John Kay’s report on the UK equity markets presents a beautiful – if old-fashioned – vision: worthy, long-term investors working with management to create companies that build value for the country as a whole. What’s not to like?
Dig a little deeper though and this vision – which includes an attack on the efficient markets hypothesis – is flawed. The report wants unhappy investors to engage with managers rather than sell shares. But for most executives, a falling share price is far more persuasive than an irate phone call. The report also calls for an end to quarterly reporting to discourage short-term trading. But blocking investors from receiving information only prevents them from making more informed decisions, while amplifying the opportunity for insider trading. Finally, the report takes a UK-centric view of equity investing – investors and issuers can and will take their business elsewhere if London becomes a more opaque and expensive place for the industry to do business.
There is nothing wrong with encouraging investors to engage more with companies and the current system is not perfect. The report’s idea that directors’ long-term performance incentives should be in shares to be held until retirement is worth considering, while investors would also benefit from the report’s call for full disclosure of fund management costs.