June 22 (Bloomberg) -- U.K. Business Secretary Vince Cable has asked the economist John Kay to review how the equity market functions and suggest ways to give better long-term incentives to companies and strengthen shareholder involvement.
Cable has been a persistent critic of the finance industry, attacking “spivs and gamblers” in a speech last year and arguing that the focus on short-term results and daily price movements leads managers to make poor decisions. Kay, author of “The Truth About Markets” and a visiting professor at the London School of Economics, helped popularize the phrase “casino banking” in the aftermath of the financial crisis.
As well as examining how to encourage long-term thinking, Kay has been asked to find ways of strengthening the engagement of institutional investors and increase corporate transparency. In recent columns in the Financial Times newspaper, he has called for new insolvency rules, greater responsibilities for company directors and better business ethics.
“The financial crisis has raised justifiable concerns about whether there are systemic flaws in the way companies are owned and managed in the U.K.,” Cable will tell an Association of British Insurers conference today, according to extracts of his speech released by his office. “About executives being given incentives to pursue strategies not in the long-term interest of their shareholders; about shareholders allowing takeovers that destroy value.”
The investigation comes out of a review Cable’s department has been conducting into the whole of corporate governance in the U.K., taking in issues including pay and takeover rules. Kay has been asked to report back to Cable next year.
“Equity markets are a principal mechanism of control and accountability for boards and senior managers, and a means by which individuals and households provide for retirement and other long-term financial goals,” Kay said in a statement.
“The review will examine how these capital-market disciplines contribute to the achievement of such goals and to the community more generally by enhancing the competitiveness and long-term performance of British business,” he said.
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