Today’s publication of the Kay Review into short-termism in the UK equity market could have the same impact as 1992’s landmark Cadbury Report, which became a benchmark for global corporate governance according to Penny Shepherd MBE, Chief Executive of UKSIF, The UK Sustainable Investment and Finance Association.
Shepherd said: “Although Kay’s reforms are focused on the UK market, the global nature of the UK stock market means this will strike a chord that will echo around the world.”
The recommendations of Cadbury, which included Chairman and Chief Executive splits as well as a proliferation of non-executive directors to audit and remuneration committees, were adopted in varying degree by organisations including the EU and the World Bank.
Shepherd’s comment was one of a number of positive initial responses to the Kay Review.
The UK National Association of Pension Funds (NAPF), which represents 1,200 pension schemes with some 15m members and assets of around £800bn came out strongly in favour of Kay’s findings. Chief Executive Joanne Segars said equity markets must work more effectively in the long-term interests of investors and savers to ensure they can see that they are getting value for money: “The NAPF is pleased to see Kay say that transaction costs and stock lending income should be set out more clearly. Boardroom pay must also become more transparent and more strongly linked to long-term performance.”
She said Kay was right to recommend that asset owners get tough with managers to deliver long-term returns and better corporate governance, but noted that this was not easy given the constraints on pension funds trustees time and capacity: “Pension funds need to hold their managers accountable for delivering long-term returns, and quality stewardship should be a key factor when picking or reviewing investment managers. However, at present there are many competing priorities for trustees, and managers’ capabilities are difficult to assess.”
The NAPF also welcomed Kay’s recommendation of an investor forum on engagement, which would beef up the existing Institutional Investor Committee run by the UK’s pension, insurance and asset management trade bodies: “Our members regularly engage with companies on routine and more serious matters. This approach fits well with Kay’s suggestion of a forum to encourage collaboration among domestic and overseas investors, and it’s something funds will be keen to get involved in.FairPensions, the London-based lobbying group, welcomed Kay’s recommendation to revisit fiduciary duty in order to promote more long-term, sustainable investment decisions. Christine Berry, Head of Policy and Research, said: “We particularly welcome the report’s emphasis on fiduciary standards of care. Applying these standards to everyone managing other people’s money would help address the chronic loss of public trust in an industry which is seen as self-serving and profiteering. Berry said the UK government’s response to Kay needed to “rescue” fiduciary duty from the prevailing obsession with short-term returns and said it shouldn’t “cherry pick” from the Kay’s recommendations on the issue.
Chris Hitchen, Chief Executive at Railpen Investments, who advised Kay on the report, said: “If savers are to achieve good long-term returns, they need everyone in the investment chain to be aligned with them. Professor Kay makes a compelling argument that trust must become the cornerstone of the UK equity market once again.”
Alan MacDougall, managing director of PIRC, the UK proxy voting firm, said: “If you stand back and look at the full picture the Review has outlined, it is clear that the investment chain as currently structured is not working effectively. In almost every link in the chain there is a bias in favour of activity, regardless of whether this can be proven to be in the interests of either issuers or savers. Intermediaries seem to be the only group which unquestionably gains, but the lack of clarity about whose interests they actually serve has also corroded trust in the system as a whole. Therefore big themes of the review seem to us to be the need for disintermediation and the re-establishment of trust and professional standards in the investment industry. These are both significant challenges, and will not be solved quickly, but they are also the right targets in our view.”
The UK Investment Management Association (IMA) was, however, more equivocal in its response to Kay, calling it a “welcome contribution to the debate” and pointing out that as the fund management trade body it does not believe its members contribute to short-termism. The IMA’s Director of Corporate Governance and Reporting, Liz Murrall, said the IMA agreed with Kay’s call for better engagement between companies and the fund management industry: “IMA’s survey of the activities that underlie the Financial Reporting Council’s Stewardship Code shows that engagement is increasing steadily and that it has a positive influence on corporate behaviour. On the need for collective engagement we will consider this in the context of those bodies which already exist in this area.”