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

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

8 Annex B: Summary of the Kay Review's recommendations

In his final Report, Professor Kay made 17 recommendations. Each of these is outlined below,[265] followed by a summary of the government response:

1. The Stewardship Code should be developed to incorporate a more expansive form of stewardship, focussing on strategic issues as well as questions of corporate governance;

The FRC regularly reviews the implementation and impacts of its Codes, and will produce its next report on developments in Corporate Governance and Stewardship in December this year. In light of this and future exercises it will consider whether further changes to the Stewardship Code may be desirable in due course to reflect Professor Kay's recommendation.[266]

2. Company directors, asset managers and asset holders should adopt Good Practice Statements that promote stewardship and long-term decision making. Regulators and industry groups should takes steps to align existing standards, guidance and codes of practice with the Review's Good Practice Statements;

The Government supports this recommendation. The development and promotion of good practice in the investment chain is central to achieving the culture shift that Professor Kay advocates. Professor Kay's suggested Good Practice Statements—aimed at company directors, asset managers and asset holders in turn—provide a starting point from which to achieve this.[267]

3. An investors' forum should be established to facilitate collective engagement by investors in UK companies;

The Government intends to ask a small group of respected senior figures from business and the investment industry to review industry progress, including that made by institutional investors on shareholder engagement, both collectively and individually, and to assess companies' perception of the extent and quality of this engagement. This review will complement the Government's progress report in Summer 2014.[268]

4. The scale and effectiveness of merger activity of and by UK companies should be kept under careful review by BIS and by companies themselves;

The Government accepts this recommendation, and welcome Professor Kay's thoughtful analysis of the impact of mergers and acquisitions on UK companies.[269]

5. Companies should consult their major long-term investors over major board appointments;

The Government agrees with the Kay Report that efforts by companies to consult their shareholders in advance of making major appointments to the board is consistent with developing long-term trust-based relationships that support engagement in pursuit of sustainable value creation. The establishment of an investor forum, as suggested by Professor Kay, may provide a means for such consultation to take place, but it need not be the only means. Many companies already consult shareholders on board appointments in the context of wider engagement activity and this is to be welcomed.[270]

6. Companies should seek to disengage from the process of managing short-term earnings expectations and announcements;

The Government supports this recommendation, which again represents good practice for companies. This recommendation has also been appended to the Good Practice Statement for Company Directors published alongside this response.[271]

7. Regulatory authorities at EU and domestic level should apply fiduciary standards to all relationships in the investment chain which involve discretion over the investments of others, or advice on investment decisions. These obligations should be independent of the classification of the client, and should not be capable of being contractually overridden;

The Government accepts the view that there should be common minimum standards of behaviour required of all investment intermediaries, but believes that describing these standards as 'fiduciary' has the potential to cause some confusion.[272]

8. Asset managers should make full disclosure of all costs, including actual or estimated transaction costs, and performance fees charged to the fund;

The Government agrees with Professor Kay that there should be transparency of all costs and charges in the investment chain and are therefore supportive of this recommendation. This recommendation is reflected in the Good Practice Statement for Asset Managers, signalling Professor Kay's intention to improve transparency through the development of industry good practice.[273]

9. The Law Commission should be asked to review the legal concept of fiduciary duty as applied to investment to address uncertainties and misunderstandings on the part of trustees and their advisers;

The Government [...] accepts this recommendation and has asked the Law Commission to undertake a review of the legal obligations arising from fiduciary duties (and more widely) that dictate what considerations are appropriate for trustees and other investment intermediaries seeking to act in their clients' best interests.[274]

10. All income from stock lending should be disclosed and rebated to investors;

The Government supports this approach and would like to see separate disclosure of stock lending costs and income endorsed by the industry in the context of the development of a more comprehensive industry-led disclosure regime, as discussed above. The Government's progress report in Summer 2014 will assess to what extent the investment industry has responded to this recommendation and what further action might be appropriate in the context of relevant EU policy developments in this area.[275]

11. Mandatory IMS (quarterly reporting) obligations should be removed;

The Government has already made clear its strong support for the [European] Commission's proposal [to amend the EU Transparency Directive] and will therefore take forward work to deliver this recommendation in the context of ongoing negotiations with the Commission and EU Member States. UK implementation of the proposed changes would fall to the FCA and be subject to consultation and cost-benefit analysis.[276]

