Is a Barack Obama approach to the banks necessary here in the UK? Or does the solution lie in governance?

Barack Obama has put the running, structure and leadership of the world's largest banks firmly in the spotlight. But is such drastic change really necessary? The Walker Report would suggest what is really needed is improved governance at the UKs top banks:

• Board size, composition and qualification – the most talked about change in this area was the prescription that non-executive directors (NEDs) of major banks should be required to increase the time they spend on the company’s business to 30 to 36 days per year, and that expected time commitments should be specified in service contracts.  However, the UK unitary board structure and the Combined Code of the FRC remain fit for purpose.

• Functioning of board – it was not just NEDs who should devote more time to the bank, in Sir David’s view.  Chairmen of major banks should commit around 2/3 of their time to the business of the bank, and they should be put up for election on an annual basis.  Another key recommendation was the importance of NEDs challenging and testing proposals put forward by executive directors.  The board should also undertake a rigorous evaluation of its own performance, with external facilitation of the process at least every third year.  It was the absence of challenge by the NEDs on bank boards which had helped bring about the financial crisis.

• Institutional shareholders – Sir David recommended that the FRC be given responsibility for a new Stewardship Code, a code of best practice emphasising the importance of engagement of the institutional shareholders.  This will be based initially on the Code on the Responsibilities of Institutional Investors, prepared by the Institutional Shareholders’ Committee.

• Governance of risk – Sir David recommended that FTSE 100-listed banks or life insurance companies establish a board risk committee, and appoint a chief risk officer (CRO) to oversee risk management on a company-wide basis.  Annual reports and accounts should include a separate “risk report”.

• Remuneration – given the media furore over bankers’ bonuses over the past year, this was the area which most industry parties were watching most closely.  There were concerns that top earners of banks would be “named and shamed”.  To the relief of many in the major banks and building societies, what Sir David recommends instead is disclosure in bands of employees earning £1 million and over, with remuneration broken down into salary, cash bonus, deferred shares, performance-related long-term awards and pension contributions.  At least one half of incentive payments should be structured on a long-term basis, with half vesting after 3 years and the other half vesting after 5 years.  Executive directors and senior employees should be expected to maintain a shareholding in the company in line with the amount of their remuneration.  Clawback should be used to reclaim amounts in the event of misconduct.  Sir David suggests that these recommendations be incorporated in the FSA’s review of the Remuneration Code in 2010.