The Kay Report: government proposals to tackle short-termism in the UK equity markets
Market reCap January 2013 edition
- Enhancing the effectiveness of the listing regime: response to Consultation Paper 12/2
- Major changes proposed for controlled companies with a premium listing
- Primary Market Bulletin No.4: update on UKLA Knowledge Database
- Inside AIM – fifth edition focussing on nomad's consideration of directors
- Takeover Code changes operating satisfactorily concludes Takeover Panel report
- New European plan for online gambling
- The Kay Report: government proposals to tackle short-termism in the UK equity markets
As reported in the third edition of Market reCap, Professor Kay's final report (published in July 2012) concluded that short-termism is a problem in UK equity markets.
The government issued its formal response to Professor Kay's report on 22 November 2012. This broadly endorses his analysis and conclusions, and promises steps to deliver on the specific recommendations in the report in order to ensure that the UK equity markets fulfil their core purpose, including:
- asking business groups and investment industry trade associations to signal to what extent they can endorse the "Good Practice Statements" for directors, asset managers and asset holders, and to suggest how these statements might be further developed;
- working with the European Commission and other EU member states to end mandatory quarterly reporting obligations (through proposed amendments to the Transparency Directive);
- encouraging the establishment of an investors' forum to champion constructive engagement with companies, having agreed with Professor Kay that this should not trigger any mandatory bids under the Takeover Code; and
- instructing the Law Commission to review legal obligations arising from fiduciary duties that dictate what considerations are appropriate for trustees and other investment intermediaries seeking to act in the client's best interests.
In certain areas, a "wait and see" approach is adopted, with the investment industry being monitored on its response to the Kay report. Further measures may then be introduced in due course if required (subject to EU law and policy considerations). This could include regulation on the disclosure by asset managers and other intermediaries of transaction costs and fees, and of income from stock lending. It is also acknowledged that it "would be appropriate for government to take greater interest in mergers and acquisitions", but it is not apparent precisely what form this involvement will take on proposed takeovers.
Other aspects of the report are deemed to be within the scope of existing initiatives, such as the ongoing reforms to the narrative reporting regime, and the Financial Reporting Council's continuing development of the Stewardship Code (following the amendments issued in September 2012).
Where the government has not followed the report's recommendations, the differences in approach tend to be clarificatory rather than substantive, for example:
- omitting from the report's list of key principles the reference to all participants in the equity investment chain observing "fiduciary" standards in their relationships with clients and customers. Instead it is stated that such persons should act in good faith, in the best long-term interests of clients and beneficiaries, and in line with generally prevailing standards of decent behaviour; and
- adding two of the report's recommendations to the "Good Practice Statement for Company Directors", namely that directors should consult major long-term investors over major board appointments, and that companies should seek to disengage from the process of managing short-term earnings expectations and announcements.
The House of Commons Business, Innovation and Skills Committee has announced its intention to inquire into the Kay report and the government's response, inviting written submissions of evidence by close of business on Friday 18 January 2013. According to the government response, it is planned to publish an update in summer 2014 on the progress made to achieve the report's recommendations.
A copy of the government's response to the Kay report can be accessed here.
Daniel Hooke is a Senior Associate (PSL) in the Corporate Group of Field Fisher Waterhouse LLP in London.