Skip to main content

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.

Popular posts from this blog

The Failure of Herstatt Bank

As an undergraduate, I was taught about the failure of Herstatt Bank in 1974 and Herstatt risk. This bank was only the 35th largest bank in Germany at the time so why would anyone be interested in studying its failure? Herstatt failed because of its involvement in risky foreign exchange business. When it closed its doors on 26 June 1974, counterparty banks (mainly in New York) had not received dollars due to them because of time-zone differences - this is known as settlement risk. The cross-jurisdictional implications of its failure resulted in the Bank for International Settlements setting up the Basel Committee on Banking Supervision and Herstatt's failure was a key reason for the establishment of real-time gross settlements systems, which ensures that payments between two banks are executed in real time. The Bank of England's Ben Norman has an interesting post on Herstatt over at the Bank's new blog ( Bank Underground ). As well as giving an excellent overview of

Boom and Bust: A Global History of Financial Bubbles

Boom and Bust: A Global History of Financial Bubbles, co-authored with my colleague Will Quinn , is forthcoming in August. It is published by Cambridge University Press and is available for pre-order at Amazon , Barnes and Noble , Waterstones and Cambridge University Press . 

The Great Depression

Marginal Revolution University has a great video on the Great Depression.