UK: Corporate governance – Kay Review Final Report published

The Final Report by the Kay Review into UK equity markets and long-term decision making has now been published. The Final Report has concluded that short termism is a problem in the UK equity markets and that the principal causes of the problem are a decline of trust and the misalignment of incentives at the various stages of the equity investment chain. The Report also sets out a series of principles and recommendations that are designed to provide a foundation for the long-term perspective.

In June 2011, the Government commissioned Professor John Kay to carry out an independent review into investment in UK equity markets and its impact on the long-term performance and corporate governance of UK quoted companies. In February this year, Professor Kay published an interim report, which provided an overview of issues raised by respondents to the Review's call for evidence (see corporate e-bulletin 2012/09 for more details).

The Final Report explores the main problems in the equity markets (such as short-term decision-making and an increase in intermediation in equity investment). It then sets out the reforms which the Kay Review believes are necessary to ensure that the equity markets support long-term corporate performance. Specific recommendations include:

• Stewardship Code – The Stewardship Code should include a more expansive form of stewardship, which focuses on strategic, as well as corporate governance, issues. The Report states that stewardship should be key to the equity investment chain.
• Good Practice Statements – Directors, asset managers and asset holders should adopt the Good Practice Statements set out in the Final Report, which promote stewardship and long-term decision making. The Report encourages regulators and industry groups to align existing standards, guidance and codes with the Good Practice Statements.
• Investors' forum – An investors' forum should be established to help facilitate collective engagement by investors in UK companies.
• Monitoring merger activity – The Government and companies should keep under review the scale and effectiveness of merger activity carried out by, and in relation to, UK companies.
• Board appointments – Companies should consult their major long-term investors over major board appointments.
• Interim management statements – The requirement to produce interim management statements should be abolished.
• Directors' and asset managers' remuneration– Remuneration should be aligned with long-term performance. In particular, the Report recommends that long-term performance incentives for executive directors should be paid only in the form of shares which should be held at least until after the executive has retired from the business.
• Concept of fiduciary duty - The Law Commission should review the legal concept of fiduciary duty as it applies to investment, as there is currently uncertainty and misunderstanding on the part of trustees and their advisers.

BIS is considering the recommendations in the Final Report in depth and will respond later in the year.

The Final Report and the BIS press release are available on the BIS website