UK: Kay Review of UK Equity Markets and Long-Term Decision Making - Final Report

In June last year the Secretary of State for the Department for Business, Innovation and Skills commissioned Professor John Kay to undertake a review of investment in UK equity markets and its impact on the long-term performance and governance of UK quoted companies: see here. An interim report was published earlier this year in which issues were identified and responses to an earlier call for evidence summarised: see here (pdf). This afternoon, at the Royal Society for the encouragement of Arts, Manufactures and Commerce (RSA) in London, Professor Kay will launch his final report: see here.

Update - ahead of the London event, the Department for Business, Innovation and Skills has published a copy of the report: see here (pdf). The following recommendations are made:

• The Stewardship Code should be developed to incorporate a more expansive form of stewardship, focussing on strategic issues as well as questions of corporate governance.
• Company directors, asset managers and asset holders should adopt Good Practice Statements that promote stewardship and long-term decision making. Regulators and industry groups should takes steps to align existing standards, guidance and codes of practice with the Review's Good Practice Statements.
• An investors’ forum should be established to facilitate collective engagement by investors in UK companies.
• The scale and effectiveness of merger activity of and by UK companies should be kept under careful review by BIS and by companies themselves.
• Companies should consult their major long-term investors over major board appointments.
• Companies should seek to disengage from the process of managing short term earnings expectations and announcements.
• Regulatory authorities at EU and domestic level should apply fiduciary standards to all relationships in the investment chain which involve discretion over the investments of others, or advice on investment decisions. These obligations should be independent of the classification of the client, and should not be capable of being contractually overridden.
• Asset managers should make full disclosure of all costs, including actual or estimated transaction costs, and performance fees charged to the fund.
• The Law Commission should be asked to review the legal concept of fiduciary duty as applied to investment to address uncertainties and misunderstandings on the part of trustees and their advisers.
• All income from stock lending should be disclosed and rebated to investors.
• Mandatory IMS (quarterly reporting) obligations should be removed.
• High quality, succinct narrative reporting should be strongly encouraged.
• The Government and relevant regulators should commission an independent review of metrics and models employed in the investment chain to highlight their uses and limitations.
• Regulators should avoid the implicit or explicit prescription of a specific model in valuation or risk assessment and instead encourage the exercise of informed judgment.
• Companies should structure directors’ remuneration to relate incentives to sustainable long-term business performance. Long-term performance incentives should be provided only in the form of company shares to be held at least until after the executive has retired from the business.
• Asset management firms should similarly structure managers’ remuneration so as to align the interests of asset managers with the interests and timescales of their clients. Pay should therefore not be related to short-term performance of the investment fund or asset management firm. Rather a long-term performance incentive should be provided in the form of an interest in the fund (either directly or via the firm) to be held at least until the manager is no longer responsible for that fund.
• The Government should explore the most cost effective means for individual investors to hold shares directly on an electronic register.

UK: the first Stewardship Code published

The Financial Reporting Council has today published the UK Stewardship Code: see here (pdf). Operating on the 'comply or explain' basis, the code contains seven principles and accompanying guidance. For example, Principle 1 provides that "Institutional investors should publicly disclose their policy on how they will discharge their stewardship responsibilities". The Stewardship Code accompanies the revised corporate governance code published earlier this year.

The purpose of the code, as explained in its preface, is "to enhance the quality of engagement between institutional investors and companies to help improve long-term returns to shareholders and the efficient exercise of governance responsibilities". Further information concerning the Code and its implementation is available here (pdf). This document also explains:

... there were a number of significant issues raised by the consultation which are not addressed in the Code and which merit further consideration. These include, for example, whether institutional investors should disclose their policies on stock lending, arrangements for voting pooled funds, and the nature of the information to be disclosed on voting records. The FRC will carry out further work on these issues in advance of the monitoring exercise planned for the second half of 2011".

UK: the pre-budget report: tax, stock lending and a governance code for building societies

The chancellor delivered his pre-budget report (PBR) today and, as expected, announced the introduction of a temporary bank payroll tax of 50% on discretionary bonus payments over £ 25,000: see here for HMRC guidance and the draft legislation. The Government offered several justifications for the new tax: it was necessary until remuneration practices change as a result of corporate governance and regulatory reforms; evidence that some banks are proposing bonuses that are not consistent with a prudent approach to risk; and fairness: the tax representing a quid pro quo for taxpayer support of the banking sector. 

Of particular interest elsewhere in the report are the following announcements (at paras. 3.39 and 3.58):

The FSA has been reviewing the governance and risk management of stock lending in the market. The Government welcomes this work and will work with the FSA and market participants as necessary to help develop thinking in this area.

Following the Walker Review, and the subsequent Financial Reporting Council (FRC) consultation on the Combined Code, the Government proposes the introduction of a specific governance code for building societies and other financial mutuals. The Government will also consider the introduction of a regular independent review of building societies (and other financial mutuals) adherence to the Code".