UK: Government must drive implementation of Kay Review, says Committee

The Government must be willing to pick up a ‘regulatory stick’ to drive implementation of the Kay Review, says the Business, Innovation and Skills Committee in a Report published today.  The Committee urges the Government to immediately publish clear, measureable and achievable targets for implementation of each of Professor Kay’s 17 recommendations.  This should include a clear measure of success for the recommendation (a target); who is responsible for achieving the target; a clear deadline by which the target needs to be achieved, and the action the Government will take if it is not.

• The Kay Review of UK Equity Markets and Long–Term Decision Making
• The Kay Review of UK Equity Markets and Long–Term Decision Making (pdf)
• Inquiry: The Kay Review
• Business, Innovation and Skills Committee

Commenting on the Report, Adrian Bailey MP, Chair of the Business, Innovation and Skills Committee, said:

“Professor Kay sought to bring about cultural change to improve long-termism in the equity market.  We support this aim and his recommendations for bringing it about. 

“The cultural change advocated by Professor Kay will not happen without a catalyst, the 12 years of inaction following the Myners Review is proof enough of that. 

“It is not enough for the Government to simply say it supports Kay’s recommendations and then leave it to the industry to change of its own volition.  The Government must set measurable, accountable targets through which reform can be driven and measured.”

Recommendations 

The Report also considers some of the underlying principles of the Kay Review and outlines how these can be turned into specific recommendations.  These include (Quotes from Adrian Bailey MP, follow the recommendations):

Stewardship

• Asset managers are allowed to use commissions to pay for long-term research, including long-term stewardship, but it appears very few are aware of this.  The Financial Conduct Authority should highlight this fact to all major institutional investors and should set out a minimum proportion of a firm’s commission that should be used towards such activities. [para 104]
• The Government should outline what it considers a minimum acceptable level of sign up to the Stewardship Code and outline what action it will take if this target is not met by the market on a voluntary basis. [para 89]
• The Stewardship Code should be enhanced to take account of strategic issues as well as those around corporate governance.  This should include, among other things, allowing investment managers to focus on strategic issues facing companies within their policies on how they discharge their stewardship responsibilities. [paragraph 85]
• The Government should outline its timetable for all companies to sign up to Kay’s Good Practice Statements.  If this target is not met, the Government should be prepared to incorporate them into the already established Stewardship Code. [para 98]

“We agree with Professor Kay that a more expansive form of stewardship needs to be developed – one that focuses not just on questions of corporate governance, but on strategic issues too.  With this in mind, we make specific recommendations on how the Code can be enhanced and Professor Kay’s principles turned into reality.

“If stewardship is to take a more prominent role, it needs to be better resourced.  It is concerning that many asset managers appear unaware that they can use commissions to pay for long-term stewardship research.  The FCA must take action to remedy this.”

Financial Transaction Tax

• The Government should commission an impact assessment of the introduction of a Financial Transaction Tax at a level which is the average profit made on a High Frequency Trade in the UK.  The Government should also conduct a feasibility study of the proposal to ban any banks which establish branches in offshore centres that do not adhere to the OECD’s white list of financially compliant economies from trading in the UK.  This should include an assessment of whether doing so would counter arguments against a domestic FTT being ineffective in the global market. [para 113]

“We found some support for the concept of a Financial Transactions Tax, but concerns about the practicality of its implementation. 

“Something being difficult is not sufficient justification for rejecting it out of hand.  The Government should assess the likely impact of the introduction of a Financial Transaction Tax and how the obstacles to its implementation can be overcome.”

Mergers and acquisitions

• The Government should conduct an assessment of the take-over regimes of other similar economies with a view to learning about the impact that takeovers have had on their companies and economies.  It should summarise which positive elements may be incorporated into our domestic system to strengthen our economy and ensure that takeovers benefit, rather than damage our economy. [para 119]
• The Government should outline in its response what action it will take to engage with companies and their investors to ensure that any investment merger activity is to the long-term benefit of the UK economy. [para 120]
• The Government should produce a feasibility study outlining the risks and benefits of a policy that differentiates between shareholders and voting rights based on the length of time a share has been held.  The Government should also commission a study to set out the impact on the UK of foreign takeovers of British companies over the past 25 years. [paras 125-127]

“The Government needs to do more to ensure that takeovers of UK businesses benefit, rather than damage, our economy. 

“We heard that the principle of ‘one-share one-vote’ is fairest.  But I cannot help thinking back to the evidence that, overall, takeovers detract value from companies.  The Government should consider the risks and benefits involved in changing shareholders’ voting rights based on the length of time they have held shares in a company.”