Tuesday, August 03, 2010

Sir David Walker Espouses Board Risk Committees and Involvement of Institutional Investors

Companies should have a board-level risk committee to advise on risk appetite and tolerance as core elements in the firm’s strategy, according to corporate governance guru Sir David Walker. In an important address to the Cambridge Judge Business School, Sir David rejected as ``seriously misconceived’’ the argument that risk matters should be left to executive risk committees because non-executive board members cannot be expected to master the complexities of a large firm. He is not suggesting that the board risk committee be given large doses of granular risk data. The risk committee should appoint an expert chief risk officer capable of presenting risk issues to the board in a thematic way. Further, while financial firms will especially benefit from a risk committee, non-financial companies could also benefit, particularly in the M&A area. In 2009, Sir David released the seminal Walker Report on Corporate Governance.

Sir David also said that institutional investors need to be more attentive to corporate governance issues. He recommends that fund managers clearly disclose their business model and whether they commit to the new code of conduct for institutional investors. The code emphasizes that fund managers must monitor their investee companies and stand ready to escalate their individual, and if needs be their collective activities, to protect shareholder value.

The code asks institutional investors to satisfy themselves that the investee company’s board and committee structures are effective, and that independent directors provide adequate oversight. Institutional investors should also set out the circumstances when they will actively intervene. Under the code, instances when institutional investors may want to intervene include when they have concerns about the company’s strategy and performance, its governance or its approach to the risks arising from social and environmental matters.

Sir David also emphasized that institutional investors must become better stewards of their investee companies and support well-composed and well-run boards with assurances that long-term value creation strategies will be supported. At the same time, Sir David sees a role for short-term activism when hedge funds and private equity funds face a misdirected or sclerotic board.