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Impact Investing

IPE special report May 2018

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Kay seeks corporate governance ‘settlement’

John Kay's long-awaited final report on long-term decision making within the UK's equity market did not offer many surprises. Many of the proposals had already been hinted at in February's interim report, such as the abolition of quarterly reporting to aid companies in more long-term thinking.

However, the ‘Kay Review of UK Equity Markets and Long-term Decision Making' did propose changes that could lead to improvements for both domestic and overseas investors in the UK.

Using the current political climate as a backdrop, Kay argued at the report's launch in July that the recent ‘shareholder spring', which deposed a number of chief executives over disputed pay deals, would need to come to a natural conclusion and bring about change. Kay said: "[As] the Arab Spring needs to be followed by a stable constitutional settlement, so does the shareholder spring need to be followed by it."

To bring about this stable ‘constitutional settlement', Kay has looked to pre-existing arrangements both domestic and foreign, suggesting the creation of an institutional investor committee that mirrors both the US Council of Institutional Investors and a similar but failed council in the UK.

Some have argued this could result in the UK, most likely London and Edinburgh as its main trading hubs, becoming a global centre for responsible stewardship. However, the success hinges on investors - especially pension funds and insurance companies - engaging in any future shareholder opposition. To a limited extent, this approach has been successful even without the existence of such a board - with June's legislative proposals by the UK's Department for Business, Innovation and Skills already hinting at a stronger voice for shareholders through the introduction of a binding vote on pay.

Granting shareholders the ability to express their view, knowing their vote will not simply be disregarded, should only serve to foster greater engagement between companies to avoid the damaging occurrence of a pay package being rejected. By granting shareholders the necessary teeth, they will rarely be required to bare them.

However, the issue of short-termism remains a divisive one. In IPE's Off The Record quick poll, the 34 respondents from across Europe were divided on whether Kay was correct that the markets had become too short-termist. More than half agreed that they had, while just over a third believed that short-termism was only a problem in limited parts of the market.

Respondents were reluctant to admit that this short-term perspective was entirely the fault of investors. One Dutch respondent blamed existing regulation - such as the solvency guidelines governing insurers - for their inability to fulfil their role as long-term investors.

However, a UK respondent argued that investors - asset owners and managers - had become "besotted" with benchmarks, and had lost sight of the long-term fundamentals.
Another respondent said the problem was habitual, in that, as long as trustees continued supporting short-term behaviour - such as demanding quarterly reports that Kay suggested should be abolished - no change would occur.

No respondents said a greater level of engagement was needed, as urged by Kay, instead indicating that the system of remuneration within company boards and asset managers should be modified to encourage more forward-looking investors and board decisions.

With many investors reluctant to undertake the tasks of engagement and active voting rights, greater commitment is needed to ensure that Kay's good intentions for an investor forum amount to more than just well-meaning words.
 

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