UK secretary of state for business, innovation and skills Vince Cable has announced an independent review of the UK equity markets, which will make recommendations on the mechanisms of corporate control and accountability provided by UK equity markets and their impact on long-term competitive performance of listed companies.
The review will be conducted by Professor John Kay of The London Business School, assisted by a panel of experts, and is expected to publish a report in 2012.
Speaking at a conference held by the Association of British Insurers, Cable said, “It is especially urgent that we work out how the equity investment regime can be recalibrated to support the long-term interests of companies as well as underlying beneficiaries, such as pension fund members.”
Cable said that a call for evidence on factors driving investment and management decisions in October 2010 had revealed a disconnect between corporates and asset owners. “We heard concerns from the ultimate owners of assets that the way fund managers are incentivised is short-termist,” he said. “Others claimed that the rise of proxy voting agencies and the use of index funds mean that shareholders are less interested in acting like owners.”
The minister also referred to a paper published in May 2011 by Andrew Haldane and Richard Davies of the Bank of England, which analysed the pricing of companies' equities. “What they found was significant evidence of short-termism in investment decisions – and evidence that it is a growing phenomenon not declining,” Cable said.
Responding to the announcement, Richard Saunders, chief executive of UK institutional investment trade body the Investment Management Association (IMA), said, “Equity markets exist to service the interests of two constituencies: investors seeking a profitable return on their long-term savings, and companies seeking to raise capital. This review affords an opportunity to examine how far the needs of those two groups are met, and to ensure that excessive value is not being extracted by intermediaries.”
The terms of reference for the review include an examination of whether legal duties and responsibilities of asset owners and fund managers, and the fee and pay structures in the investment chain, are consistent with asset owners' long-term objectives.