Investors await Kay Review into long-term decisions making and markets

Fiduciary duty a possible area of focus

The UK government has confirmed that the Kay Review into equity markets and long-term decision making – one of the most keenly awaited consultations for years – is expected to publish its interim report tomorrow (February 29).

Headed by respected economist and commentator Professor John Kay, the review was commissioned by the government last year as part of a raft of consultations triggered by the financial crisis.

It will come as issues like executive pay and boardroom diversity have broken into mainstream discourse.

It’s understood that the review will initially stick to identifying problems that need fixing and won’t be making recommendations at this stage. The review will be followed by a further round of consultation with a final report expected in July.

Kay’s panel comprises Sir John Rose, former chief executive of Rolls-Royce, James Anderson, Partner and Manager at Edinburgh-based fund manager Baillie Gifford, and Chris Hitchen, CEO of the Railways Pension Trustee Company and former Chairman of the UK National Association of Pension Funds.

One area of focus for the report is expected to be the role of fiduciary duty in investment decision-making. It’s been argued that a misinterpretation of the concept has prompted investors to focus too much on short-term investment gains. Link

Ahead of the publication of the review, Hermes Equity Ownership Services, the stewardship service that’sowned by the BT Pension Scheme, called on the government to respond to Kay by issuing guidance on the interpretation of fiduciary duty.

Hermes said it needs to be considered from a longer-term perspective – “leading to less value lost through excessive transactions and more gained through good stewardship”.

It argues that the explosion in market volatility has created a negative cycle – reducing long-term investment in companies’ shares and promoting an increasingly short-term approach by institutional investors.

Robert Talbut, the investment chief at £40bn (€47.3bn) fund managers Royal London Asset Management who recently took over as chairman of the Association of British Insurers’ Investment Committee, reckons Kay is likely to be interested in how to boost company performance and the impact of the unintended consequences of regulatory change over the past 35 years. “I think that he will want to talk about how do we raise sustainable business performance and what role shareholders should play in that,” he told RI.

Talbut also thinks Kay will look at the investment chain and ask if there is too much “rent” being extracted.

Kay himself has stressed that the review is about corporate decision making and corporate performance, not corporate governance. “We will be concerned with actions and effects.”