Walker’s way: evolution, not revolution

WHENEVER anything goes wrong in British business, governments wheel out the corporate governance experts. Most of the time, this achieves absolutely nothing. Yesterday’s report by Sir David Walker, which is far from revolutionary, will achieve some – but not much – good. There are two main reasons why Walker won’t satisfy the ridiculously high ambitions set out for him by the government, namely making it much less likely we suffer another boom and bust.

First, contrary to the received wisdom, the credit crunch wasn’t primarily caused by a problem in the way corporate boards work – rather, it was the result of massive macroeconomic and policy failures combined with a series of gross intellectual errors shared by virtually the entire international political and financial establishment. Giving more power to non-executives, one of Walker’s ideas, would make no difference if all senior City types continue to think alike – especially if non-bankers are gradually forced off boards and all non-execs are drawn from a small pool of talent.

Second, the main governance problem is not the detailed composition of boards or directorships or even bonuses – it is that unless a system is found to make PLC shareholders behave more like hands-on owners, managers will continue to run riot. Walker does propose a way to help shareholders work together by signing a memorandum of understanding on how to deal with problems at a firm. This hardly goes far enough, however; Walker should have stuck to his original idea of a “standing secretariat” of large investors. The truth is that nobody has worked out how to make PLCs operate more like private equity firms, where owners exercise real, immediate control over managers. And I doubt Walker’s proposals would have halted RBS’s bid for ABN Amro.

Yet some of the changes proposed are positive; and crucially, none seem too damaging. Contrary to what many have suggested, there are no caps on pay. Bonuses could surge to even more elevated heights over the next few years; but they will be based on longer-term criteria, involve more equity and less cash and hence be more sustainable. One worry: if we move too far ahead of other jurisdictions, UK banks will have to pay even higher compensation to prevent a brain drain. And equity-based bonuses are no panacea: executives at Lehman were routinely compensated in that manner and it did nothing to prevent catastrophe. Banks will have to publish data on how many non-board high earners they have, a headline-grabbing move of no real substance. It makes sense for chairmen to be elected annually; it makes sense for remuneration committees to monitor the pay of top earners who are not on the board. Barclays already makes sure its board approves all packages for traders above £500,000. In fact, several Walker proposals appear to endorse measures long since adopted by Barclays, including the creation of a powerful chief risk officer role.

The danger, paradoxically, is an excessive crackdown on executive powers: if CEOs are so hamstrung that they cannot move fast or take sensible risks, and spend all of their time fighting counterweights seeking to cover their backsides, banks will become excessively bureaucratic. On balance, however, this is a sensible report which may even improve the performance of UK banks over the next decade.