E&Y comments on Walker review

The publication of the Walker review into corporate governance and risk management within banks will dictate much stricter standards for boardrooms, said Ernst & Young.

John Liver, regulatory and risk management partner at Ernst & Young, commented: ‘Walker’s review of corporate governance and risk management will crystallise much more rigorous standards for boards looking to adapt to the new demands and expectations of shareholders and the general public alike.’

What follows is a summary of Liver's comments on the implications of the review.

Raising the bar even further

‘Board directors of financial institutions will be facing greater responsibilities to provide transparency and demonstrate that they are effective at managing risks, particularly their approach to and governance arrangements for managing the risks to the current and future strategy of the institution.’

‘Many of the new proposals represent an evolution of good practice – but the challenge will be in finding the right individuals to take up and deliver the additional responsibilities for the board under much closer scrutiny from shareholders.’

Risk committee to have explicit input to the firm’s remuneration policy

“The challenge will be in finding the right individuals to take up and deliver the additional responsibilities for the board.

John Liver, regulatory and risk management partner at Ernst & Young.

‘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.’

Institutions will need to find non-execs with ‘substantial financial experience’ to chair and contribute to board risk committees

‘Clearly, risk management responsibility rests with the Board – Walker is not suggesting that this changes. But by recommending a dedicated forum for discussions and challenge on risk management, Walker is rightly responding to the call for clearer and stronger governance of risk management. Such active non-executive oversight of risk management should provide for improved transparency and accountability to stakeholders around the decisions and steps being taken to manage risks.’

‘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.’

Increased transparency and disclosures

‘For confidence in the governance of risk to improve, there needs to be a close relationship between boards and shareholders. If shareholders are seen as important ‘stewards’ of companies, they need to be furnished with information that allows them to assess the effectiveness of boards in managing risks of the future strategy. There are benefits of a separate risk report that focuses on the forward looking aspects of the risk management framework and governance arrangements in the context of the corporate strategy. If pitched at the right level, such a report would be a welcome addition to the disclosures already made by companies.’