Lack of trust driving short-termism
The long-awaited Kay review of UK equity markets and long-term decision making, published today (23 July), said intermediaries, particularly asset managers, are dominant shareholders, but are conflicted between the interests of UK business and desire for returns from investors.
The report, commissioned by business secretary Vince Cable in June 2011 and written by Professor John Kay, said a culture should be fostered in which business and finance work together to create high-performing companies and sustainable returns for savers.
The document said: “The appointment and monitoring of active asset managers is too often based on short-term relative performance.
“The shorter the timescale for judging asset manager performance, and the slower market prices are to respond to changes in the fundamental value of the company’s securities, the greater the incentive for the asset manager to focus on the behaviour of other market participants rather than on understanding the underlying value of the business.”
The report warned that competition between asset managers on the basis of relative performance was a zero sum game.
It said: “The asset management industry can benefit its customers – savers – taken as a whole, only to the extent that its activities improve the performance of investee companies.
“This conflict between the imperatives of the business model of asset managers, and the interests of UK business and those who invest in it, is at the heart of our analysis of the problem of short-termism.”
The report proposed that regulators, company directors, asset managers and asset holders should adopt good practice statements that promote stewardship and long-term decision making.
It also suggested asset management firms should structure managers’ remuneration to a long-term performance incentive and said quarterly reporting requirements should be removed.