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'Constitutional settlement' must follow Shareholder Spring, says Kay

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  • 'Constitutional settlement' must follow Shareholder Spring, says Kay

UK - A recent series of shareholder revolts over executive pay packages would have been greatly aided by the presence of an investor forum, Professor John Kay has suggested.

Speaking last night in London as he launched the eponymous review of UK equity markets and how to encourage long-term investment behaviour, Kay also criticised the current extent of intermediation between asset owners and managers, saying the "central" figure in all such transactions should be the manager.

Highlighting one of the report's suggestions for the creation of a new investor forum - which the paper said would give a voice to all institutional investors with UK equity holdings, allowing for both "supportive and critical action" - he likened the current situation to that facing a number of countries in the wake of the Arab Spring uprisings.

"[As] the Arab Spring needs to be followed by a stable constitutional settlement, so does the shareholder spring need to be followed by it," Kay told attendees.

"It is extremely easy to think of recent current examples where collective action by shareholders would have been useful."

However, some industry members were still uncertain about how effective such a forum would be, with Governance for Owners partner Simon Wong noting that the final report had failed to detail how the forum differed from existing endeavours, or how it would set about increasing engagement of non-domiciled investors.

Wong's concerns echoed those raised by PIRC managing director Alan MacDougall, who said existing bodies had "morphed", changing from their original purpose into industry lobby bodies. 

Kay also echoed sentiments repeatedly expressed that the chain of intermediaries created a system of misaligned incentives.

He said the current chain of intermediation was too long, citing the number of managers available to oversee assets on behalf of pension funds and other institutional clients.

"It costs too much on one hand, and, on the other, it creates extended potential for misalignment incentives as each group of these intermediaries operates its own business model," he said.

"The central figure in the chain is, and should be, the asset manager."

Wong shared his concerns, but he argued that the final report failed to examine the role of pension funds within the equity chain in sufficient detail.

"In particular, we feel reliance on intermediaries can be reduced through reforms in the structure and governance of asset owners," he said.

He said this could be achieved by consolidating smaller pension schemes, which could result in increased internal expertise at board and management level - an argument often put forward by those who argue in favour of consolidating the UK's local authority pension schemes.

Also responding to the report, law firm Sackers highlighted Kay's emphasis of the importance of the fiduciary role of investors, speculating that the academic hoped pension scheme trustees would increase their engagement role.

Zoe Lynch, a partner at the firm, said: "Perhaps he is asking pension fund trustees to step up to the plate and see whether they can bring their influence to bear in developing a more long-term view of the market."

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