Government will announce the next steps in its review of corporate governance and economic short-termism in summer 2011
UPDATE September 2011: BIS has now announced that the Kay Review will constitute the continuation of its work on “A Long-Term Focus for Corporate Britain”. The Kay Review will publish an interim report in February 2012 and a final report in July 2012. See this post for details of the Kay Review.
In October 2010 the Department for Business, Innovation and Skills (BIS) launched a review of “corporate governance and economic short-termism” by issuing a call for evidence. In the words of BIS, this review “considers the role of directors and shareholders and asks fundamental questions; for example, about shareholder engagement, market short-termism and the functioning of the investment chain in the UK. It also considers directors’ remuneration and…the economic case for takeovers”. The call for evidence is here.
BIS has now published a “Summary of responses” received to the call for evidence. There were 98 responses - relatively few, at least compared to the over 2,000 responses received by Lord Davies’ review of women on boards, which we discuss in this post. BIS analyses the broad themes of these responses in the following terms:
- “Overall, respondents believe that short-termism exists in UK equity markets but provided little evidence to demonstrate the scale of the consequences for companies and investors. Many respondents noted the decline in the proportion of UK equities held by UK institutional investors (and a corresponding rise in the proportion held by overseas investors and hedge funds), and raised a range of concerns related to this increasing atomisation of ownership of UK companies. However, many respondents also made the point that the UK benefits from investors using a range of strategies, both long-term and short-term.
- The majority of respondents believe that boards tend to take a long- term view but face short-term pressures. The most effective forms of engagement vary between companies but voting is viewed as a key form of engagement between the company and its owners.
- The majority of respondents believe that agency problems exist in the investment chain. Most respondents felt that greater transparency of fund manager pay and mandates would be beneficial; however, fund managers were in disagreement and viewed current disclosure as sufficient.
- The majority of respondents agree that executive pay has risen to unacceptable levels in some cases given performance, however they did not agree on the causes or the best methods of mitigation.
- There was a mixed response on the issue of whether boards understand effectively the long-term implications of takeovers or communicate these effectively to investors. However, there was not much support for requiring a vote for shareholders in acquiring companies involved in a takeover.”
BIS will publish the next steps in this review in summer 2011. (This has now been superseded by the Kay Review – see this post.)
One of several corporate governance and “long-termism” reviews in progress
This review is one of several underway in the UK and at EU level. The European Commission green paper on corporate governance in listed companies is due to be published in the first half of April 2011. Ongoing related work in the UK includes BIS’s review of listed company narrative reporting, see here, the Takeover Panel’s proposed changes to the City Code on Takeovers and Mergers, discussed here, and the Financial Reporting Council’s recommendations on corporate reporting and audit. See also entries in the “Corporate governance” category of this blog.
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