7.1.6 Walker Committee and Financial Reporting Council

After the financial crisis of 2008 the prime minister of the United Kingdom asked a committee, chaired by David Walker, to review the corporate governance of UK banks (Walker Committee 2009: 6). The consultation document generated 180 written responses, which are included in the final report that was presented in November 2009. The Walker Committee formulated 39 recommendations about different corporate governance issues, primarily focused on banks. In the same period, the Financial Reporting Council (FRC) published its review of the Combined Code. The FRC proposed adopting the recommendations of the Walker Report in the Combined Code, because the recommendations of the Walker Committee are – according to the FRC, based on consultation – appropriate to all listed companies (Financial Reporting Council 2009: 2).

The views of both reports are very critical with respect to independence, because there had been too much emphasis on independence in the past. ‘Relevant expertise has been lost due to changes in the non-executive element of boards (because the independence criteria in Provision A.3.1 have been interpreted too mechanistically) and that executive directors have been removed from boards in order to keep them to a manageable size’ (Financial Reporting Council 2009: 3.13). It is not clear whether this decrease in the number of executive directors and the increase in the number of NEDs is the result of the code provisions prescribing a board of which at least fifty per cent consists of independent NEDs. Research shows that prior to the introduction of this code provision in 2003 a majority of the boards already fulfilled this requirement (3.15). Some reactions in the consultation period speculated that the movement towards more independent NEDs is the result of code provisions prescribing the staffing of board committees with independent NEDs (3.16).

According to the FRC, companies have focused on the independence of NEDs and not on other merits of the members of the board. This was not the intention of the provision in the Combined Code (3.17). Therefore, the FRC report proposes including in the Combined Code that ‘the board and its committees should consist of directors with the appropriate balance of skills, experience, independence and knowledge of the company to enable it to discharge its duties and responsibilities effectively’ (3.18). Moreover, the FRC recommends that ‘the principles in the Combined Code should be revised to stress the need for an appropriate balance of skills, experience and independence and for candidates for board appointments to be drawn from a broad talent pool’ (Financial

Reporting Council 2009: 17). The report adds that if companies think that a particular code provision undermines their ability to meet certain principles, they should not comply with them and give a thorough explanation to the shareholders.

The Walker Committee agrees with the view of the FRC that the results of stricter independence regulation lead to movements as have been observed (Walker Committee 2009: 3.9). The Walker Report recommends a good balance between executive directors and NEDs, in order to prevent companies from having boards with only one CEO, one CFO and NEDs, like in the United States, Canada and Australia (Walker Committee 2009: 3.4). On such boards, the CEO and CFO have a very strong position in controlling information flows in and from the board.

Other recommendations with respect to independence are not made by the Walker Committee or by the FRC. Their views on issues regarding independence match the view of the Higgs Committee. The reports of the Walker Committee and the FRC ultimately led to the publication of the UK Corporate Governance Code (UKCGC) in June 2010. The UKCGC is divided into five sections, which deal with (1) leadership, (2) effectiveness, (3) accountability, (4) remuneration, and (5) relationships with shareholders. This means that the FRC ceased applying the division into two parts: company and institutional shareholders. The UKCGC has formulated eighteen main principles, distributed over the subjects of the five sections. The five different sections elaborate on these main principles with supporting principles and code provisions. The next section describes the UKCGC.