|Practice area:||Finance | Financial markets and Institutions|
|Client:||Department for Business, Innovation and Skills|
|Published:||27 October, 2014|
|Keywords:||qualitative analysis stakeholder surveys and consultations|
The Kay Review found that the growth of intermediation and principal-agent relationships in the investment chain have led to an increased reliance on metrics and models to measure performance of companies and investment portfolios. Professor Kay argued that these measurements may be inherently unsuitable for investors with long-term investment horizons, and suggested that the presence of misaligned incentives can lead to intermediaries promoting the use of particular metrics or models which prompt investment decisions in line with their interests rather than those of end investors. Kay instead recommended that metrics and models used in equity investment should give information relevant to the creation of long-term value in companies and good risk-adjusted long-term returns to savers.
Taking this analysis as its starting point, the research focused on:
- the relationships between asset holders and asset managers, and the use of metrics and models in selecting and monitoring investment funds and their managers; and
- the relationships between asset managers and company management, and the use of metrics and models to select and monitor equity investments and to assess underlying company performance.
With a principal-agent framework in mind, the research was conducted using a series of semi-structured interviews with a variety of market participants, including company CEOs, investor relations managers, sell-side analysts, buy-side researchers, asset managers, a variety of types of investor and a number of representative bodies.
A number of findings of the research have been taken forward by the Government as it seeks to implement the recommendations of the Kay Review. These include:
- Improving the dialogue between companies and investors about future earnings and dividends to reduce unwarranted short-term market reactions by communicating uncertainty rather than providing point estimates for forecasts
- Improving the information companies receive from their investors about their reasons for changing equity holdings so as to reduce short-term reactions by company management