It is hardly surprising that corporate governance should come under scrutiny in the wake of the experience of critical loss and failure throughout the banking sector. Now Sir David Walker has published his final recommendations and the Financial Reporting Council (FRC) has reported on its review of the Combined Code and it is possible to see some changes in emphasis and practise. But there is still uncertainty about how the changes will be put into practise and their effect. Although remuneration was the main focus of attention when the Walker Report was published, it deserves an article to itself and this article looks at some of the other trends and unanswered issues.

Investor engagement

Institutional investors can play an important role improving corporate governance. However, there was considerable comment on the proposals originally put forward to encourage engagement and how these fitted with fund managers' fiduciary duties to clients and various requirements which affect collective action. It is now proposed that the Code prepared by the Institutional Shareholders' Committee should become a 'Stewardship Code'. The FRC will consult on whether this can be operated efficiently before taking responsibility for it. Institutions and fund managers will need to say if they will commit to the code on a comply or explain basis. Walker recognises the challenges to effective engagement but indicates where he thinks fund managers should focus their initiatives, including strategy, performance and leadership.

Walker wants only long-term shareholders and fund managers to commit more resources to the chairman, better communications with corporate brokers and collaboration with other shareholders where there are shared concerns. He recommends that the Financial Services Authority (FSA) review whether regulatory impediments to engagement can be minimised. He is also keen to encourage non-UK investors to follow the Code, although regulatory concerns outside the UK may also pose challenges.

Similarly, from the company's perspective there is encouragement from the FRC to achieve better dialogue between companies and shareholders. The FRC has said it will consider options to produce practical guidance on good practise engagement. Both sides will want to avoid incurring unnecessary costs without an obvious benefit.

Boardroom behaviour and non-executive directors

Walker concludes that boardroom behaviour, particularly the lack of sufficient challenge by non-executive directors, contributed to the crisis. He hopes his proposals for better training and advice, a bigger time commitment, the chairman exercising strong leadership skills and non-executive directors more actively challenging the role of the executive will all encourage the right approach. For banks and other financial institutions, he stresses the importance of experience in the financial industry – even if this means the board does not have 50% independent directors. The FRC is also proposing to make an appropriate balance of skills, experience and independence on the board more important than 50% independent directors.

The FRC wants to refocus on the principles, with new principles on the roles of the chairman and non-executive directors, board composition and directors' commitment (although no minimum is proposed). There is no requirement for a separate board risk committee, although Walker requires one for FTSE 100 banks and life insurers. The FRC is also encouraging a greater focus on defining the company's risk appetite and tolerance, board behaviours, better training and support. The hope is that this should reduce a box-ticking approach and encourage boards to think deeply about how they approach their role.

Next steps

The FRC is consulting on changes to what will become the UK Corporate Governance Code and the FSA and Government will need to implement some Walker recommendations. But the real question is whether companies and shareholders can find better ways to engage.

Vanessa Knapp is a principal consultant at Freshfields Bruckhaus Deringer.