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Vince Cable welcomes Kay review’s outline proposals on stock markets

Professor John Kay’s interim report seeks to encourage more responsible capitalism and challenge predatory activity

Business secretary Vince Cable has welcomed outline proposals designed to instil greater long-termism in equity markets, including increased protection from hostile takeovers, extra powers for long-term shareholders and an end to the “tyranny” of quarterly reporting.

The proposals, published on Wednesday, come from Professor John Kay who was commissioned by Cable to look into the impact of equity markets on the long-term performance of UK-based firms. In his interim report Kay sets out his thinking on more responsible capitalism and how to challenge the predatory activity that undermines efficiency and sustainability. Cable himself has set great store by the Kay review and hopes its implementation will form one of the central legacies of his time as business secretary.

The report sets out the case for restraints on short selling and high-frequency trading, and proposes greater transparency on excessive asset management fees. It also outlines various means to enable the rejection of takeover bids which may be in the interests of some investors but not the company itself. Kay suggests there is a widespread view that “while it was once the case that shareholding was dominated by large UK institutions which were likely to have long-term stakes in both the acquirer and the company potentially to be acquired, and could therefore take a view of the merits of the transaction as a whole, this was no longer true. In some recent transactions a large proportion of shares in the target company had been owned by arbitrageurs whose only interest was in a rapid, profitable exit.”

At present UK company law does not provide enhanced rights for long-term shareholders. One proposal would be to disqualify voting by shareholders who acquired shares after announcement of the bid. Arbitrageurs would therefore have a reduced influence on the outcome of the takeover.

On quarterly reporting, singled out by Kay for its distorting impact on company managers’ time horizons, the government is likely to be very supportive. Ministerial sources pointed out that the European commission has recently proposed moving away from mandatory requirements on quoted companies to produce quarterly reports and interim management statements.

Writing in the Financial Times (£; registration), Kay said: “The common reaction to every failure in financial markets has been to demand more disclosure and greater transparency. The tyranny of quarterly earnings has created a dysfunctional cycle of smoothed and exaggerated numbers and relations between companies and analysts based on earnings guidance, an activity almost unconnected to the real business of the company and to assessing its progress.”

Kay is not making any recommendations at this stage and will present his final report, including recommendations for action, in the summer.

Cable said: “One of the big overriding themes in economic policy has to be generating – in both equity markets and corporate Britain generally – a belief in the importance of the long-term perspective. I’m very grateful to Professor Kay for the work he has done so far and I look forward to receiving his final recommendations in the summer.”

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