Stewardship and engagement “central” to long-term investment – interim findings of Kay Review

The concept of asset manager ‘stewardship’ of beneficiary money – engaging with companies over the long-term – has been identified as a key finding of the eagerly awaited interim findings of the Kay Review published today (Feb 29th). The initial findings of the review on UK Equity Markets and Long-Term Decision Making, headed by respected economist Professor John Kay, found wide agreement among respondents that ‘stewardship’ was key to asset managers investing in high performing companies and providing strong returns to beneficiaries. It said: “Asset managers are stewards of the funds entrusted to them by investors. They discharge that function most effectively by acting as stewards of the corporate assets they control by virtue of their management of these funds. Such stewardship is the only means by which, taken as a whole, the financial services sector can discharge its responsibilities to those who entrust funds to it.” The interim findings, which aim to draw together initial outlines from external submissions, will be followed by a further consultation period (deadline April 27), with the final report expected in July. The UK government would then be expected to introduce legislative recommendations based on the report. The panel working with Kay on the report comprises former Rolls-Royce chief Sir John Rose, James Anderson Partner and Manager at Baillie Gifford, the Edinburgh-based fund manager, and Railpen CEO and former National Association of Pension Funds (NAPF) Chairman, Chris Hitchen. While the Kay review interim report is not a set of proposals, it does suggest that stewardship will be given major consideration in the final discussions. The further work of the review, it said, would focus on the best way to “effect further change” in that direction. The report says stewardship “emphasises voice over exit”, or engagement over selling shares. Itsays the principle of stewardship also extends more widely than corporate governance. Describing the concept, it says: “Asset managers concerned with stewardship would be expected to engage with, and be committed to, the companies in which they held stock. They would normally be supportive of company management, but would be ready to engage in constructive criticism and, in the extreme cases, to act themselves or in conjunction with others to effect change.”
Kay said most respondents felt there was too little stewardship of this kind. He added, however, that stewardship was not the only style of asset management and nor should other approaches be excluded. But he noted that “the broad objectives of stewardship won wide support.” More fundamentally, Kay said, the concept of stewardship implied a group of people committed to the long-term success of the company, rather than a rotating panel of temporary appointees. The review also highlighted the role of fiduciary duty in the investment chain and referred to submissions on the topic from FairPensions, Hermes, the Church of England and the Co-operative Asset Management. It said the panel had expected to hear more about the activities of analysts, the traditional interface between investors and companies, but noted: “We did not.”
In an article for the Financial Times written today, Kay suggested that there was also little support for quarterly reports by companies to investors, suggesting that this could also be a key area for suggested reform.
The existing UK Stewardship Code is a voluntary initiative that followed a recommendation by the 2009 Walker review on governance at banks and financial institutions. Its aim is to enhance the quality of engagement between institutional investors and companies to help improve long-term returns.
Link to interim Kay Review