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BIS publishes progress report on the implementation of the recommendations of the Kay review

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30 Oct 2014

The Department for Business, Innovation and Skills (BIS) has published a report (“the progress report”) detailing the progress made in implementing each of the 17 recommendations outlined by Professor Kay in his review of the UK Equity market in 2012 (the “Kay Review”). The progress report highlights that “good progress” has been made but that “more needs to be done”.

Professor Kay’s review ‘Kay Review of UK Equity markets and long-term decision making’ (link to BIS website), 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 Kay 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 government actions to address the recommendations of the Kay Review were initially detailed in their response to a Business, Innovation and Skills Select Committee (BISC) report in November 2013 which called on the government to set “clear, measureable and achievable targets” for implementing each of the recommendations set out in the Kay Review.  That response included an appendix which summarised initial progress to date and set forward looking objectives upon which progress was to be assessed in 2014.

The progress report is split thematically into three parts.  Each part highlights the specific recommendations made in the Kay Review and notes progress made.  The three parts are:

Part A

  • This part outlines the progress made in encouraging effective shareholder engagement and stewardship investing.   
  • Key areas of progress include: the Financial Reporting Council’s (FRC’s) updated 2012 Stewardship Code (link to FRC website), the Investment Management Association’s (IMA’s) May 2014 survey of adherence to that code, the National Association of Pension Fund’s (NAPF’s) proposed Stewardship Disclosure Framework, the creation of the Investor Forum and the FRC’s work on board nominations including succession planning.  

Part B

  • This part outlines the progress made on improving the quality of reporting and dialogue in the investment chain to ensure that information meets long-term investor needs. 
  • Key areas of progress include: the imminent amendment to the Disclosure and Transparency Rules to remove the requirement for mandatory quarterly reporting, the government’s reforms to corporate narrative reporting with the new Strategic Report regulations for periods ending on or after 30 September 2013 (and related June 2014 FRC Guidance on narrative reporting) and the publication of new government commissioned research (link to BIS website) on metrics and models to assess company and investment performance by long-term investors. This research covers a wide range of topics, including a recommendation that companies provide guidance on future earnings using fan charts rather than point estimates and have an annual meeting with investments focussed on forward looking strategy separate from the reporting cycle and Annual General Meeting. 

Part C

  • This part outlines the progress made in building trust-based relationships and aligning incentives through the investment chain.
  • Key areas of progress include:  the government’s reforms to the governance of company directors’ remuneration with the revised law on directors’ remuneration policy including strengthening the accountability of shareholders through a binding vote and disclosure applicable from September 2013 and the FRC’s latest revisions to the UK Corporate Governance Code which seek to encourage longer-term remuneration structures.

The progress report highlights that there has been a “significant contribution to the necessary shift in the culture of equity markets advocated by Professor Kay”.  However, it highlights that further progress is still needed and sets out a number of areas that the government, market participants and regulatory authorities will continue to focus on.  Key areas of focus include:

  • The FRC commitment to focus on encouraging and monitoring signatories to the Stewardship Code to “ensure they are delivering on the commitment they have given”.
  • The Government continued support of the development of the Investor Forum which it considers “has the potential to deliver a step change in effective collective investor engagement on the part of investors in UK companies”.  At the same time as the progress report was published, the Investor Forum announced the appointment of a new board (link to IMA website) and published a discussion paper  (link to IMA website) on its key principles and approach to engagement.
  • A Government roundtable in January 2015 to consult senior stakeholders from business and the investment industry on their views of progress to date on shareholder engagement and stewardship, and on what further steps the Government, FRC and industry can take to encourage better engagement and long-term stewardship engagement.
  • A continued focus by the government on ensuring the executive remuneration is aligned with long-term sustainable company performance.  It is due to publish shortly a summary of key findings and policy conclusions from a study of how the new directors’ remuneration regime operated during the 2014 reporting and AGM season. 

The full progress report, which expands upon progress in these key areas and others, can be downloaded from the BIS website below.

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