Kay Review Attempts to Address Short-Termism and Trust, but Fails to Provide Catalyst for Behavioural Shift

The role of trust in the investment industry forms the central thrust of Professor John Kay’s Review of UK Equity Markets and Long-Term Decision Making. One year in the making, the Kay Review cites the degradation of trust and the misalignment of incentives throughout the investment chain as the principal causes of short-termism. Mr. Kay is an advocate for “keeping it (the chain) simple”, but what are the real deliverables of this great review effort? Where is the industry changing impetus to affect the much-needed behavioural shift? Where is the catalyst for a restoration of trust?

Short-termism, or the excessive focus on short-term outcomes, is nothing new of course. But up to now, there has been little tangible progress in tackling it. Views among stakeholders differ over whether anything meaningful can be done to overcome short-termism, or indeed whether anything needs to be done. Just as the investing industry’s reaction to this (very long) review ranges from optimistic expectation of change, to wait and see, to complete disagreement.

So what does the Kay Review prescribe? It sets out a series of principles and recommendations to overcome the deficiencies in the equity market, as Kay sees them. But the recommendations are underwhelming. Of the 17 proposals (aimed in the main at issuers and investors), few have substance and some call for further reviews — it is a review calling for more reviews — not direct action that would break the 30-year history of mutually supportive, non-self-interrogatory locked-in agendas for the media, money, and power circles.

One of the few concrete and substantial recommendations is that mandatory quarterly reporting obligations should be removed, so that managers can unashamedly spend more time running the business and less time obsessing about the markets. Letting management focus on running their businesses is a positive, although the total removal of quarterly reporting obligations does rather go against the grain of increasing transparency for investors — something that we would not support.  For those requiring further insights, we suggest reading our recently published Visionary Board Leadership report.

Kay also advocates for establishing an investors’ forum to facilitate collective engagement by investors in U.K. companies; that companies consult their major long-term investors over major board appointments; that high-quality, succinct-narrative reporting be strongly encouraged; that asset managers make full disclosure of all costs, including actual or estimated transaction costs, and performance fees charged to the fund; and that all income from stock lending be disclosed and rebated to investors; and so on — you get the impression.

In terms of the further reviews or steps needed before changes can be made, Kay suggests that the government and relevant regulators commission an independent review of metrics and models employed in the investment chain to highlight their uses and limitations; that the Law Commission be asked to review the legal concept of fiduciary duty as applied to investment to address uncertainties and misunderstandings; and that the UK government explore the most cost effective means for individual investors to hold shares directly on an electronic register. How much time will all these efforts take and will anything change substantially because of these reviews?

Whilst for the most part, the Review’s suggestions are well grounded and unobjectionable, they do fail to map out a realistic path to reform, focusing more on what should be done rather than how to go about achieving it. In short, there is no catalyst here for restoring trust.