The Kay Review of UK Equity Markets
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.