The Kay Review of UK Equity Markets and Long-Term Decision Making - Business, Innovation and Skills Committee Contents

2   Background

Structure of the equity market

3. The rise of the institutional investor has been a significant evolution of the equity market in past few years. However, it has been accompanied by, and often linked to a decline in engagement and a rise in both short-termism and foreign owners. To understand the structure of the equity market, Aviva plc cited evidence about the rise in short-termism:

    The Bank of England's Andrew Haldane has highlighted the sharp decline in average holding periods for UK equities since the mid-60s from a period of almost 8 years to just 7½ months in 2007, a trend that is reflected in the US and other international equity markets:
FTSE Average Holding Periods 1966-2005

    About two thirds of the turnover in UK equities is accounted for by hedge funds and high frequency traders.[5]

4. The market has been so distorted and complicated, the phrase 'owner' is no longer clear in its usage. Indeed, Professor Kay writes:

    The term "share ownership" is often used, but the word "ownership" must be used with care. It is necessary to distinguish:

    ·  Whose name is on the share register?

    ·  For whose benefit are the shares held?

    ·  Who makes the decision to buy or hold a particular stock?

    ·  Who effectively determines how the votes associated with a shareholding should be cast?

    ·  Who holds the economic interest in the security?[6]

5. The decline in individual investors has also been accompanied not only by a rise in institutional shareholders but also by a significant rise in foreign owners of UK equities. In 1963 only seven per cent of UK equities were held by owners outside of the UK. In 2010 that figure had risen to 41.2 per cent.[7]

Shareholder engagement

6. At the heart of Professor Kay's Review of the market was the question of engagement by shareholders. However, as he said in his Review, this is not simply a matter of volume:

    The issue that concerns us is not whether there is too much or too little shareholder engagement. [...] Shareholder engagement is neither good nor bad in itself: it is the character and quality of that engagement that matters.[8]

7. Our witnesses from the sector agreed with this principle but argued that good engagement was hard to define. For example, Harlan Zimmerman, Senior Partner at Cevian Capital, was keen to point out the common mistake of confusing 'engagement' with 'voting':

    [Voting] is a form of engagement that is very measurable, but it is not necessarily very meaningful if the objective is to steward the companies and improve them, as opposed to stopping them from doing bad things.[9]

This view was echoed by Neil Woodford, Head of UK equities at Invesco Perpetual:

    There can be a disproportionate focus on voting as representative of your corporate engagement. In the environment that I experience day to day in the UK, corporate engagement is a bit like an iceberg. The bit that you can see above the surface is your voting record, but the vast bulk of your engagement is actually below the surface. It is not obvious how you engage or when you are engaging.[10]

He went on to explain that successful reform would be achieved only when shareholders voted with their voices and not with their feet, by acting like 'owners' not 'traders':

    If you believe that at the first disappointing piece of news or the first opportunity you can exit the shares and move on to something else, then you will never think like an owner, and therefore you will not be actively engaged with that business. Ownership is crucial—a sense of ownership on behalf of obviously the asset owners as well as the asset manager.[11]

8. Dr Paul Woolley, Head of the Paul Woolley Centre for the Study of Capital Market Dysfunctionality, took a slightly different stance. He told us that in order for the Kay Review to be considered a success, the recommendations that came out of it needed to achieve a shortening of the investment chain in order to "tackle the issue of too many intermediaries between savers and the assets they own, and the cost of those layers".[12] The Chartered Institute of Personnel and Development agreed and linked the growing number of intermediaries and increased complexity within the investment chain to a recent "nosedive" in "public opinion of big businesses".[13]

5   Ev 99-100 Back

6   Professor Kay, The Kay Review of UK equity markets and long-term decision making, July 2012, para 3.12 Back

7   Professor Kay, The Kay Review of UK equity markets and long-term decision making, July 2012, page 31, table 1 Back

8   Professor Kay, The Kay Review of UK equity markets and long-term decision making, July 2012, para 1.30 Back

9   Q 191 Back

10   Q 226 Back

11   Q 241 Back

12   Ev 165 Back

13   Ev 137 Back

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© Parliamentary copyright 2013
Prepared 25 July 2013