23 Jul 2012
The report recommends that there should be a much needed shift in the culture of the stock market.
It includes restoring relationships built on long term trust and confidence, and realigning incentives across the investment chain.
In his review, ‘UK equity markets and long-term decision making’ (PDF, 608 Kb) , 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, such as 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.
- 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.
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.”