UK - A long investment chain creates opportunities for misalignment, according to John Kay, chairman of the UK's Kay Review, which published its interim report at the end of February.

Delivering a pre-recorded message at the International Corporate Governance Network's (ICGN) London conference, he said there was too much intermediation in the investment chain, including custodians, asset managers, fund of fund managers, trustees, investment consultants, platforms, financial advisers and distributors.

"There is a proliferation of intermediation in many ways that makes the business of equity investment more professional but has two big adverse consequences," he said.

"It raises the cost of the whole process, and, by interposing a long stream of intermediaries between the ultimate beneficiary - the holder of the economic interest in shares and the companies that issues equities - we create the opportunities for misalignment incentives."
He added: "That problem of misalignment in incentives is perhaps the most worrying in relation to asset managers because the business model of asset managers is predicated on their relative performance.

"The asset manager is looking for good relative performance to expand the size of this business. The trouble is that overwhelmingly good relative performance is at the expense of other asset managers. The only activity that increases the return to all beneficiaries taken as a whole is improving the underlying performance of companies."

Kay suggests this can be done by moving away from the current environment, where asset managers' performance depends on alpha but the interests of the beneficiaries ultimately depend on beta.

He explained: "[We should] put more emphasis on investing and less trading. By investing, I mean structures and incentives of asset management activity that are directed towards looking to the underlying earnings, the cash flow the company generates, and less to momentum trading, arbitrage gains, financial engineering as ways of extracting wealth relative to other asset managers."

This would lead to a more concentrated asset management sector, a relatively short chain running from the ultimate beneficiary to the companies and create supportive, long-term relationships between investors, beneficiaries and the companies, he said.

At the same event, Lawrence Churchill, chairman of the National Employment Savings Trust (NEST) Corporation in the UK, said good governance was at the very foundation of NEST because it meant the scheme could fulfil its plans more effectively.

"In future years, NEST may become one of the largest trust-based schemes in Europe," he said. "We will in time have an important role to play as a large institutional shareholder of companies globally.

"We have, therefore, decided we need industrial strength governance from the very start to help guide us as we grow. We have drawn on best practice from the compliance sector - for example, the FRC's corporate governance code, the Stewardship Code, from the public sector work and of course from the pensions sector, including trust law and all the regulatory guidelines."

The conference officially launched the ICGN Statement and Guidance on Political Lobbying and Donations, as well as the ICGN Model Contract Terms Between Asset Owners and Managers.