The UK’s Institute of Directors has hit out against the proposed review of executive pay and short-termism in the City. Speaking to the Daily Telegraph, Miles Templeman, Director General of the leading corporate lobby group expressed deep reservations that the review would not generate the period of stability that corporate policy needed.

Lib-Dem minister for Business, Cable thinks otherwise and has appointed noted academic John Kay to examine the “quick buck mentality” of UK equity markets. In a keynote speech to the Association of British Insurers biennial conference, Cable outlined a far reaching and ambitious review which aims to undsertand:

• Whether the timescales considered by boards and senior management in evaluating corporate risks and opportunities, and by institutional shareholders and fund managers in making investment and governance decisions, match the time horizons of the underlying beneficiaries.
• How to ensure that shareholders and their agents give sufficient emphasis to the underlying competitive strengths of the individual companies in which they invest.
• Whether the current functioning of equity markets gives sufficient encouragement to boards to focus on the long term development of their business.
• Whether Government policies directly relevant to individual quoted companies (such as regulation and procurement) sufficiently encourage boards to focus on the long term development of their business.
• Whether Government policies directly relevant to institutional shareholders and fund managers promote long-term time horizons and effective collective engagement.
• Whether the current legal duties and responsibilities of asset owners and fund managers, and the fee and pay structures in the investment chain, are consistent with asset owners’ long term objectives.
• Whether there is sufficient transparency in the activities of fund managers, clients and their advisors, and companies themselves, and in the relationships between them.
• The quality of engagement between institutional investors and fund managers and UK quoted companies, and the importance attached to such engagement, building on the success of the Stewardship Code.
• The impact of greater fragmentation and internationalisation of UK share ownership, and other developments in global equity markets, on the quality of engagement between shareholders and quoted companies.
• Likely trends in international investment and in the international regulatory framework, and their possible long term impact on UK equity markets and UK businesses.

Source: Dept BIS

The Kay Review follows hot on the heels of the as yet unpublished short-termism review, the introduction of the Stewardship Code by the Financial Reporting Council and the House of Lords select committee review on the role of auditors. There was widespread disappointment in the governance community when Dept BIS appeared to sideline the House of Lords evidence; the Kay Review may yet provide another opportunity to air concerns about the role of audit in investor protection.

That the Minister should be putting his own  review of governance forward is hardly surprising given the Lib-Dem commitment to governance in its election manifesto, the only one of the three main political parties to do so. The Walker Review, which led to the Stewardship Code, was a Labour government initiative and spearheaded by the Treasury Department. BIS and Treasury haven’t always worked as closely on governance initiatives as some might have hoped. The view has been that the Treasury facilitates the “markets” whereas BIS’ role in shareholder protection and company law has sometimes had to play second fiddle.

Also on the agenda for review is a separate investigation into executive pay. Although no firm details are yet available, interviews with remuneration committee chairman are expected to look at ways to tackle a “rewards for failure” culture which Cable believes is behind executive pay inflation.

For insights into Professor Kay’s views on corporate governance this 1995 essay is a useful starting point for what could prove to be a very interesting few months for the markets and the governance community.

Last Updated: 26 June 2011