Business, Innovation and Skills CommitteeWritten evidence submitted by Albion Ventures LLP

1. Albion Ventures (“Albion”) welcomes the opportunity to comment on the Kay Review of Equity Markets and Long-Term Decision Making.

Executive Summary

2. Albion supports the objectives of the Kay Review, and broadly endorses the findings and recommendations of the final report. We believe the review to be an important and timely milestone; one that sets out important principles by which the financial services industry can start to rebuild public trust and promote long-term security across its activities.

3. There are elements within the report to which we would like to respond. Notably, while we agree that measures need to be taken to discourage short-term decision making, we do not believe that mandatory quarterly reporting obligations should be removed. Instead, companies should be encouraged to focus on long-term planning within these reports, moving away from a short-term focus.

4. We welcome the Kay Review’s comments prioritising the character and quality of shareholder engagement. In addition, we feel that long-term substantial shareholders should have board representation, building an informed, trust-based relationship through which they can hold the management to account. We believe it is important for all stakeholders that organisations managing long-term funds adopt a long-term view.

5. Albion itself already meets with many of the suggestions in the Kay report. This in part is due to taking an evergreen approach to funding, reinvesting proceeds for responsible, sustainable capital growth; we have always valued long-term security, performance and relationship continuity over a short term-approach.

6. We also uphold the values of integrity and reliability in our approach to corporate governance, as advocated by the Kay report; the average length of service of senior management at Albion is nine years, and we engage continually with all our stakeholders to enhance standards. Our well-attended shareholder meetings and the overall active, involved attitude of our investor base reflect this emphasis on communication.


Quarterly Reporting

7. Albion supports the Kay Review’s general outlook that certain business cultures and practices can increase the pressure to make potentially lucrative but otherwise damaging short-term decisions. However, relating to performance measures the final report recommends that mandatory IMS (quarterly reporting) obligations be removed; grouping them under the umbrella of “excessively frequent” reporting. While we accept that some quarterly reporting will contribute to short-sighted business practices when the content has been “managed” to appear in the most positive light, we do not believe that the procedure should be removed altogether.

8. We feel strongly that shareholders should receive frequent, accurate and objective information, as part of a culture of transparency, inclusion and engagement. This helps to foster informed decision making on the part of an interested, active and long-term minded shareholder base. We believe that more information is better than less, and therefore take the view that quarterly reporting itself is not the root of this issue. Rather, the limiting element has been the nature of that reporting, erring towards the short-term view. We believe that companies should steer their quarterly reporting away from being what the Kay Report terms a “marketing speak” driven means of bringing in more capital, towards something much more balanced, objective and long-term minded. We see this as an important part of the wider shift towards a more responsible financial culture.

9. Additionally, we would like to draw the BIS committee’s attention to a reporting model widespread in certain jurisdictions, notably Japan, in which quarterly information includes a rolling 12 month financial forecast. We feel that this model would help to avoid too much very short-term focus; Japanese investors certainly tend to be longer-term minded. Indeed, in the UK such forecasts are already made available to boards, so we believe that expanding this sphere of access to include the general market would be a valuable aid to transparency, and a spur to investors for taking a longer-term attitude.

Shareholder Engagement

10. Albion both endorses the Kay Review’s criticism of “shareholder engagement of superficial character and low quality”, and agrees with the statement that “equity markets will function more effectively if there are more trust relationships which are based on voice and fewer trading relationships emphasising exit”. From our own experience, we firmly believe that inclusive, responsible decision making—based on relationships of real character and high quality—is essential for security and sustainability in the financial services industry.

11. To help achieve this, we would recommend that long-term substantial shareholders should have representation on the boards of companies in which they invest. This practice supports shareholders’ understanding of company strategy, gives them the “voice” that the Kay Report calls for, and provides a greater incentive for them to act in the company’s long-term interest. Furthermore, it allows longstanding investors to have personal, reciprocal and trust-based relationships with the company management. This is not only a mutually beneficial working relationship, but a mechanism by which shareholders can “hold the management to account” over its actions.

12. Companies and markets are, of course, diverse, both in terms of models and attitudes. As such, there may be some resistance from institutions. However, we firmly believe that quality shareholder engagement is vital; long-term investors should always be considering the long-term interests of the companies in which they hold shares, as this is the practice which offers greatest benefit to all stakeholders.

Additional Comments

13. Aside from the main points already outlined, we would like to offer some additional observations. For example, we believe that to facilitate a move away from the culture of short-termism in the financial services industry, the importance of a company’s objectives in achieving a stable business environment should be made more explicit. Long-term goals should always be a priority for financial services companies and enhancing the importance of such objectives should enable a switch in focus towards the longer term. This, in turn, should bring stability benefits, both for businesses individually as well as the wider business environment.

14. However, we believe that such changes should be cultural rather than legislative. When it is considering the recommendations of the final report, we would recommend the Business, Innovation and Skills Committee to be wary of the potential for further legislation creep in subsequent years. It is vital that in the future, would-be investors are not deterred by excessive regulatory red tape or other investment barriers.

15. In addition, while we appreciate the thinking behind the proposal for an Investors’ Forum, we question whether the need for collectivising shareholders is an appropriate focus for addressing the “disincentives to engagement” problem which the report describes. We do consider solidarity amongst investors as unnecessary and may even weaken the strength of the shareholder system, namely that shareholders vote and act as individuals.

16. We do request clarification from BIS over the extent of the proposed fiduciary standards recommended by the Kay Review. We would also welcome the opportunity to then comment more fully on this issue at a later date.

The VCT Approach

17. We at Albion believe that the VCT model already meets much of the spirit of the Kay review. Due to the structure of the VCT model and the types of company the trusts invest in, VCT’s are often more effective than other types of investment vehicles when it comes to shareholder engagement. In particular, Albion’s evergreen approach and our policy of placing appropriately experienced members of staff onto the boards of the companies we invest in, means our shareholders expect us to take a more pro-active approach than is found elsewhere.

18. We strongly believe that long-term relationships are based on good communications and responsible corporate governance. As part of this philosophy, we at Albion remain highly conscious of all stakeholders across the board, from individual investors through to HM Treasury, a highly important stakeholder given the tax incentives that VCTs attract. As such, we greatly welcome the opportunity to continue the dialogue that has been opened by the Kay Review—both with the Government and our shareholders—on the subject of long-term decision making in the financial services industry.

19. Finally, we would encourage the BIS committee to consider the positive examples the VCT model can offer to the rest of the sector when it is analysing the findings of the Kay Review.

20. We are pleased to have had the opportunity to set out these comments on the Kay review. We look forward to the next stage and would be very happy to participate further if the need arises.

Patrick Reeve
Managing Partner
Albion Ventures LLP

17 January 2013

Prepared 24th July 2013