Kay Review interim report pushes against short-term pressures

How do we wean companies and markets off the notion of short-term performance to focus on the long-term needs of the economy and society? Is a tough question, especially when experience shows that the lack of discipline from deliverables can lead to lazy management. After all, the long term is, by definition, the sum of successive short terms. The UK government is having a go at it, in a long, three-stage process of consultations and reports, the second of which has now been published. The iconoclast and economist John Kay is fronting the process, a person with a subtle mind for complexity who is nonetheless an advocate of order. "The proposals for reform we have received bear on many different areas of policy – such as the governance of companies, the ways in which economic activities are measured, the functioning of markets and the structure of the savings market," Kay writes in the introduction.

The report has at its centre the theme of ownership, a difficult concept in equity markets, and particularly one with the complexity that has developed in mature ones like the UK. "There are at least three relevant aspects of ownership," the interim report states: "Who makes the decision to buy or sell a particular holding? Who decides how the voting rights attached to the shares should be exercised? Who enjoys the economic interest in the shares?" They may not be the same, which is what makes this review difficult. Rather than detailing recommendations, it summarises concerns, among them:

• Companies and boards: The report states, for example, "the concept of stewardship implied a group of people committed to the long term success of the company, rather than a rotating panel of temporary appointees. Perhaps there is no set of rules that can define the composition of an effective board."
• Measurement and reporting: On accounts and accounting standards: "They must present a true and fair view of the affairs of the company and also contain information about the past, present and future. Not only will elements always be volatile, but subjectivity is also inevitable. It is not realistic to imagine that any prescribed body of quantitative data can fully meet all these purposes."
• Market practice: The large number of large foreign companies listed in the UK attracted a lot of comment. The review notes that the undue weighting these have in investment portfolio is often a choice the funds themselves have adopted. Could they not change their own rules?
• Asset managers: Kay likes the distinction drawn by the Investment Management Association between "investors" and "traders", calling it "helpful and important. It is investors who directly serve the purposes of equity markets in improving the performance of companies and generating returns to beneficiaries, and it is investors who obtain the information which is needed if share prices are to reflect the fundamental value of companies."
• Intermediaries: "There are many intermediaries, and many levels of intermediation," the interim review states. The unstated implication is that there are too many. "Does the interposition of many intermediaries, with business objectives which are not necessarily aligned with the interests of companies and beneficiaries, conflict with the underling objectives of promoting these interests?"

The review involves as well a further consultation, with responses due by April 27. The final report is expected to be published in July, and is likely to involve recommendations on matters like taxation that lie outside the brief of the Department of Business.

Source document: The interim report of the "Kay review of UK equity markets and long-term decision making" will be followed by a further consultation with final recommendations due in July.