A cautious welcome for Kay’s stock market plan

BUSINESS organisations yesterday gave a cautious welcome to a government report that recommends reducing “short-termism” in stock markets by cutting cash bonuses for executives and improving communication between shareholders and companies.

In his report Professor John Kay also backs the creation of a new institutional investors’ forum that would allow disparate shareholders to work together and address boards with one clear message.

His wide-ranging package of measures aims to increase the number of long-term investors who take an active interest in a firm’s progress, as opposed to trading stock on the basis of fleeting changes in a company’s share price.

To this end Kay also suggests an end to compulsory quarterly trading updates for listed firms, suggesting asset holders should “review performance no more frequently than is necessary” and instead focus on long-term returns.

“It is clear that the investment chain as currently structured is not working effectively,” Alan MacDougall, managing director of shareholder group Pirc said in response. “In almost every link in the chain there is a bias in favour of activity, regardless of whether this can be proven to be in the interests of, either issuers or savers.”

John Longworth, director general of the British Chambers of Commerce, added: “Short-term behaviour on trading floors limits the availability of capital for growing companies, and for crucial investment in the UK’s infrastructure. The City is an important economic powerhouse in its own right, but should also have as a primary role oiling the wheels of the real economy.”

Business secretary Vince Cable, who commissioned the report, will respond in detail later this year and consider whether any of the recommendations should be implemented.

But Stephen Cahill, head of exec remuneration at Deloitte, said the proposal to pay long-term incentive plans in shares when directors leave could be problematic: “This proposal...may even have the unintended consequence of driving up executive pay further as companies compensate executives for having to wait longer or of encouraging executives to change jobs more often to get access to their shares.”