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07

Kay stock market review 'offers practical ways forward'

Open-access content Tuesday 24th July 2012 — updated 5.13pm, Wednesday 29th April 2020

Plans to tackle short-termism in UK equity markets by creating an environment based on ‘long-term trust’ are a step in the right direction, according to the National Association of Pension Funds.

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Professor John Kay's government-commissioned review of stock markets found that a misalignment of incentives within the investment chain and a lack of trust had created a 'culture of short-termism'.

To address this, he called for action to restore relationships of trust and confidence along the investment chain, including by applying fiduciary standards more widely within the investment chain.

The culture of market participants needs to change with the adoption of 'good practice statements' by company directors, asset managers and asset holders. These would promote a more expansive form of stewardship and long-term decision making throughout the investment chain, Professor Kay said.

Incentives should also be realigned to better relate company directors' remuneration to long-term sustainable business performance and to better align asset managers' remuneration to the interests of their clients.

Responding to the report's conclusions, Joanne Segars, NAPF chief executive, said: 'This report offers some useful, practical ways forward. Equity markets must work more effectively in the long-term interests of investors and savers, who need to be able to see that they are getting value for money.

'The NAPF is pleased to see Kay say that transaction costs and stock lending income should be set out more clearly. Boardroom pay must also become more transparent and more strongly linked to long-term performance.

In particular, Ms Segars welcomed the review's suggestion of an investor forum to foster collaboration among both domestic and overseas investors. Pension funds would be keen to become involved in this, she said.

She added: 'We strongly support the Financial Reporting Council's stewardship code and welcome the new best practice statements for asset owners. These could encourage pension funds to be more explicit in their expectations of their asset managers and more rigorous in holding them to account.

'We plan to incorporate the relevant parts of the statements into our corporate governance and voting policy and guidance on the application of the stewardship code.'

Matthew Fell, director for competitive markets at the CBI, said the culture change targeted in the report could best be achieved by high-quality engagement between boards and investors.

'There is no silver bullet, however removing the requirements for quarterly reporting and short-term earnings updates will take away unnecessary distractions and help boards and investors focus on the long term,' he said.

'Executive pay should always be linked squarely to good performance over a meaningful period of time, but it is for individual companies to decide their own pay strategy, with engagement from investors, in accordance with the latest rules on executive remuneration.'

This article appeared in our July 2012 issue of The Actuary.
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