The Kay Review looked at the success of equity markets in achieving their core purposes of enhancing the performance of UK companies and to enable savers to benefit from the activities of these businesses. It concluded that the fundamental obstacle to achieving this purpose is the systemic short-termism in UK equity markets, caused mainly by a decline in trust and confidence and the misalignment of incentives throughout the investment chain. UK equity markets had become increasingly fragmented, with increasing intermediation. Among the recommendations of the report were for further development of the Stewardship Code to increase focus on strategic issues and corporate governance. The report contained various suggestions as to how to encourage longer-term attitudes and behaviours.
The Review's proposals aim to ‘improve the quality of engagement by investors with companies, emphasising and broadening the existing concept of stewardship’. Two of the principles of the Review are that: ‘asset managers can contribute more to the performance of British business (and in consequence to overall returns to their savers) through greater involvement with the companies in which they invest;’ and that: ‘directors are stewards of the assets and operations of their business. The duties of company directors are to the company, not its share price, and companies should aim to develop relationships with investors, rather than with ‘the market.’
The Review recommends
1. The Stewardship Code should be developed to incorporate a more expansive form of stewardship, focusing on strategic issues as well as questions of corporate governance.
2. 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 take steps to align existing standards, guidance and codes of practice with the Review's Good Practice Statements.
6. Companies should consult their major long-term investors over major board appointments.
7. Companies should seek to disengage from the process of managing short-term earnings expectations and announcements.
The Review also includes Good Practice guides relating to asset holders, asset managers and company directors.
Read the good practice guide on Asset Holders
Read the good practice guide on Asset Managers
Read the good practice guide on Company Directors
Read the next section: Regulatory background to Stewardship Engagement