Compensation & Benefits: The post-Walker corporate governance environment

January 3, 2010

Governance needs to be brought “back to centre stage” but will not
be achieved through “box-ticking conformity”

So stated the final recommendations of the Walker report published
in November 2009.


As reported in our article dated 9 November (see link in Resources
below), there has been much ongoing debate and discussion regarding
corporate governance in listed companies in both the banking and
financial institutions and non-financial services sectors.

Sir David explained that, in his view, “the fundamental change
needed is to make the boardroom a more challenging environment that it
has often been in the past”.  However, in making his recommendations,
Sir David noted that “overly-specific prescription that generates
box-ticking conformity” does not guarantee effective corporate
governance, confirming that this is still reliant on “the abilities and
experience of individuals”.  There remains a need for “judgement and
appropriate flexibility” within any prescriptive parameters which are

Sir David advocated “early preventative medicine through shareholder
engagement” and recommended that the remit of the FRC should be
extended to include responsibility for developing a Stewardship Code,
which would place a ‘stewardship’ duty on institutional investors and
fund managers, encouraging them to take a more active management role in
the business in which they invest.

Furthermore, the final report proposed for many of its
recommendations to be implemented by being included in a revised
Combined Code.

The FRC has now published its final report in this area, indicating
that it has found no evidence of “serious failings in the governance of
business outside the banking sector”. It has also commenced separate
consultations on its proposals to revise the Combined Code and the
introduction of a new Stewardship Code, resulting from the
recommendations of the Walker review (see link to article in Resources

Furthermore, in a formal acknowledgement of the new risk agenda
currently emerging, the Association of British Insurers has amended its
guidelines and released a new position paper which is intended to assist
remuneration committees to “understand how shareholders expect”
companies to apply these in “current conditions” (see link to article in
Resources below).

Detail of the recommendations

Remuneration and Incentives

The report notes that “substantial enhancement” is required in board
level review and monitoring of remuneration policies and issues.  Such
enhancement would be achieved through a board remuneration committee
setting “over-arching principles and parameters” of the remuneration
policy throughout the company.

In addition, this committee should have responsibility for
remuneration issues for all senior employees (whether at board level or
otherwise) with any potential or actual influence on the risk profile of
the company (referred to in the report as “high end” employees).

“High end” employees are those who either undertake a “significant
influence function” in the company or whose activities will or may have a
“material impact on the risk profile” of the company.

In using these terms, the report cross refers to the FSA Handbook
and Remuneration Code.

The executive summary of the report notes that a function of the
remuneration committee should be to ensure that “remuneration structures
for all such “high end” employees are appropriately aligned with the
medium and longer-term risk appetite and strategy” of the company.

One element of this would be to ensure that “high end” employees
maintain a shareholding in the company.

In addition, vesting of unvested share awards should not be
permitted as a matter of course if high end employees leave employment.

Disclosure of levels of remuneration of £1 million

Furthermore, the report recommends disclosure of remuneration for
“high end” individuals earning £1 million or more.  The proposal is for
disclosure to remain anonymous but to be done by reference to salary
bands.  Disclosure should indicate salary, bonuses, deferred shares, any
performance related long term awards and pension contributions.

It is likely that this disclosure requirement will be put on a
statutory footing in due course, having been included in the Financial
Services Bill, introduced on 19 November 2009 and currently progressing
through Parliament.

Limits on and deferral of incentive payments

At least half of variable pay per year should be in the form a long
term incentive award which is subject to a performance condition.  Half
of such an award should vest only after at least three years, with the
balance after five years.

All short term bonuses should be paid over three years, with two
thirds of these bonuses being deferred.

Remuneration committees should also be required to disclose on a
“comply or explain” basis whether the company’s remuneration policy for
“high end” employees satisfies these criteria.

Claw back should be available in “circumstances of misstatement and

Other recommendations in overview


‘FRC issues final report’

‘ABI- new executive remuneration practices’

 ‘Corporate Governance – what now for listed
non-financial services companies?’

 ‘Report published on risk governance in non-financial
service companies’


For further information or to discuss the issues
raised, please contact Guy Abbiss (
or Libs Davies (
on +44 (0) 203 051 5711.


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