Department for Business, Innovation and Skills
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Kay review sets out measures to transform UK equity markets
Restoring relationships built on long term trust and confidence and realigning incentives across the investment chain should be the basis of a much needed shift in the culture of the UK’s equity markets, according to a new independent review from Professor John Kay, published today.
In his review, ‘UK equity markets and long-term decision
making’, Professor Kay sets out a clear vision and a set of
principles to ensure that equity markets support their core
purpose of enhancing the performance of UK companies, and
providing returns to savers. The report finds that short-termism
is an underlying problem in UK equity markets, principally caused
by a misalignment of incentives within the investment chain and
the displacement of trust relationships by a culture based on
transactions and trading.
His recommendations, which are aimed at key players in UK equity
markets, as well as Government and regulators, look to:
· Improve the incentives and quality of engagement, including by
establishing an Investor Forum to foster more effective collective
engagement by investors with UK companies
· Restore relationships of trust and confidence in the investment
chain, including by applying fiduciary standards more widely
within the investment chain
· Change the culture of market participants, including by
adoption of ‘good practice statements’ by company directors, asset
managers and asset holders that promote a more expansive form of
stewardship and long-term decision making throughout the
investment chain
· Realign incentives by better relating directors’ remuneration
to long-term sustainable business performance and better aligning
asset managers’ remuneration to the interests of their clients
Launching the review, Professor Kay said:
“A lack of trust and poorly aligned incentives have helped
create a culture of short-termism in our financial markets. This
is undermining their role of supporting innovative, sustainable
long-term business performance.
“We must create cultures where business and finance can work
together to create high performing companies and earn returns for
investors on a sustainable basis. This means moving away from a
focus on short-term transactions and trading to an environment
based on long-term trust relationships. We need to broaden the
concept of stewardship through more and better cooperation between
investors and companies. We don’t want more regulation; we need to
ensure that the regulation of market structures and incentives
work properly for the real end users.
“There is no ‘magic bullet’ that will deliver these outcomes,
but the range of recommendations set out in this review will
provide a clear vision and roadmap to help us achieve a financial
world very different from our recent experience.”
Business Secretary Vince Cable said:
“This is an insightful and powerful review which describes
vividly the flaws of the UK’s financial markets and their
relationships with investors and businesses.
“Since becoming Business Secretary I have been a vocal
advocate for a new model of responsible capitalism based on
creating long-term value rather than short-term profit. Equity
markets have a vital part to play in ensuring we have well run
companies providing sustainable returns for investors. This report
is an important and timely contribution to the discussion of how
we achieve this.
“Professor Kay has set out his clear vision for a way
forward, with recommendations for government and others, and I
will consider these in depth and look forward to responding in
detail later this year.”
The Review, commissioned by Business Secretary Vince Cable in
June 2011, was established to consider how well equity markets are
achieving their core purposes: to enhance the performance of UK
companies, and to enable investors to benefit from this in returns
from equity investment. An interim report in February this year
collated the evidence gathered through extensive consultation
which was then considered by Professor Kay and his advisory board
to produce the final report released today.
Sir John Rose, a member of the review’s advisory board,
welcomed the report:
"I fully support John Kay's report. It has
clearly identified a number of factors that contribute to both
Investors and Companies taking a short term view and it has
proposed some practical mechanisms to encourage long term
investment. As importantly, it highlights the changes in attitude
that must underpin such a change."
Notes for editors
1. Copies of John Kay’s review can be found at www.bis.gov.uk/kayreview
2. The Kay Review follows on from the Department’s call for
evidence ‘A Long-Term Focus for Corporate Britain’,
launched in October 2010, which explored issues of economic
short-termism in the UK. The responses found that there was
evidence of short-termism in UK equity markets and of some agency
problems in the investment chain. A summary of responses to this
call for evidence was published in March 2011.
3. In June 2011, the Business Secretary Vince Cable asked
Professor Kay to undertake an independent review, focusing
primarily on how well UK equity markets are achieving their core
purposes:
. to enhance the performance of UK companies by
facilitating investment and enabling effective governance and
decision making in support of long-term profitability and
growth
. to enable investors to benefit from this corporate
activity in the form of returns from equity investment.
4. Professor Kay’s review was tasked to assess to what extent
equity market participants are excessively focused on short-term
outcomes to the detriment of these core purposes and what actions
might be taken to address this. It is seeking to examine the
incentives, motivations and timescales of all participants in the
equity markets – from end investors, through pension funds,
advisers, fund managers, and the markets, to company boards – and
the relationships between them.
5. Professor Kay was supported by an Advisory Board during
the review process comprising Sir John Rose, James Anderson and
Chris Hitchen.
6. The Government's economic policy objective is to
achieve 'strong, sustainable and balanced growth that is
more evenly shared across the country and between
industries.' It set four ambitions in the ‘Plan for
Growth’ (PDF 1.7MB) , published at Budget 2011:
· To create the most competitive tax system in the G20
· To make the UK the best place in Europe to start, finance and grow a business
· To encourage investment and exports as a route to a more balanced economy
· To create a more educated workforce that is the most flexible in Europe.
Work is underway across Government to achieve these ambitions,
including progress on more than 250 measures as part of the Growth
Review. Developing an Industrial Strategy gives new impetus to
this work by providing businesses, investors and the public with
more clarity about the long-term direction in which the Government
wants the economy to travel.
7. BIS's online newsroom contains the latest press notices and speeches, as well as video and images for download. It also features an up to date list of BIS press office contacts. See http://www.bis.gov.uk/newsroom for more information.
Contacts:
BIS Press Office
bispress.releases@bis.gsi.gov.uk
Nic Fearon-Low
Phone: 020 7215 5078
nic.fearonlow@bis.gsi.gov.uk