On 22 June 2011, the government launched an independent review of the effect of UK equity markets on the competitiveness of UK business.
The review should further develop thoughts emerging from the call for evidence "A long-term focus for corporate Britain", the review launched by Vince Cable last year, and the wider developments in the market leading to the Stewardship Code.
The terms of reference for the review are as follows: to examine the mechanisms of corporate control and accountability provided by UK equity markets and their impact on the long-term competitive performance of UK businesses, and to make recommendations.
This will include the following areas:
- whether the timescales considered by boards and senior management in evaluating corporate risks and opportunities, and by institutional shareholders and fund managers in making investment and governance decisions, match the time horizons of the underlying beneficiaries
- how to ensure that shareholders and their agents give sufficient emphasis to the underlying competitive strengths of the individual companies in which they invest
- whether the current functioning of equity markets gives sufficient encouragement to boards to focus on the long-term development of their business
- whether government policies directly relevant to individual quoted companies (such as regulation and procurement) sufficiently encourage boards to focus on the long-term development of their business
- whether government policies directly relevant to institutional shareholders and fund managers promote long-term time horizons and effective collective engagement
- whether the current legal duties and responsibilities of asset owners and fund managers, and the fee and pay structures in the investment chain, are consistent with asset owners' long-term objectives
- whether there is sufficient transparency in the activities of fund managers, clients and their advisers, and companies themselves, and in the relationships between them
- the quality of engagement between institutional investors and fund managers and UK quoted companies, and the importance attached to such engagement, building on the success of the Stewardship Code
- the impact of greater fragmentation and internationalisation of UK share ownership, and other developments in global equity markets, on the quality of engagement between shareholders and quoted companies
- likely trends in international investment and in the international regulatory framework, and their possible long-term impact on UK equity markets and UK businesses.
John Kay is a Fellow of St John's College, Oxford and a Visiting Professor of Economics at the London School of Economics and a popular business author. His recent book, Obliquity: Why our goals are best achieved indirectly, suggests that the most profitable businesses are those which pursue their business, not financial profits, aggressively. That, at least, would be a welcome message for boards wanting to get on with running and developing their businesses, rather than tackling more regulatory change.
The review is likely to be of particular significance to fund managers and other intermediaries.
Details of the review are available here.