Quarterly reports damage behaviour of firms and investors, says Kay Review

Critics claim Cadbury's takeover by Kraft was driven by demands for a quick reward

Quarterly reporting by companies may be damaging the behaviour of both firms and shareholders, according to the preliminary findings of the Kay Review into investment in UK equity markets.

Vince Cable, the Business Secretary, commissioned the report last June following concerns that short-term incentives are damaging the way British firms are owned and managed, particularly in light of Cadbury's takeover by the US food conglomerate Kraft Foods. Critics claimed that acquisition was driven by investors demanding a quick reward.

John Kay, a professor of economics at the London School of Economics, consulted with shareholder groups, insurers, pension funds and individual investors for the review.

His interim report said that quarterly reporting and interim management statements could be "useless or misleading".

It also described executive pay as a "principal source of friction" between groups representing shareholders and company managers, and noted criticism of "rewards for failure" was widespread.

Professor Kay also flagged up the concerns of respondents over the impact of high-frequency trading, and said he will examine using legal changes to ensure that equity markets function mainly for the benefit of the companies whose shares are traded on them and the investors whose money is involved, rather than in the interests of the asset management industry.

Ideas to combat takeovers that are damaging the long-term health of firms outlined in the report included creating a public body to review such deals, or give greater voting rights to long-term shareholders.

"One of the big, overriding themes in economic policy has to be generating – in both equity markets and corporate Britain – a belief in the importance of the long-term perspective," Mr Cable said.

The review will make its final recommendations about corporate activity and governance this summer.

Investor groups, including UK Sustainable Investment and Finance Association (UKSIF) and campaign group FairPensions were amongst those to back the interim report.

Penny Shepherd, the chief executive of UKSIF, said: "Effective transparency and procurement are not the sexiest of topics, but they must be embraced if we want to create genuine long-term relationships between companies and investors."

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