Yesterday (4 November), the government confirmed it had not ruled out legislative measures where there is a clear case that rule changes will bring about the changes advocated by the Kay Review.
After 16 months the government finally revealed how it plans to act on recommendations made by Professor John Kay to shift fund managers from short-term to long-term performance-based pay.
Last July, the Kay Review stated asset management cost disclosure was “worse than useless” if it did not take into account all layers of fees charged to the investor - including trading costs.
The government stated it would like to see appropriate levels of transparency from asset managers so that their clients would know pay packages were aligned to their investment objectives.
It stated: “The government would like to see investors move away from the default use of short-term (including quarterly) relative performance metrics, towards metrics which focus on achieving returns in line with the long-term objectives of the end investor.”
Martin Gilbert, co-founder and chief executive of Aberdeen Asset Management, said the argument for why investors should take a long-term approach was won a long time ago.
He said: “We look forward to seeing the findings from the government’s research on the models and metrics used by investors to value companies and investment portfolios. Hopefully this follow up work will emphasise why longer time horizons are better for investors.”
Dominic Rossi, global chief investment officer of equities at Fidelity Worldwide Investment, backed recommendations that company directors should be tied into the long-term performance of their companies through time-appropriate shares.
He said: “We have argued for some time for an extension in the holding period of long-term incentive plans (LTIPs) from three to five years and fully support the direction that the committee is taking.”
Mr Rossi argued the standard three-year LTIP scheme was designed before the financial crisis, and needs to be reformed.
He said Fidelity recently conducted a review of remuneration practices looking at the adoption of long-term incentive plans (LTIPs) among FTSE 350 companies (excluding non-operating companies such as investment trusts).
It found, of the 304 companies remaining, 238 had either no equity-based incentive scheme or an equity based plan that vests for three years or less.
Only 14 companies, compared with six last year, had LTIPs that extend to five years.
But Caroline Escott, head of government relations of the UK Sustainable Investment and Finance Association, urged the government to go further and give much greater recognition to the role that an understanding of environmental, social and governance (ESG) factors plays in supporting companies to deliver sustainable growth.
She said: “The financial crisis in 2007 clearly demonstrated the need for a radical reshaping of capital markets and better investment practices that support long-term economic growth.
“We are pleased to see that, in its response, the government recognises the significant steps already taken by the industry to promote and boost long-termism across the investment chain.
“We also welcome the government’s encouraging comments on the need for greater asset owner sign-up to the Stewardship Code – an important issue that UKSIF and its members have raised with policymakers and regulators as a priority issue.
“However, it is a shame that this response misses the opportunity to more explicitly highlight the need for consideration of environmental, social and governance factors by both asset owners and managers in order to fulfil their stewardship responsibilities.”
