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July 04, 2011
UK to Review Long-Term Performance of Equity Markets
    by Robert Kropp

The review will seek to determine how to establish an equity investment regime that provides accountability and supports the long-term interests of companies and investors.

In what the UK-based Department for Business, Innovation and Skills (BIS) described in a press release as "a challenge to investors, shareholders, the boards of UK listed companies and regulators to better serve the long-term interests of British businesses, investors and the economy," Business Secretary Vince Cable announced recently the launch of an independent review into UK equity markets.

"It is especially urgent that we work out how the equity investment regime can be recalibrated to support the long-term interests of companies as well as underlying beneficiaries, such as pension fund members," Cable stated.

The review will be conducted by Professor John Kay, who said, "Equity markets are a principal mechanism of control and accountability for Boards and senior managers, and a means by which individuals and households provide for retirement and other long term financial goals…I believe this is probably the most important issue in industrial policy today."

According to the Terms of Reference published by BIS, the review will focus on several issues, including 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."

The review will also consider whether equity markets and government policies encourage boards as well as institutional investors to focus on long term development; whether the legal responsibilities of asset owners and fund managers are consistent with the long-term objectives of asset owners; and "whether there is sufficient transparency in the activities of fund managers, clients and their advisors, and companies themselves, and in the relationships between them."

Finally, the review will consider the quality of corporate engagement by institutional investors and fund managers. This area of investigation seeks to build on the U K Stewardship Code, published in July 2010 by the Financial Reporting Council (FRC).

The Stewardship Code states that it "aims to enhance the quality of engagement between institutional investors and companies to help improve long-term returns to shareholders and the efficient exercise of governance responsibilities."


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