Government calls for 10 principles to guide markets to encourage long-term value creation
In a response to the widely read Kay Report that criticized the ‘short-termism’ of UK financial professionals and called for a forum to improve investor engagement with boards, the UK government offered an endorsement of key principles along with expanded suggestions of its own.
The Kay ‘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,’ UK business secretary Vince Cable writes in a 34-page response to the Kay Review of UK Equity Markets and Long-Term Decision Making released in July.
The report, authored by London School of Economics professor John Kay and commissioned by Cable, issued a series of recommendations to boost investor engagement, set standards of behavior for asset managers, encourage longer term visions among financial professionals as well as a series of other observations and suggestions.
To Kay’s call for the re-establishment of a ‘fiduciary duty’ for investment professionals, the government says it would avoid the word ‘fiduciary’ due to conflicting definitions.
It says it would instead prefer to adopt a series of principles for investment professionals, including that ‘all participants in the equity investment chain’ should act `in the best long-term interests of their clients or beneficiaries’ and ‘in line with generally prevailing standards of decent behavior’.
It says these standards should not be contractually overwritten or vary with the type of client.
The government also proposes 10 principles for equity markets, stating that metrics and models should offer information ‘directly relevant to the creation of long term value,’ and that ‘market incentives should enable and encourage companies, savers and intermediaries to adopt investment approaches which achieve long-term returns by supporting and challenging corporate decisions in pursuit of long-term value.’
It also states that ‘at each stage of the equity investment chain, reporting of performance should be clear, relevant, timely, related closely to the needs of users and directed to the creation of long-term value in the companies in which savers’ funds are invested’.
The government reply to the Kay report also stipulates that it would like less reporting of data – which it terms ‘noise’ – that is irrelevant to long-term value creation.
It says that asset managers should increasingly negotiate, collectively and individually, for the type of information they need from companies to make better long-term decisions.
As guidance for government and regulators, the government’s report suggests that future ‘regulation should adopt the perspective and interests of market users, not market intermediaries.’
