UK Kay review on investor short-termism outlines public comment questions and promises “action”

John Kay, the economics professor and Financial Times columnist charged by the UK government to examine the systemic problems of short-termism in the institutional investment chain, has laid out the questions he is asking market participants to comment on as part of the review. In June, UK Business Secretary, Vince Cable, appointed Kay to produce a major report on UK equity markets and its impact on the long-term performance and governance of quoted companies. It is one of the first times a government has sought a detailed examination of issues that may be hampering institutional investors taking long-term investment decisions as providers of corporate capital. Investor short-termism has been held up as partly responsible for the global financial crisis. Kay subsequently appointed an advisory board consisting of Sir John Rose, former Chief Executive of Rolls-Royce, James Anderson, Partner and Manager at Edinburgh-based fund manager, Baillie Gifford, and Chris Hitchen, Chief Executive of the Railways Pension Trustee Company and former Chairman of the UK National Association of Pension Funds (NAPF). Launching the review today (September 15) at the NAPF in London, Kay said he was seeking to understand the “incentives, motivations and timescales of all participants in the equity markets, and how these affect the long-term performance of UK companies.”
He also underscored a desire to produce a report “concerned with actions and effects”. He said: “We will not just be discussing what new regulation might be imposed on companies and investors, but whether existing regulation may be getting in the way of the goals of a vibrant corporate sector and the achievement of strong investment returns.”
He set out ten broad questions for the review to consider, although noted that these were not exhaustive. Kay’s review aims to look along the chain of investment decisions from asset owner to advisors, investment analysts, asset managers and investee companies.One main thrust of Kay’s questions is the timescales over which equity investors seek returns based on the strategies put together by the pension schemes that hire them. The reviews asks the extent to which equity market trading is guided by fundamental corporate analysis or by short-term market trends. It also questions how the development of high frequency computerised trading affects these investment decisions. Kay is also soliciting comment on whether the legal duties (such as trust law) and responsibilities of asset owners and fund managers, as well as the fee and pay structures in the investment chain, are consistent with long-term investment objectives. Regarding asset owners, the review poses the issue of whether turnover of asset managers is making it difficult for the latter to take a long term view of investee companies, and how advisory and fund manager fees and performance measurement impacts this also. Respondents can also comment on the quality of engagement between institutional investors and companies, the UK Stewardship Code and whether corporate governance is sufficiently integrated into fund manager investment decisions. For companies, Kay said he was interested in the value placed on intangible assets (corporate reputation, workforce skills) and whether changes in reporting obligations are helping or hindering long-term decision making. He additionally questions if publicly traded companies pay too much attention to short-term fluctuations in their share prices and whether they feel that their engagement with fund managers and analysts is properly focused on their competitive capabilities. Kay said submissions to the review should be received by 18 November 2011 before an interim report is produced in February 2012 with preliminary findings and possible recommendations. The final report is scheduled for July 2012.
Link to Kay review