News story

Government responds to the Kay Review

Government sets out steps to change the culture in the UK's equity markets.

This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

22 Nov 2012

The need for a fundamental change in the culture of investment was endorsed by Business Secretary Vince Cable today, in his response to the Kay Review of UK Equity Markets.

Download the response.

Dr Cable sets out his support for Professor John Kay’s 10 Principles for Equity Markets, which focus on reversing the culture of short-termism and restoring relationships of trust and confidence in the investment chain.

The government also committed to exploring whether changes in law or regulation are needed to deliver Kay’s principles in practice. The response sets out the work which is being taken forward to deliver Kay’s recommendations, including:

  • Working with EU counterparts to end mandatory quarterly reporting and help reduce the excessive focus on short-term earnings.
  • Endorsing clear minimum standards of behaviour for all investment intermediaries to ensure they act in the long-term best interests of their clients. The Law Commission has been asked to review the legal obligations on intermediaries to take appropriate long-term factors into account. The FSA has also been asked to ensure that the regulatory framework promotes high standards of behaviour throughout the investment chain.
  • Encouraging industry to establish an Investors’ Forum to champion constructive engagement with companies.
  • Endorsing Good Practice Statements for company directors, asset managers and asset holders, which emphasise the need for trust-based relationships and advocate more collective action by institutional shareholders; better disclosure of costs in the investment chain; increased transparency and fairness in stock lending; and better alignment between pay and long-term performance.

Vince Cable said:

“Many of us feel that in the past, our public companies and investors have focused on short-term profit at the expense of long-term value. The behaviour of many banks in the run up to the financial crisis is an extreme example of this quick buck mentality, but there is clearly a wider problem.

“That’s why I asked John Kay to look at what could be done to ensure equity markets support good, long-term decision making. His insightful review calls for a shift in the culture of investment and sets a clear challenge to companies and those who invest in them.

“His agenda is an ambitious one but I am very encouraged by the level of engagement we have seen already from investors. Not only on Kay’s ideas, but through our directors’ pay and shareholder voting reforms; in addressing diversity on corporate boards and through changes to the way companies report their business strategy and results. These actions will help restore trust in markets and in the system of capitalism on which our future prosperity depends.”

Dr Cable will be launching the Government’s response in a speech at the National Association of Pension Funds’ (NAPF) Annual Conference later today.

The Kay Review

The Kay Review, published in July, presented a compelling argument for market participants to change their behaviour and make investment decisions based enhancing the performance of UK companies and supporting long-term growth, rather than maximising short-term gains.

The Government response looks in detail at each of the Kay Review’s 17 recommendations and highlights the steps being taken to deliver them, either through specific policy measures or by business and industry working together to develop good practice.

Delivering on this agenda will require a sustained commitment from Government, regulators and others. The Government will publish an update in Summer 2014 setting out the progress achieved in delivering Professor Kay’s recommendations and reporting how well companies and investors have stepped up to the plate.

Published 22 November 2012