Taking the Long View Penny Shepherd MBE, Chief Executive Reputation in Financial Services 22 January 2013

@UKSIF @NEIW13 @PennyShepherdUK

UKSIF welcomes Government’s Response to the Kay Review

“The Kay Review could become as influential over time as the

1992 Cadbury report on Corporate Governance”

Where shall we start?

Acknowledgement: OccupyLsx

Where shall we start?

“I do not apologise for being correctly quoted as saying that while the financial services industry performs many economically vital functions, and will continue to play a large and important role in London’s economy, some financial activities which proliferated over the last ten years were ‘socially useless’, and some parts of the system were swollen beyond their optimal size. “not all financial innovation is valuable, not all trading plays a useful role, and that a bigger financial system is not necessarily a better one. “parts of the financial services industries need to reflect deeply on their role in the economy, and to recommit to a focus on their essential social and economic functions, if they are to regain public trust.

Adair Turner

Mansion House Speech 2009

Socially Useful Financial Services

Support for “Real Economy” Transactions

Risk Mitigation & Pooling

Capital Allocation

Kay Review of UK Equity Markets and Long-Term Decision-Making

Independent Review

for BIS July 2012

“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.”

Business Secretary Rt Hon Vince Cable MP launching the Kay Review

Professor Kay’s Analysis

• Short-termism is a problem in UK equity markets

• Causes:

– Decline of trust

– Misalignment of incentives throughout the investment chain

His Way Forward

• Restore relationships of trust and confidence • Diminish role of trading and transactional cultures • Improve investor stewardship • Shift to market structures that create appropriate

incentives rather than countering inappropriate incentives through detailed rules of conduct

• Tackle misaligned incentives • Reduce pressures for short-term decision making

10 Principles and 17 Recommendations

His Recommendations

Include:

• Good Practice Statements / Enhancements to Stewardship Code / Fiduciary Behaviour

• Investors’ Forum

• End to quarterly earnings reporting

• Disclosure of investment-related costs

• An independent review of metrics and models

• Improved remuneration: company directors and asset managers

Ensuring Equity Markets support Long-Term Growth: The Government Response

• Accepted analysis & conclusions

• Endorsed the ten principles

– Supported directions for market participants

– Will explore directions for regulatory policy

• Responded to the seventeen recommendations

• Progress Update: Summer 2014

Industry Reactions

1. Support the analysis

2. Not so sure about the detailed recommendations

Version A Version B

Industry Reactions

“... the recommendations are underwhelming. Of the 17 proposals (aimed in the main at issuers and investors), few have substance and some call for further reviews — it is a review calling for more reviews ...not direct action that would break the 30-year history of mutually supportive, non-self-interrogatory locked-in agendas for the media, money, and power circles ... there is no catalyst here for restoring trust.”

Clare Fargeot, CFA Institute (EMEA Region) on CFA Institute blog, August 2012

As influential as Cadbury?

“Many boards at the time had too much of the flavour of a club, with collegiality taking precedence over constructive questioning and challenge.... “While support for the Code was extremely heartening, there naturally were criticisms. Some considered that it would fetter enterprise, others that it had no teeth. ... “What was striking was how quickly and how widely companies accepted the Code’s recommendations. .. “I believe that in that short space of time [since 1992] boardroom effectiveness in this country has been transformed. ..

Sir Adrian Cadbury, 2012

Engaging Asset Owners: UKSIF’s Next Step

Ownership Day Tuesday 12 March 2013

Kay Review: A catalyst for restoring trust?

Acknowledgement: OccupyLsx

Thank you Reputation in Financial Services 22 January 2013

@UKSIF @NEIW13 @PennyShepherdUK