Prospect Roundtable – The Kay Review: adviser perspectives
Martin Gilbert, CEO of Aberdeen Asset Management, hosted an event on shorttermism in equity markets in association with Prospect. On the panel were Professor John Kay, Henry Tapper and Sir George Cox. The debate was chaired by Bronwen Maddox, Editor of Prospect.
From left to right: George Cox, Henry Tapper, John Kay, Bronwen Maddox and Martin Gilbert
Professor John Kay, economist, explained to a large audience at Aberdeen Asset Management’s London office, the reasoning behind his report into equity markets, published 18 months ago. The report, he said, pointed out that stock exchanges were a product of the 20th century, designed to suit the purposes of large manufacturing corporations such as rail companies. But 21st-century exchanges list the stocks of companies that are much less capital intensive. Companies, especially technology companies such as Google and Facebook, can become cash generative much faster. When Facebook issued equities, raising £16bn, it had little idea what to do with the money.
Kay said UK markets were no longer a significant source of funding for investment by UK companies and were now dominated by asset managers, consultants and other intermediaries. The raison d’être of equity markets, he said, was not however intended to be the intermediaries but rather the savers whose funds are invested and the companies in which they are invested.
A cultural change is required across the entire equity investment chain, said Kay. The system should be simpler, involve fewer intermediaries, and require more specialists and fewer conglomerates. Martin Gilbert stressed that the conduct of firms intervening in the investment chain should be driven by the principle of putting customers first. This implies that banks must work harder on customer service and in that sense involves a greater degree of responsibility to be demonstrated by firms.
The rapid trading in evidence in equity markets was, Kay said, a measure of the “decay” of those markets, not of their health. Investors should place their money with asset managers for much longer periods—and those managers should face an entirely different regulatory framework. Kay noted that the regulation of the past 20 years had not worked, and its principle failure was that it was supervisory. Instead of being rules-based, said Kay, regulation should focus on the structure of markets. He also pointed out that asset managers were largely accepting of this point, saying the dysfunctional structure of regulation interfered with their operations.
When asked about the response to his report, Kay said it was broadly positive— but not from politicians. He lamented their failure to use the “bully pulpit” to call for change in equity markets and said it was disappointing that their reflexive reaction was simply to call for more regulation.
Sir George Cox, Pro-Chancellor of Warwick University, then commented on the importance of company formation, asking rhetorically where the companies were going to come from that Britain needed. Cox said that Britain was not growing companies in the necessary way because a culture of short-termism was diminishing the commitment to long-term investment. The government, he said, was driving short-term thinking. Cox said that public companies were expected to report every quarter and staff performance was also assessed on that time-frame. This leads to a short-term outlook, said Cox, a problem for all public-listed companies. He contrasted this with the example of Jaguar Land Rover—when the company was acquired by Tata, a multi-year programme of company reform was put in place and the results, said Cox, were very strong. This kind of long-term planning could never be done with a public company.
Henry Tapper, Director of First Actuarial, said technology could help to empower the end users of equity markets, allowing more people to have a voice in influencing the direction of change and encouraging more stringent governance. Technology, he said, allowed people to cut out the middle-men.
Martin Gilbert said that his firm looks to hold equities for the long-term, in many instances for 10 years or more. He agreed with Kay’s point that there was too much intermediation in equity markets, and felt that fund managers should pay for their own research, a change that was being pursued by the Financial Conduct Authority (FCA). Commenting further on the FCA, Gilbert said that the review into dealing commission, announced recently, was going to speed up reduction in overall fund charges and reduce costs to investors.
Towards the end of the discussion, Kay turned to the question of pay and incentives for financiers. Bonuses that were paid on the basis of hitting targets, he said, tended to increase the likelihood that those targets would be met. Should the Chancellor be paid according to the GDP statistics? asked Kay, wryly. If so, he said, this would have little effect on living standards, but the GDP calculations would certainly be interesting.
To this, Gilbert responded that he felt bonuses should remain, but that a greater part of these should be paid in shares, meaning the recipient would have a longterm interest in the health of the company.
In conclusion, Kay showed a muted optimism. His biggest concern, however, was the possibility of another financial crisis, caused by a failure to address the lessons of the last one. Populist politics were, he said, making that outcome more, not less, likely.
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