Restoring ‘trust and confidence’ - The Kay Review of UK equity markets and long-term decision making

03 September 2012

The Final Report from John Kay is a typically good and provoking read – far more so, to be honest, than many of the papers that hit our desks day-in, day-out. It has the potential to be one of the most significant initiatives that UK business has seen for some time - or it could turn out be a damp squib. Much depends on how it is taken forward by the Government – we believe it is an opportunity that must not be passed up.

It was always going to be more than a critical look at some of the components of the equity markets – the insidious effects of short-termism on the competitiveness of UK business were the real target from the start.

The Final Report begins by recognising that UK business needs to “invest” and “develop its capacity for innovation, its brands and reputations, and the skills of its workforce” in a way that “will enable us to achieve our long-term financial goals.” Based on his review, Kay records “wide agreement...that equity markets today [are] not as effective as they should be in supporting these purposes.” This goes right to the heart of UK business and his report is a real opportunity to tackle some of the issues that are often blamed for the financial crisis.

The solutions Kay suggests are firmly centred on the themes of restoring trust and confidence between investors, companies and intermediaries and creating a culture that incentivises the right behaviour, allowing equity market participants to look beyond the short term to sustainable, long-term performance.

I’m very glad to say that this is absolutely consistent with the discussions around ‘trust’ and ‘doing the right thing’ that PwC has been leading in recent times. Because it doesn’t feature on the balance sheet trust can be overlooked. However, a whole range of recent events have demonstrated the need to build and sustain trust back into the core of corporate and business culture.

Kay does not see further regulation aimed at preventing ‘wrong behaviour’ as the answer; he takes a principles-based approach, and wants a regulatory framework that creates a culture of ‘doing the right thing’ and enables and encourages investors to achieve “long-term returns by supporting and challenging corporate decisions in pursuit of long-term value”.

In the PwC response to Kay’s Interim Report we looked forward to the implementation phase and said that it would have to proceed with caution. The equity markets play a vital role in the UK economy and positive features must be preserved. As always, care is needed to avoid disadvantaging the UK against our international competitors – though with the preponderance of overseas companies among recent flotations, the effects of any changes to the markets would not be limited to UK business.

Having said this, the principles and many of the recommendations in the Kay Review must not be left to languish – restoring trust is just too important for all of us involved in UK business. The report’s recommendations are addressed to the Government, regulatory authorities and key players in the investment chain and Secretary of State Vince Cable is to consider the report and respond later in the year. Although there has been a mixed response to some of the recommendations, we should all take an active part in making the most of this opportunity.

Here are a couple of thoughts to get the ball rolling:

  • Is it not time to look again at different classes of share for listed companies, with different voting rights to reward long-term investors?
  • Why should Good Practice Statements be limited to directors, asset managers and asset holders? Why should other advisers not follow suit – including audit firms, law firms and banks?

 As always, do please keep in touch – I really value your responses to this blog.



Thank you for this commentary on the Kay Review. I agree with your insights and can only reiterate that our work within the IIRC (International Integrated Reporting Council) is to build an Integrated Reporting Framework that allows "..equity market participants to look beyond the short term to sustainable, long-term performance."

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