which is currently under review by the Financial Reporting Council (FRC). The FRC will consider to what extent the recommendations are also applicable to listed companies in other sectors, and Sir David is himself reported to have said that the contents of the Review, apart from the treatment of risk, are applicable to all companies.

The consultation on the Review will run until 1 October 2009, with conclusions in November 2009.

The Review’s recommendations focus on the role of NEDs. Given the complexities of being a NED of a large bank or financial institution, the Review recommends:

The time commitment that a NED is expected to give to the BOFI board is to rise from the current norm of around 25 days, to 30 − 36 days a year.

The stress placed on the role of NEDs continues in the recommendations for their boardroom role. NEDs should be more prepared to challenge executives, should be "ready, able and encouraged to challenge and test proposals on strategy put forward by the executive", and should satisfy themselves that board discussion and decision-taking on risk matters is based on accurate and appropriately comprehensive information.

Regarding the chairman of a BOFI, he should also be "capable and active", committed to the job by spending not less than two-thirds of his time on it, and should face annual re-election.

The Review also recommends that senior independent directors should continue to act as a check to a CEO, and be intermediaries for communication between shareholders and the CEO, in the event that this becomes difficult or inappropriate.

Regarding board performance, the recommendation is for a "formal and rigorous" internal evaluation review, although with external facilitation of this process every second or third year. The evaluation should be included in the annual report and should include such meaningful, high-level information as the board considers necessary to assist shareholders’ understanding of the main features of the evaluation process.

In summary, the Review identifies the need for the board and the FSA to communicate and engage with institutional shareholders. BOFI boards should ensure that they are made aware of any material changes in the share register, understand as far as possible the reasons for changes to the register, and that they satisfy themselves that they have taken steps (as necessary) to respond.

The FSA should also communicate with shareholders in the event of substantial change over a short period in a BOFI share register, and should be ready to contact major selling shareholders to understand their motivation for selling and to seek from the BOFI board an indication of whether and how it proposes to respond.

Broadly, the recommendation aimed at achieving greater institutional shareholder engagement is for the FRC to ratify the "statement of principles" in the Review, which sets out the responsibilities of institutional shareholders and agents. These will become "principles of stewardship".

Fund managers and other institutions authorised by the FSA to undertake investment business should then indicate on their websites their commitment to the principles of stewardship. To support this, the Review recommends that the FSA should encourage commitment to the principles of stewardship as a matter of best practice and as part of its authorisation process, and that it should require clear disclosure of such commitment on a "comply or explain" basis.

Final recommendations for institutional shareholder engagement are for:

The recommendations on shareholder engagement are interesting, but the Review admits that UK long-only fund managers are only one part of the equation these days. The challenge will be to encourage sovereign wealth funds and others to engage in the process. Traders may not be particularly involved.

The Review's main recommendation is for the establishment of a board risk committee, separate from the audit committee, chaired by a NED, and including an independent credit risk officer (CRO).

The CRO should participate in the risk management and oversight process at the highest level on an enterprise-wide basis and have a status of total independence from individual business units. Alongside an internal reporting line to the chief executive or finance director, the CRO should report to the board risk committee, with direct access to the chairman of the committee in the event of need.

The risk committee should, as a matter of good practice, have the power to scrutinise important transactions, drawing on external advice where appropriate and available, and, if necessary, should be able to block them. The report of the board risk committee should be included as a separate report within the annual report and accounts.

There has been a great deal of recent comment about capital and liquidity but this will not be enough without effective direction. In this respect, it is encouraging that the Review recognises that strategy and risk are intertwined, so that risk-assessment must be a matter for the board, just as strategy is. CROs will welcome this but NEDS should too. They should get better access to the right information, some of which may, in the past, have been buried in internal capital assessments.

In relation to remuneration, the Review focuses on structure, deferral, performance and disclosure. The main points on remuneration include:

The Review recognises that the time commitment of chairmen and NEDs is bound to increase as a result of implementing the recommendations and that, correspondingly, their fees are likely to increase significantly.