London School of Economics professor denounces City’s short-term culture and chain of middlemen

There should be a reduction in the number of financial intermediaries and the reestablishment of a ‘fiduciary duty’ for investment professionals, argues Professor John Kay in his long-awaited report into the UK’s equity markets.

The report – titled the Kay Review of UK Equity Markets and Long-Term Decision Making – came out today, just over a year after it was commissioned by UK business secretary Vince Cable.

Kay, a professor at the London School of Economics, warns in the report that a culture of ‘short-termism’ has taken over the financial world, where profits from transactions and trading rather than creation of long-term value are driving decision-making.

This behavior is benefiting the large number of middlemen in the industry – advisers, consultants and trustees who counsel retail investors and investment bankers who advise corporations – instead of individuals seeking to save their money or invest in their pension fund.

The ‘undesirable’ effect of the bonus culture is also highlighted by Kay. Speaking on BBC Today, he declared that ‘we don’t pay politicians bonuses, we don’t pay surgeons bonuses… it wouldn’t affect how hard they work, but it would affect the way they work.’

The report recommends that shareholders have more say on executive pay, which Cable has already taken action on by calling for a binding vote on pay, and that remuneration for top management be locked up until retirement.

In addition, Kay says the requirement for UK companies to produce quarterly financial statements is encouraging market participants to take short-sighted actions.

In response to the report, advisory body PIRC and the Confederation of British Industry both applaud Kay’s recommendations on disintermediation and the improvement of industry standards.

They also agree that a change in culture would require that boards and shareholders develop better engagement, moving beyond corporate box ticking and focusing more on strategy.