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Business, Innovation and Skills Select Committee calls on government to implement Kay review recommendations

  • Corporate Governance  Image

25 Jul 2013

The Business, Innovation and Skills select committee (BISC) has today published a report calling on the government to publish “clear, measureable and achievable targets” for implementation of each of the 17 recommendations outlined by Professor Kay in his review of the UK Equity market in 2012 (the “Kay Review”).

Professor Kay’s review ‘Kay Review of UK Equity markets and long-term decision making’, published in July 2012, sought to address the issue of short-termism in the equity market.  The aim of the report was to “set out principles that are designed to provide a foundation for a long-term perspective in UK equity markets and describe the directions in which regulatory policy and market practice should move”.  

The review concluded: 

Short-termism is a problem in UK equity markets, and that the principal causes are the decline of trust and the misalignment of incentives throughout the equity investment chain.

The review established 17 recommendations which were intended for the government, regulatory authorities and “key players in the investment chain” to provide “the first steps towards the re-establishment of equity markets that work well for their users”. 

The BISC report highlights that the government has supported all of the recommendations in the Kay report but also note that there is a lack of evidence that progress has been made.  

The BISC report seeks to take forward the recommendations in the Kay review and provide actions for the government to undertake in order that progress against the recommendations can be measured. 

The report comments: 

We recommend that the Government immediately publishes clear, measurable and achievable targets for implementation of the Kay Review. In particular, in its response to this Report, the Government must outline for each of Professor Kay’s 17 recommendations what needs to have been achieved by the Government’s review of progress in 2014

The main conclusions in the BISC report are:

  • Investors Forum – Professor Kay’s recommendation was aimed at facilitating collective engagement to the benefit of the equity market and UK businesses.  The BIS Committee recommends that the Government “outlines a clear timetable for setting up the Forum, engaging with different types of investors, along with milestones and assigned responsibilities for achieving this”.
  • Fiduciary duty - The BIS Committee recommends that the Government liaises with the Law Commission to bring forward the timing of the project into the legal definition of fiduciary duty.  The report recommends that this issue is given “the appropriate priority and publishes its final definition in the first quarter of 2014”.
  • Appointment of executives - Professor Kay provided a recommendation, proposing that companies “consult with major investors over all board appointments”. The BIS Committee recommends that the “Government publishes a timetable for the implementation of this policy, clarifies which investors companies are to consult with and outlines how it intends to combat the issues surrounding insider trading and confidentiality which inevitably accompany such board appointments”.
  • Remuneration of executives – Professor Kay recommended that company directors should be tied into the long-term performance of their companies through time-appropriate shares. The BISC report recommends that “since the Government has accepted Professor Kay's analysis and agreed with his findings it should reconsider its response and take an active approach to its implementation”.
  • Incentivising fund managers – The Kay Report provided a specific recommendation as to the incentives driving the action of fund managers however the BISC report highlights that the government has not acted on this recommendation.  The report recommends that “the Government takes a harder line when framing the culture in which fund managers work by highlighting best practice where it sees it". Additionally the report recommends that the government “should work towards the goal that fund manager performance be reviewed over longer time horizons than the typical quarterly cycle” 
  • Quarterly Reporting - Professor Kay recommended that the removal of quarterly reporting.  The BISC report recommends that “the Government now outlines a clear timetable to implement this recommendation including what alternative strategies would be followed in the absence of any change in EU law”.  The report also recommends that the government seek to ensure that any changes to quarterly reporting practices are accepted globally.
  • Narrative Reporting – the BIS Committee recommends that “the Government outlines how it proposes to implement auditing and monitoring of narrative reports”.  The report also recommends that “on-going shareholder scrutiny and transparency must be at the heart of this” and that “these processes must be in place before the proposed changes to narrative reporting come into effect”.

The report also makes a number of recommendations on the UK Stewardship Code, the financial transaction tax and mergers and acquisitions.  Among other things, the BISC report recommends enhancements to be made to the Stewardship Code and includes government action points for encouraging sign up.       

The Business, Innovation and Skills Committee would like the government to have set targets to implementing their recommendations so that they can report on progress against these in their “review of progress” in 2014. 

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