The long-awaited Kay Report into economic short-termism in the markets has been published in the UK.
In June 2011, in the context of the recent years of economic turmoil, the UK government appointed Professor John Kay to carry out an independent review into economic short-termism and related issues in the UK equity markets. Following a call for evidence in September and the publication of an interim report the following February, on 23 July 2012 Professor Kay published his final report.
The final report, entitled The Kay Review of UK Equity Markets and Long-Term Decision Making, concludes that “short-termism is a problem in UK equity markets, and that the principal causes are the decline of trust and the misalignment of incentives throughout the equity investment chain”. The report identifies a number of principles which should be central to promoting a long-term perspective in UK equity markets and goes on to make a number of specific recommendations to support these principles. Among these recommendations are the following:
- The UK Stewardship Code (which is not applicable in Ireland as yet) should be developed to incorporate a more expansive form of stewardship, focussing on strategic issues as well as questions of corporate governance.
- Company directors, asset managers and asset holders should adopt “good practice statements” that promote stewardship and long-term decision-making. Regulators and industry groups should take steps to align existing standards, guidance and codes of practice with the Kay Review's Good Practice Statements.
- In relation to all significant board appointments, companies should consult their major long-term investors.
- Regulatory authorities at EU and domestic level should apply fiduciary standards to all relationships in the investment chain which involve discretion over the investments of others or advice on investment decisions.
- Asset managers should make full disclosure of all costs, including actual or estimated transaction costs and performance fees charged to the fund.
- All stock lending income should be disclosed and returned to investors.
- Mandatory IMS (quarterly reporting) obligations should no longer apply.
- The UK government and relevant regulators should commission an independent review of metrics and models employed in the investment chain to highlight their uses and limitations.
- Companies should structure directors’ remuneration so that incentives are related directly to sustainable long-term business performance. Long-term performance incentives should be provided only in the form of company shares to be held at least until after the executive has retired from the business.
For a link to the Kay Report, please click here.