30th July 2012
The Kay Review was always going to be a bit of a muddle, ranging as it does across broad, tangled and inter-connected parts of a hard to fathom value chain with many actors. Alternatively vague and technocratic, it seizes on some general problems without making many concrete recommendations for urgent, incremental change.
It is hard to disagree with the general thrust that an emphasis on short-termism has distorted the market, although by and large those parts of the market that are responsible are not the ones that Kay is addressing. Nevertheless, a good start here would be for companies to become more robust in defending the long-term over mild blips quarter on quarter, most recently exemplified by the hysteria surrounding a blip in Apple's numbers. In the context of focusing on the downside of short-termism, it is also sensible to have a debate on the legal concept of fiduciary duty as applied to investment as Kay recommends. A definition that fails to acknowledge, for instance, climate change risk, is most certainly failing in its fiduciary duty. Indeed a holistic appraisal of risk should routinely include ESG (environmental, social and governance) factors that might affect sentiment, expectations and future strategy.
A further excellent counter to the culture of short-termism comes in Kay's recommendation to disclose all income received from stock lending and for it to be rebated to the beneficial owner. We assume this will attract hostile opposition, as fund managers have made a very nice living from this ancillary activity, but Kay is to be commended for tackling it head on.
In other areas, Kay seeks consensus around narrative reporting that harks on the vague. In our view the UK Stewardship Code has made little difference in practice, and only then at the cosmetic edges. A recent survey by PIRC suggests that many of the Code's signatories fail to disclose adequate information on voting as the Code requires; Kay should be setting standards of minimum compliance rather than vague notions of "a more expansive form of stewardship". Similarly, the vague concept of an "investor forum" needs more flesh if it is not to be seen as just another talking shop with little bite.
Professor Kay has sought technocratic solutions to perceived problems, and many will fail to set the world alight. What is missing is the arc of vision that encompasses the various actors in the value chain and how the underlying investor is further distanced from decision making with every added link. The report fails to understand the pervasive influence of investment consultants or the quality of trustee appointments; it makes no recommendations for trustees to be remunerated and adequately trained. It fails to recommend the pooling of assets to achieve greater influence and critical mass in the market place (something some of the London Borough pension funds are just beginning to assemble). There is little on mandate construction, surely at the core of the investment chain and its potential outcomes, and little recognition that an influential part of the market operates passively and has no incentive to act as a steward.
Kay's brief was so extensive, that perhaps it was always destined to disappoint. There is good, sensible stuff here that could improve performance and streamline efficiency; urgent consideration must be given to taking cost out of the chain to the benefit of the humble investor. The challenge, in a globalised world where short-termism and international ownership are institutionalised, will be to effect change that delivers meaningful benefit.
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