Asset managers should be paid in line with the long-term interests of their clients, adopt good practice standards and be prepared to act collectively in an investors' forum, according tothe Kay Review, a report into the UK equity market by economist John Kay.
They ought also to take more involvement in the companies they invest in and evaluate their investment decisions based on judgments about long-term company performance, said the report.
These and other recommendations in the report are designed to discourage short-termism in business.
Short-termism is inefficient, said the report, because it can discourage investment in long-term, intangible goals such as product development and employee training, while encouraging “hyperactive behaviour by executives”, such as restructuring, financial engineering or mergers and acquisitions that fail to add real value to companies.
As well as the recommendations for asset managers, the report calls for executive pay to be tied to long-term company performance and suggests the government monitors the scale and effectiveness of merger activity in the UK.
“The asset management industry can benefit its customers – savers – taken as a whole, only to the extent that its activities improve the performance of investee companies,” said the report. “This conflict between the imperatives of the business model of asset managers, and the interests of UK business and those who invest in it, is at the heart of our analysis of the problem of short-termism.”
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