The Government has published its response to Professor John Kay's review of UK equity markets and long-term decision making, which focused on changing the perceived culture of short-termism in the equity markets (the Kay Review).
The response was very supportive.
The Government endorsed the Kay Review's 10 principles for equity markets and the directions for the market participants which follow from those principles, it was in agreement with most of the 17 specific recommendations, and it stated its full support for the Good Practice Statements for Company Directors, Asset Managers and Asset Holders.
However, in looking to implement the Kay Review, it is not proposing any immediate new regulation (beyond that already announced), but hopes instead to promote a change in culture and to encourage market participants themselves to take the lead.
Among the specific recommendations it is taking forward, the Government has:
- Confirmed its commitment to working with EU counterparts to end mandatory quarterly reporting
- Expressed its intention to keep merger and acquisition activities of and by UK companies under review
- Endorsed the Good Practice Statements for Company Directors, Asset Managers and Asset Holders
Quarterly reporting is a requirement of the EU Transparency Directive, implemented in the UK by the Financial Services Authority.
There are concerns that rigid quarterly reporting requirements are promoting a short-term focus, and the Kay Review questioned its effectiveness, recommending that such requirements be removed.
Since the Kay Review was published, the European Commission has issued proposals to remove the mandatory requirement to produce quarterly interim management statements. In its response, the Government reaffirmed its commitment to working with the Commission to achieve this.
Keeping M&A activity under review
In its commentary on the recommendation in the Kay Review that the scale and effectiveness of merger activity of and by UK companies should be kept under careful review, it has sought to emphasise that it does not intend to interfere in M&A activity; that it is committed to open markets; and that, in particular, it is not opposed to foreign ownership of UK businesses.
The Government expressed support for statements made in the Kay Review that there is a tendency of some companies to place too much emphasis on acquisitions, rather than developing and investing in their existing businesses.
It stated its belief that companies should focus on building long-term value rather than undertaking transactions which may destroy value, and expressed support for recent moves by the Takeover Panel to strengthen the position of target companies.
However, it has said that it does believe it would be appropriate for government to take a greater interest in mergers and acquisitions, but quite what will flow from this statement remains to be seen.
Good practice statements
The Good Practice Statements incorporate and expand on certain of the recommendations and focus on three parts of the equity markets:
- company directors - who it wants to focus on the long-term creation of value
- asset managers - whose decision-making affects both the clients for whom they invest and the companies in which they invest
- asset holders - who set mandates for asset managers and are responsible to their clients for how funds are invested
On the issue of directors' pay, which is covered by the Good Practice Statement for Company Directors, the Government identified that it does not believe there is a case for blanket regulation of the structure of directors' remuneration, but that it should be determined by individual companies in consultation with their shareholders. It has already embarked on a comprehensive set of reforms to the governance framework for directors' remuneration, which will support change in this area.
However, it endorses the proposal that directors should be paid in a way which incentivises sustainable long-term business performance. The Good Practice Statement suggests that long-term performance incentives should be provided in the form of company shares to be held until after the executive has retired from the business, and the Government has indicated that this is an idea which companies should actively consider.
The Kay Review proposed that the Good Practice Statements would not be binding in legal or regulatory terms, but expected that most participants in the investment chain would be likely to comply with them, and considered it likely that regulatory authorities and the courts would have regard to them.
The Government supports this, and is asking relevant business representative groups and investment industry trade associations to review the Statements, signal to what extent they can endorse them and suggest how they might be further developed.
The Government's response to the Kay Review sent out a clear message that it is committed to exploring the changes necessary to deliver Professor Kay's recommendations. It will be publishing a report in summer 2014 to highlight progress.
The Government's response is available for you to read by download