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 Statementsaimed
at company directors, asset managers and asset holders in turnprovide
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
277
Department for Business, Innovation and Skills, Ensuring equity
markets support long-term growth: The government response to the
Kay Review, November 2012, paras 3.53 & 3.56 Back
278
Department for Business, Innovation and Skills, Ensuring equity
markets support long-term growth: The government response to the
Kay Review, November 2012, para 3.59 Back
279
Department for Business, Innovation and Skills, Ensuring equity
markets support long-term growth: The government response to the
Kay Review, November 2012, para 3.60 Back
280
Department for Business, Innovation and Skills, Ensuring equity
markets support long-term growth: The government response to the
Kay Review, November 2012, para 3.64 Back
281
Department for Business, Innovation and Skills, Ensuring equity
markets support long-term growth: The government response to the
Kay Review, November 2012, para 3.68 Back
282
Department for Business, Innovation and Skills, Ensuring equity
markets support long-term growth: The government response to the
Kay Review, November 2012, para 3.70 Back
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