12. High quality, succinct narrative reporting should be strongly encouraged;

The Government supports this recommendation. We are already focused on this policy objective, which was the subject of a Coalition Government commitment, and have carried out two consultation exercises in the past two years. [...] The Government published draft regulations to bring about the changes to the structure and format of reporting on 18 October 2012, with the intention of bringing these into effect in October 2013. We will be working closely with the FRC as they develop the guidance on the new provisions.[277]

13. The Government and relevant regulators should commission an independent review of metrics and models employed in the investment chain to highlight their uses and limitations;

The Government will [...] explore with market participants, the regulators, academics and relevant representative and professional bodies how best to stimulate more debate and economic analysis in this area. We expect to set out further proposals early in the new year.[278]

14. Regulators should avoid the implicit or explicit prescription of a specific model in valuation or risk assessment and instead encourage the exercise of informed judgment;

Recommendation 14 has potentially wide-ranging implications for regulatory policy and will therefore be considered in more detail by the relevant government departments and independent regulators, alongside the broader directions for regulatory policy.[279]

15. Companies should structure directors' remuneration to relate incentives to sustainable long-term business performance. Long-term performance incentives should be provided only in the form of company shares to be held at least until after the executive has retired from the business;

The Government agrees that the structure of remuneration should be determined by individual companies in consultation with their shareholders and that agreeing and sharing good practice is the appropriate way to promote change in this area. The Government does not believe there is a case for blanket regulation of the structure of company directors' remuneration and believes that companies and their shareholders need flexibility to negotiate outcomes that work for them. The Government's comprehensive reforms to the governance framework for directors' remuneration will help to support change in this area.[280]

16. Asset management firms should similarly structure managers' remuneration so as to align the interests of asset managers with the interests and timescales of their clients. Pay should therefore not be related to short-term performance of the investment fund or asset management firm. Rather a long-term performance incentive should be provided in the form of an interest in the fund (either directly or via the firm) to be held at least until the manager is no longer responsible for that fund;

Professor Kay's stated intention to shift the culture of asset manager pay through the development of industry good practice, rather than by imposing pay structures in regulation. Recommendation 16 is therefore reflected in the Kay Good Practice Statement for Asset Managers. The Government will encourage asset managers to adopt such models by promoting consideration of the Kay Good Practice Statement for Asset Managers.[281]

17. The Government should explore the most cost effective means for individual investors to hold shares directly on an electronic register.

The Government believes reducing intermediation costs and removing barriers to direct engagement for individuals wishing to hold shares electronically is a desirable policy objective. It will however be necessary to address this recommendation in the context of policy proposals relating to central securities depositories and securities law in the EU. This will include consideration of future arrangements for how investors can hold shares in a way that increases shareholder transparency and facilitates them exercising their shareholder rights, under the requirements set out in any final EU legislation.[282]

265 Professor Kay, The Kay Review of UK equity markets and long-term decision making, July 2012, page 13 Back

266 Department for Business, Innovation and Skills, Ensuring equity markets support long-term growth: The government response to the Kay Review, November 2012, para 3.5 Back

267 Department for Business, Innovation and Skills, Ensuring equity markets support long-term growth: The government response to the Kay Review, November 2012, para 3.6 Back

268 Department for Business, Innovation and Skills, Ensuring equity markets support long-term growth: The government response to the Kay Review, November 2012, para 3.18 Back

269 Department for Business, Innovation and Skills, Ensuring equity markets support long-term growth: The government response to the Kay Review, November 2012, para 3.19 Back

270 Department for Business, Innovation and Skills, Ensuring equity markets support long-term growth: The government response to the Kay Review, November 2012, para 3.28 Back

271 Department for Business, Innovation and Skills, Ensuring equity markets support long-term growth: The government response to the Kay Review, November 2012, para 3.31 Back

272 Department for Business, Innovation and Skills, Ensuring equity markets support long-term growth: The government response to the Kay Review, November 2012, para 3.34 Back

273 Department for Business, Innovation and Skills, Ensuring equity markets support long-term growth: The government response to the Kay Review, November 2012, para 3.37 Back

274 Department for Business, Innovation and Skills, Ensuring equity markets support long-term growth: The government response to the Kay Review, November 2012, para 3.44 Back

275 Department for Business, Innovation and Skills, Ensuring equity markets support long-term growth: The government response to the Kay Review, November 2012, para 3.50 Back

276 Department for Business, Innovation and Skills, Ensuring equity markets support long-term growth: The government response to the Kay Review, November 2012, para 3.51 Back