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Finance: Equity Markets

Volume 736: debated on Monday 23 April 2012


Asked By

To ask Her Majesty’s Government what assessment they have made of the findings of the Kay review of United Kingdom equity markets and long-term decision-making; and whether they intend to take any consequential action.

My Lords, the Kay review’s interim report, published in February, presented a discussion on a wide range of issues highlighted by respondents to the review’s call for evidence. It did not include any firm conclusions or recommendations. We expect Professor Kay to make the recommendations in his final report in the summer and it would not be appropriate for the Government to prejudice Professor Kay’s findings ahead of the final report.

I am surprised by the Minister’s appraisal of the Kay report. However, will she concede that the rules of corporate government in the UK are in need of drastic revision? Does she not recognise the virtue of restricting the voting rights to shareholders who have long-term interests in companies in which they have invested, and is it not clear to her that the advisory role of shareholders on remuneration gives them insufficient powers to constrain the exorbitant executive awards that we have seen in recent times?

My Lords, as the noble Viscount will know, the review forms a key part of the action taken following the department’s A Long-Term Focus for Corporate Britain: A Call for Evidence, which was published in October 2010. We are exploring the issues of economic short-termism in the UK alongside executive pay and narrative reporting. Of course we are concerned. We have put forward this independent investigation by Professor Kay so that the very points that the noble Lord has mentioned will be addressed.

My Lords, on 3 November in the other place, the Leader of the House, the right honourable Sir George Young, said that the Government were considering methods by which shareholders could become members of board remuneration committees. In this House on 30 January, the noble Baroness said that she would welcome employee representatives on board committees. Do those continue to be the Government’s positions and, if so, when will we see some action?

On the Government’s view on shareholder/worker representation on company boards and committees, we decided not to include such proposals in the packet of measures for greater transparency. However, Professor Kay’s independent report will inform all the Government’s judgments from this point.

My Lords, although I totally respect the view of the noble Baroness on premature discussion of the Kay report, does she not agree—a point with which I am sure the previous noble Lord would agree—that if markets are to take a longer-term view of investments, the fund management industry needs to change its method of remuneration so that fund managers are not rewarded by the short-term performance of the companies in which they invest?

My noble friend is right. We are looking at how the long-term proposals can be best served. Short-termism can be very advantageous, but it can also be dangerous in the long term, and we are only too delighted to support him in his view.

My Lords, the noble Lord, Lord Peston, will realise that there have already been two opening questions from the Labour Benches. It is now only fair that we go to the Conservatives.

My Lords, does my noble friend not recognise—I am sure that she does—that in times of low interest rates investors look for short-term and long-term reports, and that they therefore as a whole look forward to the report from Professor Kay and recognise that very little was done by the previous Government to address this issue?

My noble friend puts it extremely well. Of course short-termism and long-term planning go together. These are difficult times. We need to do the very best that we can. It is worth remembering that the United Kingdom has a world-leading corporate governance and company law regime. The World Bank rates the United Kingdom as the best place in Europe and the fifth best in the world for doing business. It is vital that the UK continues to be seen as world-leading in corporate governance.

I did not give way because I was under the impression that the coalition was still part of the Government. Whatever the state of play is on that side of the House, is not the best performing economy in Europe Germany, to take an obvious example? Short-termism is frowned upon in Germany, where the shareholders are committed to the firms in which they hold shares in the longer term, as are the workers. We advised the Germans immediately after we won the Second World War. They ended up rich and we ended up a comparative economic disaster. Is it not time the Government stopped holding back from taking a view on this and actually started, as my noble friend Lord Myners said, to do something?

I am interested to hear the noble Lord’s question. In the more than a decade in which his party was in power, it did absolutely nothing to advance from the position after the Second World War that he quotes.

Either I was too slow or someone else was too hasty. I am advised that the Kay report does not address the question of employee shareholders. Does that mean that the Government will reconsider their previous statements on employee shareholders?

As I have said and as I am happy to repeat, this is an independent report by Professor Kay. He is able to say what he likes on the whole of this subject and we look forward to what he recommends.

The challenge is how one incentivises people for longer-term thinking. The trouble is that if the quickest way of turning a fast profit in order to maximise one’s share options is to axe longer-term research and development, there will be no benefit to Britain in the longer term. One sees that happening too often. There are two sorts of shareholders and unfortunately the bigger lot are in there for the short term as well for investment purposes.

The noble Earl is quite right. We sell ourselves short if do not invest in the future and do not look at R&D. It is an important part of anyone’s balance sheets, certainly in the FTSE 100, and I am happy to agree with him.