The Kay Review of UK Equity Markets and Long-Term Decision Making - Business, Innovation and Skills Committee Contents


3   Previous review of the market

9. The commissioning of the Kay Review was not the first attempt by a Government to examine and reform the UK equity market. In 2001, Lord Myners published his Review of Institutional Investment in the United Kingdom (the Myners Review).

10. In the introduction to that Review, Lord Myners gave the following description of his work:

    The review does not seek to argue that the institutions whose investment behaviour it examines have some public interest responsibility to invest in certain ways. But it is a legitimate issue of policy concern to establish the extent to which institutions' approaches to investment decisions are:

    ·  rational;

    ·  well-informed;

    ·  subject to the correct incentives; and

    ·  as far as possible, undistorted.

    The review also has a specific remit to investigate institutional investment in private equity, but its purpose in doing so is to determine whether there are unnecessary barriers to such investment which should be removed, not to promote such investment regardless of whether it is right for the institution concerned. Indeed, a sudden move by pension funds to increase their allocation to private equity without proper consideration and analysis would be both damaging to them and contrary to the spirit of the review's recommendations. Private equity requires a sustained long-term approach, not rapid entry and exit driven by short-term performance results or changing fashion.[14]

11. Lord Myners told us that the Kay Review was "very well argued" and identified the core issue which was "the emergence over the last 30 years of a transactional relationship between companies, investors and intermediaries, and the dominance of the financial intermediaries, matched by a steady erosion of trust as the basis for commercial relationships".[15] However he went on to argue that without Government action the Review would have little impact on the sector:

    I do not think that the Professor's report will add a jot or tittle to the prosperity of the UK economy and the success of our businesses.[...] The industry's response to Kay is, I think, one of considerable comfort. It might be summed up with: "Move along, Sir. Nothing much to look at here".[16]

12. Lord Myners made more than 50 recommendations to the then Government to implement change. However, little progress was made in the implementation of those recommendations. Lord Myners argued that the reason for this was that the Government had simply lacked the resolve to act:

    I am very disappointed in the lack of progress after my report on institutional investment in 2001. It relied on the same statements on principles of best practice that Kay is continuing to rely on. I have come to the conclusion that there are some fundamental flaws in our current approach to corporate ownership.[17]

He went on to remind us that "there is a long succession of reports on these areas" and that "there is very little in Kay's early chapters that represent any fresh and additional perspective on these issues".[18]

13. Professor Kay's remit appears to support that lack of progress. We asked the Secretary of State for assurances that the Government would act on the Kay Review. Although the Secretary of State acknowledged that "there is always a danger of nice reports that just never happen",[19] he assured us that this would not be the case with the Kay Review:

    We are not letting the matter rest. [...] We have made it very clear that in the summer or autumn of 2014 we want to go back over what the Kay Review has recommended to make sure that these things are actually happening. We are also commissioning a group of independent people who will track these recommendations and see that they are being followed through.[20]

14. In the 12 years since the Myners Review, little has changed in the role and actions of institutional shareholders. The recommendations and findings of the Kay Review cannot be ignored or diluted as we have heard the Myners Review was. The similarities between the remit of the Kay review and that of the Myners Review demonstrate that little progress has been made to reform the sector. It is therefore critical that they do not share a similar fate. The Government must play an active role to drive reform on implementation of Professor Kay's recommendations. Our Report, therefore, concentrates on where that activity must take place.


14   Lord Myners, Myners Review of institutional investment: Final Report, March 2001, page 4, para 5 Back

15   Q 83 Back

16   Q 83 Back

17   Q 84 Back

18   Q 84 Back

19   Q 314 Back

20   Q 314 Back


 
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Prepared 25 July 2013