Following his review of investment in the UK equity markets and its impact on the long-term performance and governance of UK quoted companies, Professor Kay published his final report on 23 July 2012. The report considers that the underlying problem in UK equity markets is the current culture of short-termism, driven largely by an increasing lack of trust together with poorly aligned incentives within the investment chain. Professor Kay’s recommendations, addressed to the Government and other concerned parties, include the following:

  • the Stewardship Code should be expanded to include a more far-reaching model of stewardship, covering strategic matters as well as questions of corporate governance;
  • company directors, asset managers and asset holders should adopt the Good Practice Statements set out in the Kay report in order promote stewardship and long-term decision making;
  • regulators and industry groups should ensure that existing standards, guidance and codes of practice reflect the Good Practice Statements;
  • an investors’ forum should be set up to encourage and facilitate collective engagement by investors in UK companies;
  • companies should:
    • consult their major long-term investors over significant board appointments;
    • refrain from the process of managing short term earnings expectations and announcements;
    • structure directors’ remuneration to link incentives to sustainable long-term business performance;
    • provide long-term performance incentives for directors by way only of the grant of company shares which should be held, at least, until after the director has retired from the business;
  • asset management firms should:
    • make full disclosure of all costs and performance fees charged to the fund;
    • structure managers’ remuneration to align the interests of asset managers with those of their clients;
    • avoid linking managers’ pay to the short- term performance of the investment fund or asset management firm;
    • offer a long-term performance incentive in the form of an interest in the fund to be held, at least, until the manager ceases to be responsible for that fund; and
  • the Government should:
    • consider the most cost effective method for individual investors to hold shares directly on an electronic register; and
    • ask the Law Commission to review the legal concept of fiduciary duty as it relates to the investment process.
  • Additional recommendations made by Professor Kay on the topic of fiduciary duties include the following:
    • the regulatory authorities should apply fiduciary standards to all relationships in the investment chain that involve discretion over the investments of others or the provision of advice on investment decisions. (The fiduciary duties should override any contractual provision to the contrary and apply whatever the category of client.); and
    • all income from stock lending should be disclosed and paid by way of rebate to investors.

The Kay Review of UK Equity Markets and Long-term Decision Making: Final Report available at:

http://www.bis.gov.uk/assets/biscore/business-law/docs/k/12-917-kay-review-of-equity-markets-final-report.pdf