July 16 (Bloomberg) -- British banks should delay bonus payments, increase the policing powers of risk committees and bolster the responsibilities of chairmen to avert a repeat of the financial crisis, a government-commissioned report said.

Board remuneration committees should scrutinize pay at all levels in a company, and be allowed to claw back bonuses, David Walker, a former executive director at the Bank of England and ex-chairman of Morgan Stanley International, recommended in his report on corporate governance to be published today. Chief risk officers should report directly to a board committee, and a non- executive director should be given the job of overseeing risk controls, Walker said.

“There is a culture that it is not the done thing to rock the boat,” Walker said in a telephone interview. “The emphasis I am placing on challenge is of huge significance, and palpably absent in a lot of the boards that failed.”

British lawmakers are looking at ways to redesign banking regulations after the worst financial crisis since the Great Depression led the government to take over four lenders and commit 1.4 trillion pounds ($2.3 trillion) to bail out the country’s financial system. Chancellor of the Exchequer Alistair Darling asked Walker to review the link between pay and risk- taking and whether directors failed to prevent the collapse of the financial industry. Darling has said he’ll review Walker’s report before the government acts.

Government Welcome

Bank bonuses must be linked to long-term performance, Prime Minister Gordon Brown told a House of Commons committee in Westminster today.

“If it’s based on short term deal making then the system is put at risk,” he told parliamentarians. “It is only on the basis of long term performance that we can guarantee the bonus system.” Walker had made 39 recommendations in his interim report and the government supported the thrust of his paper, Brown said.

The Financial Services Authority, Britain’s markets regulator, welcomed the report and said many of the recommendations complemented its work.

“Board members in future must ask tougher questions of their chief executives,” said Treasury Minister Paul Myners in an e-mailed statement. “They need to spend far more time fulfilling their responsibilities.” The Government also planned to recommend Walker’s ideas internationally, it said.

Walker called for pay to be “balanced,” so that at least half of bonuses are awarded in long-term incentives over a three-to-five-year period, with the other half in short-term bonuses paid in three years, with not more than one-third in the first year.

‘Outrage Factor’

Banks should publish “bands” showing the compensation paid to “high end” executives who receive more than the median compensation of board members, Walker said. They would not be named, the report said.

“Banking is all about the level of risk and you have you to encourage more responsibility on a personal level, so I think targeting pay is very welcome,” said Thomas Kirchmaier, professor of management at the London School of Economics. “I don’t see immediately how publishing bankers’ pay is going to create a difference apart from an outrage factor, which I doubt is very helpful.”

Walker said his recommendations would probably be applied to all U.K.-based banks, including foreign-owned firms with operations in Britain such as Goldman Sachs Group Inc., Deutsche Bank AG and Credit Suisse AG.

Cash Bonus Ban

In the U.S., Merrill Lynch & Co.’s decision to pay $3.6 billion in bonuses last year after a government bailout, drove the U.S. to ban cash bonus payments for the top 25 employees at companies that have more than $500 million of taxpayer funds.

For other banks, Treasury Secretary Timothy Geithner has proposed a set of “broad-based principles” to encourage companies to align pay with long-term performance.

Chief executive officer’s plans for large takeovers should be scrutinized and, if necessary, blocked by a board committee chaired by a non-executive director, Walker said. The proposal comes after the government bailed out Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc.

The core objective of banks was the “successful arbitrage of risk,” Walker said, which meant that bank boards must be engaged in monitoring the lender’s actions. A chief risk officer should report to both the board’s risk committee as well as the CEO or finance director, Walker said. Chairmen of banks should have experience of working in the financial industry and sitting on a company board so they have enough authority to question and fire a CEO, Walker said.

‘Control Freak’

“If the embedding of authority, perhaps based on some early success or reputation, makes the CEO become effectively unchallengeable (and possibly a control freak), the CEO will themself be a major source of risk” and should be removed by the chairman, Walker said.

Tom McKillop and Dennis Stevenson, the former chairmen at RBS and HBOS Plc, were criticized by lawmakers for their lack of experience in running banks in February during a parliamentary investigation into the causes of the financial crisis.

Consultation on the proposals will take place between now and the end of October. A final version of the report will published in November.

To contact the reporters on this story: Andrew MacAskill in London at amacaskill@bloomberg.netJon Menon in London at jmenon1@bloomberg.net

Last Updated: July 16, 2009 06:07 EDT