Kay Review

Vince Cable Excerpts

Thursday 22nd November 2012 Written Statements

[The Secretary of State for Business, Innovation and Skills (Vince Cable)]

I would like to inform the House that the Government are today publishing their response to the “Kay Review of UK Equity Markets and Long-Term Decision Making”. Copies of the response will be placed in the Libraries of both Houses.

In his final report, Professor John Kay concluded that short-termism is a problem in UK equity markets, principally caused by a decline of trust and the presence of misaligned incentives in the investment chain. The report sets out a vision for reform of UK equity markets to ensure that they support long-term investment, constructive relationships between companies and in their investors, and sustainable value creation by British companies. It has been widely welcomed by business and the investment industry.

The Government response welcomes the Kay report—accepting Professor Kay’s analysis and conclusions. It endorses 10 principles for equity markets to which market practitioners, Government and regulatory authorities should have regard, and the report’s directions for market participants which follow from these principles.

The Government also commit to working with relevant regulatory authorities to explore further the Kay report’s directions for regulatory policy, to identify to what extent these directions are practical, what changes in the law or in regulation might therefore be appropriate, and how these can best be delivered.

The response sets out a number of steps the Government are taking to deliver on the Kay report’s detailed recommendations, including:

completing reform of corporate narrative reporting to be higher quality, simpler, more relevant to users and more focused on forward-looking strategy;

pursuing reforms to the EU transparency directive which will remove mandatory quarterly reporting;

promoting the revised edition of the stewardship code which emphasises that stewardship should encompass engagement by investors on company strategy.

Many of the report’s recommendations are for market participants—in particular companies and institutional investors. The Government agree that the necessary changes in culture cannot simply be achieved through regulation, but rather through the development of good practice in the investment chain. The Government are promoting Professor Kay’s good practice statements for company directors, asset managers and asset holders, as the basis for industry-led standards of good practice.

The report’s recommendations, and the good practice statements, aim to deliver, among other things, more collective action by institutional shareholders via the establishment of an investors’ forum, better disclosure of costs in the investment chain, transparency and fairness around the lending of securities, and better alignment between pay and long-term performance for company directors and asset managers.

The Government response notes promising signs that market participants are responding to the challenge in each of these areas, but makes clear that more progress is required: delivering on this agenda will require a sustained commitment.

The response therefore makes clear the Government’s intention to publish an update, in summer 2014; setting out what further progress has been achieved by Government and others, to consider Professor Kay’s directions for regulatory policy and to deliver his specific recommendations.