I have
recently finished reading the interim report of the Kay Review. The terms of
reference for the review are: "to examine the mechanisms of corporate control
and accountability provide by UK equity markets and their impact on the long
term competitive performance of UK businesses". All finance students
should read this interim report as well as anyone interested in equity markets
- click here.
Here are some of my highlights:
1. There has been a decline in collective action by institutional investors.
2. The mode
of appointing non-executives (by a board committee with substantial input from
the Chairman) raises questions about their independence.
3. Some
non-executive directors may hold too many non-executive roles to perform
effectively.
4. The
increase in nominee holdings due to the introduction of electronic trading and
settlement means that the majority of holdings of UK equities are nominee
holdings, which means that beneficial shareholders are not on share register,
do not receive information from company, and have no voting rights.
5. Personal
shareholders have become disenfranchised.
6. The
regulatory framework now favours liquidity over long-term ownership.
7. The
primary market (IPOs) in the UK is not working well at the minute. There has
been a substantial fall in listings on the main exchange.
8. Many
mining and commodity companies, whose operations are mostly outside the UK, are
now listed on the London market. Many of these companies have lower corporate
governance standards as well as a limited free float of shares.
9. There is a
lot of vehement criticism of high frequency trading by respondents to the
Review.
10. Insider
trading rules appear to inhibit asset management firms and institutional
shareholders from engaging directly with managers of companies.
11.
Institutional investors favour exit over voice.
12. The UK is
an outlier amongst major economies in that share ownership is highly dispersed.
Family ownership is not very common in the UK, whereas it is common amongst
medium-sized US corporations.
Overall, these potential deficiencies may undermine the UK equity market, which
would be detrimental for companies requiring equity finance and savers looking
for a decent return on their investment. It will be interesting to see what
recommendations the final report makes.