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UK govt backs long-term, share bonuses for companies and fund managers in Kay Review response

Implementation of Kay good practice statements to be reviewed in 2014.

Bonuses for company directors should be based on long-term sustainable criteria and held in shares until retirement, while asset managers should pay incentives on similar long-term share criteria with a pay-out only once responsibility for the investment has ended, the UK government said today in its response to the Kay Review on UK Equity markets. The Kay Review by respected UK economist and journalist, Professor John Kay, came out in July this year and amongst a raft of recommendations called on asset owners and managers – as well as companies themselves – to adopt ‘Good Practice Statements’ that promote stewardship and long-term decision-making. The UK’s government response published today (November 22) puts the signing by investors and corporates of the Good Practice Statement forward as a backdrop for 17 recommendations based primarily around corporate and investor long-termism, consensual engagement, trust and sustainable financial health.
Aside from the bonus recommendations, the government’s major investor proposals on Kay include the creation of a new investor forum for corporate engagement, a review of fiduciary duty by the Law Commission, and a major transparency drive on investors’ fees. It said the UK’s Stewardship Code should also be tightened to reflect the Kay Review, if considered necessary by the UK Financial Reporting Council that oversees it. On the corporate side, the government has backed Kay’s suggestions that companies should stop quarterly reporting in line with suggested EU changes, and adopt more narrative reporting of their long-term business risks alongsidestandard financial data. The Government said it was asking its various regulatory bodies with responsibility for corporate/investor issues to review their rules based on the Kay Review findings, and that it would publish a progress report in Summer 2014 on the implementation of its Kay recommendations. David Paterson, Head of Corporate Governance at the UK National Association of Pension Funds (NAPF), said: “By endorsing Professor Kay’s recommendations, the Government is giving a clear direction of travel, which will help pension funds play their part more effectively in reducing a short-termist culture in UK companies and markets. Equity markets must work more effectively in the long-term interests of investors and savers.” The NAPF said the ending of mandatory quarterly reports by companies would help reduce the excessive focus on short-term earnings: “There is a strong sense among our members that quarterly results reporting and trading updates bring excessive focus to the short-term with little or no benefit for the long-term investor. So we are pleased that the Government will undertake work in this area.”
Penny Shepherd MBE, UKSIF Chief Executive, said: “Today’s statement shows that the Kay Review could become as influential over time as the 1992 Cadbury report on Corporate Governance which celebrated its 20th anniversary this year.”
Link to UK government response to Kay Review