In September 2012, the Kay Review of UK Equity Markets and Long-Term Decision Making, was published. It concluded 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 identified a number of principles which should be central to promoting a long-term perspective in UK equity markets and made a number of specific recommendations to support these principles. Among the recommendations were 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, focusing 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 that involves 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.
Earlier this year, the UK's Business, Innovation and Skills Committee published its third Report of Session 2013/2014 on the Kay review, and on 4 November, the Government published its response to that review.
The Government sets out a summary of actions required to deliver the Kay Review in Annex A of the report which include:
- In the context of developing the Stewardship Code to emphasise that stewardship should focus on strategy as well as governance issues, the FRC is currently reviewing the implementation of the Stewardship Code and any resulting changes will be subject to consultation in the first half of 2014;
- In terms of removing mandatory quarterly reporting, the Government intends to implement the relevant sections of the revised EU Transparency Directive in the UK as soon as possible. This will involve changes to the FCA's Disclosure and Transparency Rules and a timetable will be published when the Directive comes into force;
- In terms of reforms to narrative reporting, Regulations came into force on 1 October 2013 and the FRC's guidance is expected to be finalised early in 2014;
- In terms of reforms to executive remuneration, Regulations also came into force on 1 October 2013 and this area will be kept under review; and
- In terms of a review of fiduciary duties in investment, the Law Reform Commission is due to publish a report on this in June 2014;