The UK Government's progress report on the implementation of the Kay Report was published recently.
In July 2012 Professor Kay published a report, entitled the Kay Review of UK Equity Markets and Long-Term Decision Making, which followed an independent review into economic short-termism and related issues in the UK equity markets.
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.
The progress report published in November 2014 outlines the specific progress made in encouraging effective shareholder engagement and stewardship investing.
A number of key measures are identified in the progress report as having been achieved including:
- The Financial Reporting Council (FRC) published an updated Stewardship Code in September 2012, strengthening the emphasis on engagement on long-term company strategy, in line with the recommendation of the Kay Review;
- Evidence suggests encouraging progress in the volume and quality of stewardship and engagement, and on reporting on stewardship activity, although more progress is needed;
- Leading institutional investors have also delivered against Professor Kay’s recommendation that they create an Investor Forum to improve the amount and effectiveness of collective engagement which was a key recommendation of the Kay Review;
- There has been a positive response from both companies and investors in terms of developing good practice on stewardship and engagement, specifically, a new Stewardship Disclosure Framework, developed by the National Association of Pension Funds which encourages asset managers to clearly articulate their approaches to stewardship to their clients.
- A number of Professor Kay’s recommendations focused on improving the quality of reporting and dialogue in the investment chain to ensure that information meets the needs of those with long-term investment objectives. Part B of the report describes progress made against this goal. In particular, the review highlights the UK Government’s reforms the corporate narrative reporting framework, introduced from October 2013, to make annual reports less burdensome, more relevant, and more focused on long-term company strategy, and evidence of a positive response from companies;
- The FRC’s new guidance on narrative reporting published in June 2014;
- The removal of mandatory quarterly reporting requirements, in line with the recommendation of the Kay Review, following amendments to the EU Transparency Directive and changes to UK legislation;
- Part C considers the progress made in building trust-based relationships and aligning incentives through the investment chain, including the Government’s response to the Law Commission review into the fiduciary duties of investment intermediaries;
- The Government’s comprehensive reforms to the governance of company directors’ remuneration to boost transparency in reporting and strengthen accountability to shareholders through a binding vote, which support Professor Kay’s recommendation on company directors remuneration;
- The agreement of a new UCITS (Undertakings in Collective Investments in Transferable Securities) Directive which includes provisions to better align the remuneration of asset managers with the interests of their clients and
- The FRC’s latest revisions to the Corporate Governance Code, which reflect recent reforms to remuneration reporting and seek to encourage more genuinely long-term remuneration structures.
The progress report sets out a number of steps that the Government in the UK plans to take to continue to implement and monitor the Kay Report.