Long-term Matters: Kay - make your voice heard
The Kay review is the best thing we've had on short-termism for decades. It's the nail in the coffin of the debate about whether there is short-termism and if investors contribute. The UK business secretary, Vince Cable, is really well suited to act on it. And the UK is well positioned as a catalyst for international change.
Kay could have been tougher and Cable may yet be neutralised by colleagues. But that's not the point. The question for investment professionals is what are we going to do? If we choose to empower ourselves and act, this will ensure the review doesn't end up on a dusty shelf.
Kay highlights six areas for change. I don't have all the answers but here are some critical questions that call out for practical engagement. That means you!
Kay proposes that the UK Stewardship Code goes beyond corporate governance box-ticking to focus on strategic issues - ie a "more expansive form of stewardship". Think health and safety for oil and gas companies, and ethical culture and governance of risk for banks.
Specifically, the review proposes that company directors, asset managers and asset holders adopt good-practice statements that promote stewardship and long-term decision-making.
What changes does this mean in practice and how will they be delivered, given the mindsets and skills of current investment practitioners and the drivers/constraints they face today?
One widely reported recommendation is to create an investors' forum that facilitates collective engagement with UK companies by investors, both UK and overseas. There have been several attempts in the UK, and most independent commentators aren't impressed. And there's experience from other countries - the Australian Council for Superannuation Investors, the (Dutch) Eumedion, the Canadian Council for Good Governance, and the Council for Institutional Investors in the US.
What are the lessons we can learn from both UK and international experience to maximise the success of this new investors' forum?
Kay also proposes that companies stop managing short-term earnings expectations. Several leading commentators have made this recommendation, but only a few have acted on it. What lessons can be learned from this?
His most radical recommendation is that the UK Law Commission reviews the legal concept of fiduciary duty as applied to investment, to address uncertainties and misunderstandings on the part of trustees and their advisers. How can this be done in way which contributes to improvements in the next five years and doesn't get kicked into the long grass?
And there's a nitty-gritty recommendation: Kay wants government/regulators to commission an independent review of models employed in the investment chain, to highlight their uses and limitations. What should this review focus on and how could it be done so that it doesn't become an academic and marginalised debate?
Finally, and very importantly, he proposes that both companies and investment managers (and I'd add asset holders) structure remuneration to incentivise sustainable long-term business performance. Based on what's already known by good remuneration and performance specialists, which of today's practice should be definitely stopped, which new practices should be added and what is worthy of experimentation?
And here's a challenge. You have a choice. If you want to help make sure nothing happens, sit back and wait to see who acts. Or you can engage with these questions - send me your ideas or speak about what you are doing or think should be done.
Together, we just may be able to make something of this review. I wonder which choice your end beneficiaries would like you to take?
Raj Thamotheram is an independent strategic adviser, co-founder of PreventableSurprises.com and president of the Network for Sustainable Financial Markets