The Kay Review - what next?

The Kay Review - what next?


Author: Chris Garnett

The Kay Review, commissioned by the government and published in July 2012, explored issues of short-termism in UK equity markets.

The government's recent progress report sets out key developments following the Kay Review, including reforms to reporting, director remuneration and the code regulating takeovers.

Reporting reforms

As expected, the government agreed with Kay's recommendation and quarterly reporting requirements have been removed - it was felt they promoted an excessively short-term focus.

Annual reports have also been reformed and new regulations were introduced in 2013.
In June 2014 the Financial Reporting Council published 'Guidance on the Strategic Report' which outlines what is required by the new regulations.

The government view is that the reforms make reporting more focussed on long-term company strategy, more relevant and less burdensome - whether this is the case remains to be seen. Companies (with the exception of small companies) are now required to produce a separate strategic report presenting insights into the company's future challenges and opportunities.

Director remuneration

Legislation introduced in October 2013 aimed to relate directors' remuneration to sustainable long-term business performance. Companies must now prepare a legally binding remuneration policy which sets out the potential pay of each director and how that figure links to performance and company strategy.

Boosting transparency is a key objective and companies must also report on each director's pay in the previous financial year.

Kay stated that the most effective way to link remuneration to long-term incentives is for executive directors to hold shares in the company until after they have left the business. The progress report confirms that there has been continued evolution of good practice for remuneration policies, some of which have included long-term share ownership as proposed by Kay.

NAPF and Hermes recently published guidance on remuneration structures which recommended long-term share investment for directors. The guidance emphasises that responsibility for ensuring that remuneration policies are designed with long-term company success in mind rests with the remuneration committee.

M&A review

The Kay Review recommended that the scale and effectiveness of merger activity should be kept under careful review. So the government welcomed the Takeover Panel's proposed changes to the Takeover Code. These changes provide a framework to allow the Panel to monitor and enforce 'statements of commitment' made by offerors during a takeover.

The Panel is confident that the changes would provide an effective means of supervising compliance and the government has taken the Panel's advice that there is no need for any additional sanctions.

What happens next?

Good progress is being made towards a culture shift in UK equity markets, but there is still more to do.

The progress report sets out a number of 'next-steps' the government will take, such as developing the Investor Forum; ensuring that executive remuneration is aligned with long-term sustainable company performance; and convening a roundtable discussion in January 2015 with senior stakeholders to gather views regarding the progress of shareholder engagement and stewardship.


This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.