23 July 2012
Last updated at 02:51 ET
Professor John Kay says changes in board remuneration are necessary
A government-backed review of the financial industry is expected to accuse the City of an obsession with making short-term profits.
John Kay, a professor at the London School of Economics, will warn that the culture of “short-termism” is hurting Britain’s economy.
Mr Kay is expected to criticise pay policies that focus on quick gains.
His review of equity markets and long-term decision making was commissioned by Business Secretary Vince Cable.
‘Clients’ interests’
“A culture of trust relationships, which is actually central to making financial services work, has been displaced by essentially a culture of transactions and trading,” Professor Kay told BBC Radio 4’s Today programme.
He explained that the financial markets were dominated by too many middlemen, and confirmed that his recommendations may mean job losses in the City.
“Over the last 10 years, companies have done OK, people in the financial sector have made a lot of money, and savers have done pretty badly,” he said.
He said that the incentives of middlemen were too focused on short-term gain – something that damaged the long-term profitability of companies – and that their remuneration reduced the returns of the people whose money they were responsible for investing.
He recommended applying “fiduciary” standards to more people in the chain responsible for investing pensioners’ and savers’ money.
“Anyone who manages money or advises people on how to invest their money ought to have an obligation to put their clients’ interests first,” he said.
He is also due to call for an end to the requirement for listed companies to provide quarterly financial reports, and for shareholders to have more say on boardroom pay and on key decisions.
Professor Kay criticised annual bonuses, adding that much of company executives’ pay should be locked up until they reach retirement, in order to encourage them to focus more on investment and their companies’ long-term performance.
“We don’t pay politicians bonuses, we don’t pay surgeons bonuses… if we did… it wouldn’t affect how hard they work, but it would affect the way in which they work.”
The report comes after this year’s “shareholder spring” which saw some institutional investors challenge remuneration policies at several companies.
In an interim report published in February, Mr Kay highlighted concerns from major institutional shareholders, such as pension funds, that the financial markets are policed in a way which favours investment bankers and stockbrokers.
