Out-Law News 3 min. read

Government and industry set out "encouraging progress" towards a longer-term UK investment culture

Recent reforms by government, regulators and industry has given the UK what it needs to deliver lasting changes to corporate culture, two years after the publication of an influential report on ending market short-termism, the business secretary has said.

Vince Cable was speaking at a launch event for the Investor Forum; a group representing the interests of institutional investors including pension funds and insurers. The group was formed in response to one of the recommendations of Professor John Kay in his 2012 report, and counts Kay amongst its founding members.

This week, the government's Department for Business, Innovation and Skills (BIS) published its own 'progress report' on the implementation of the Kay Review. In that report, it listed recent developments on investor engagement, corporate reporting reform and executive remuneration, and announced that regulators would be looking to embed long-termism in guidance for investors following recent recommendations by the Law Commission.

The report also confirmed the "imminent removal" of mandatory quarterly reporting as recommended by Kay, following changes to the EU's Transparency Directive and related UK legislation. The Financial Conduct Authority (FCA) is due to publish the necessary changes to its Disclosure Rules and Transparency Rules next month, according to the report.

"An excessively short-term, 'quick-buck' investment culture was one of the key factors that led to the financial crash of 2008," Cable said. "I was determined that government should do something about it and make our equity markets better at supporting long-term value creation by British businesses."

"I am encouraged by the progress that has been made in implementing [Kay's] recommendations not just by government and regulators but also by the investment community itself. Sustained commitment will be needed to ensure that we fully deliver on Professor Kay's vision, but I am convinced that we now have the building blocks in place to deliver a lasting shift in the culture of investment," he said.

The Kay Review was commissioned by the UK government to look at ways to encourage long-term corporate decision-making, and to restore public confidence in stock markets. Published in July 2012, the final report set out 17 recommendations in the form of 'statements of good practice', which Kay said should be adopted into "clear and specific guidance" rather than "detailed regulation". The creation of an 'Investor Forum' as a means of improving engagement between big investors and UK companies, with its own permanent secretarial staff, was one of the central recommendations of the report.

The Law Commission's review of the 'fiduciary duties' of investment intermediaries was published this July in response to one of Kay's recommendations. The Commission, which is the law reform body for England and Wales, encouraged a shift towards longer-term investment decisions in which intermediaries, such as pension fund trustees, should be allowed to take social, ethical and other non-financial considerations into account, rather than simply short-term financial performance.

In its progress report, the government accepted the Law Commission's recommendations aimed at government departments, the Financial Conduct Authority (FCA) and the Pensions Regulator in full. In particular, it said that this would involve the inclusion of long-term factors in investment decisions in regulatory guidance for trustees of trust-based pension schemes, and in guidance for the new independent governance committees of contract-based pension schemes. The government would also consult on introducing a new requirement for trustees of trust-based schemes to state the scheme's policy, if any, on stewardship in the scheme's Statement of Investment Principles.

"The report highlights how much is underway in improving investment governance and stewardship in pension schemes," said pensions expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com.

"Various government bodies, regulators and lobbying groups have all come together to improve how pension schemes invest and it is early days still. Actual achievements will be measurable only once relevant measures have been in place for some time. But the will is there, and everybody seems to be moving in the right direction," he said.

The government also highlighted its "comprehensive reforms" to the governance of company directors' remuneration, including transparency initiatives and the introduction of a binding shareholder vote on pay policy in order to strengthen accountability to shareholders. It said that it was currently "monitoring the impact of the reforms" in the context of the 2014 reporting and AGM season, noting that concerns had been raised by stakeholders about some approaches taken by companies in interpreting the regulations.

"While the report is broadly positive as to the steps that have been taken to date, clearly government is aware of the concerns of some about how certain provisions have been interpreted and the consequences for transparency and accountability," said Matthew Findley, a remuneration expert at Pinsent Masons. "This may indicate a toughening of attitudes at government level as well as investor level in 2015."

"Some of the key themes emerging recently, and which will remain on remuneration committee agendas as companies gear up for the 2015 AGM season, are the use of post-vesting holding periods, increased share ownership guidelines and a renewed focus on malus and clawback. There is also an increased focus on making sure the various safeguards have 'teeth'. The apparent desire for companies to move away from earnings per share and total stakeholder return performance measures is understandable to some degree, but it creates a tension in relation to the potential disclosure of commercially sensitive information and the need for transparency," he said.

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