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July 24, 2009

Report Calls for Effective Board Oversight of Risk Exposure and Exercise of Shareowner Responsibilities
    by Robert Kropp

UK report identifies excessive risk taking by financial industries as significant factor in the financial crisis, and provides recommendations for boards and institutional shareowners to prevent recurrence. -- Asked by the UK government to analyze the failures of the banking industry and related financial industries in the wake of the financial crisis, Sir David Walker, currently a senior advisor to Morgan Stanley, produced a 90-page consultation document that includes a raft of recommendations for boards of directors and institutional shareowners.

The report, entitled A Review of Corporate Governance in UK banks and Other Financial Industry Entities, finds that "Weaknesses in risk management, board quality and practice, control of remuneration, and in the exercise of ownership rights" all contributed to excessive risk taking leading up to the onset of the crisis.

The report provides numerous recommendations pertaining to the composition and functioning of corporate boards of directors in financial industries. The Financial Services Authority (FSA), which regulates the financial services industry in the UK, "should give closer attention to both the overall balance of the board in relation to the risk strategy of the business and take into account the relevant experience and other qualities of individual directors."

Board members "should be ready, able and encouraged to challenge and test proposals on strategy put forward by the executive." Boards should conduct formal and rigorous evaluations of their performance on a regular basis, and publish the evaluations in a special section of corporate annual reports. Additionally, boards "should establish a board risk committee separately from the audit committee with responsibility for oversight and advice to the board on the current risk exposures of the entity and future risk strategy."

The report also includes a number of recommendations directed to institutional shareowners. It recommends that proxy voting power should be exercised, that voting records by fund managers and other institutional investors should be disclosed, and that proxy voting policies should be publicly available.

The report also recommends that the Statement of Principles, developed by the Institutional Shareholders' Committee, be ratified as a matter of best practice by the Financial Reporting Council (FRC), an independent regulator responsible for promoting confidence in corporate governance and reporting.

The Statement of Principles calls for the setting out of policies for the discharge of shareowner responsibilities, the monitoring by shareowners of corporate performance, and intervention by shareowners when necessary. According to the report, the Statement of Principles should form the core of a new Principles of Stewardship to provide guidance for institutional investors.

Fund managers and other institutional investors should indicate on their web sites their commitment to the Principles of Stewardship.

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