UK - The stock market has "almost no importance at all" for generating new funds to invest in UK industry, according to Professor John Kay.
Speaking at the National Association of Pension Funds investment conference in Edinburgh earlier today, Kay - who is conducting a review on the matter - said markets "plainly" were not working well if market participants had had a good decade even though the market itself had suffered over the same period.
The professor told conference delegates that many long-held beliefs and preconceptions about equities were wrong.
"We need to understand that equity markets today are primarily secondary markets - that, as the source of new funds for investing in UK industry, equity markets are of almost no importance at all," he said.
Kay also criticised what he perceived to be a growing focus on absolute returns over relative returns, stressing that "pounds, not alpha" paid for pension benefits.
"Taken as a whole," he said, "people's pensions are paid for by beta, not alpha - because alpha aggregated over all investors is essentially zero.
"For the market as a whole, the only thing that generates additional returns is higher performing companies."
Kay lamented that the business imperative of asset managers was not to create better performing companies but to outperform their rivals.
He also criticised an incentive structure that rewards a sale of shares over engagement.
Speaking specifically of corporate governance, he said: "Many fund managers regard this as something that is not so much to the benefit of their client, it's something they regard as an additional cost that will have to be paid for in some way or another.
"This is the group of problems that arises from a particular example of misaligned incentives, in which asset managers have a business model built around their relative performance."
He compared investors with traders, saying the former looked to gain returns from the underlying cash flow generated by the company, while the latter looked for returns from movements in market share prices - trading on "momentum, arbitrage or being in some sense market makers".
Kay acknowledged that the market required both traders and investors, but he said that trading had overtaken genuine investment activity in the current environment of incentives and rewards.
He said his final report would aim to achieve two goals.
"One will be, in the broadest of terms, to describe the kind of philosophical policy shifts we need to make over a period of years if we are to get an equity market better suited to the needs of its users and customers," he said.
The other will be to propose "incremental changes" moving the market towards this philosophical change.