The Kay Review

What the Kay Review means for UK equity markets.

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November 2012 saw the government publish its response to the Kay Review, completing the life-cycle of the independent assessment of short-termism issues in the UK equity markets. But, what do you need to know about the Review?

Professor John Kay, a leading economist, author and columnist for the Financial Times, was tasked with carrying out the review by Business Secretary Vince Cable in June 2011, and delivered his final report a year later in July 2012.

The Kay Review of UK Equity Markets and Long-Term Decision Making, to give it its full title, set out to examine how capital market disciplines contribute to the achievement of long-term financial goals and to the community more generally by enhancing the competitiveness and long-term performance of British business.

Takeovers and mergers were often mentioned as the type of deals the Review should address, with Kraft’s takeover of Cadbury in 2010 often cited as a prime example of short-termism. The deal was accused of ignoring the long-term welfare of the famous company and its staff in favour of short-term share gains.

In his final report, Kay blamed the short-termism problem on “the decline of trust and the misalignment of incentives throughout the equity investment chain”, and set out a number of recommendations, principles and directions to discourage it, including:

  • 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.
  • better alignment between pay and long-term performance for company directors and asset managers.

Other needs identified by Kay were the establishment of better practice at all levels, improved engagement between company and investor, a philosophy shift towards more structured thinking and the removal of pressure to make short-term decisions. These recommendations were not just for the government though, with regulatory authorities and key players in the investment chain needing to play their part.

In its published response, the government welcomed the findings of the Review, and committed to further explore the Review’s policy directions, and identify their practicality and suitability. They also agreed that the necessary change in culture needs to come through the development of good practice in the investor chain, rather than through regulation.

There will therefore be no initial change in legislation as a result of the review, but the government has committed to publish an update in 2014, which we will be sure to cover.

In welcoming the Review, Vince Cable said, “Professor Kay has produced a detailed and insightful analysis of investment in UK public companies, and a series of thought provoking recommendations. His report presents a clear challenge, calling for a shift in the culture of investment in the UK to address misaligned incentives, restore trust and confidence in the investment chain, and tackle the short-termism which too often impedes the creation of sustainable value by British companies.”