Foreword

The report highlights that British business must invest in innovation, brands, and workforce skills to sustain competitive advantages in global markets. There is wide agreement that current equity markets are not as effective as they should be in supporting these long-term objectives. Successful financial intermediation depends on trust and confidence, which are products of long-term relationships rather than anonymous short-term trading.

Short & long-term decisions

Short-termism in business is characterised by under-investment in physical or intangible assets and hyperactivity among executives focused on restructuring or mergers and acquisitions. Business investment in the UK as a share of national income has declined over the past decade, and research and development expenditure as a percentage of GDP is lower than that of principal trading competitors. The review identifies companies like ICI and GEC as examples where poor long-term decision-making and financialisation damaged corporate success, contrasting them with the long-term approach of firms like Rolls Royce and ARM.

Equity markets & listed companies

Equity markets facilitate financial intermediation between savers and companies, but increased complexity has led to information asymmetry and principal-agent conflicts. The review finds that UK equity markets are no longer a significant source of capital for new investment; most publicly traded UK companies are self-financing. New equity issuance has been negative over the last decade, as finance raised through initial public offerings (IPOs) and rights issues is offset by share buybacks and takeovers. Consequently, the primary role of equity markets relates to the oversight of capital allocation within companies rather than between them.

The structure of shareholding

Shareholding in the UK has become increasingly fragmented. Individual ownership has declined from 54% in 1963 to roughly 11%, while non-UK holders now account for over 40% of ownership. This shift has been accompanied by a massive increase in intermediation, with custodians, asset managers, and consultants added to the investment chain. This proliferation increases costs for investors and creates potential for misaligned incentives, often prioritising secondary market trading over long-term stewardship.

Market efficiency: economic issues

The review critiques the strong version of the efficient market hypothesis, arguing it is a poor basis for regulation. Excessive reliance on information disclosure has led to a cascade of data that often acts as noise rather than useful information. Copious data provision can drive short-term decisions and aggravate cognitive biases such as excessive optimism, loss aversion, and anchoring. Effective “value discovery” requires deeper research into fundamental company capabilities rather than just monitoring price movements.

The role of asset managers

Asset managers are now the dominant players in the investment chain. The report distinguishes between those who “invest” based on fundamental value and those who “trade” based on short-term price expectations. Current trading volumes exceed what is necessary to support the core purposes of equity markets. Performance monitoring is often based on short-term relative benchmarks, which encourages “closet indexation” and discourages genuine engagement with investee companies.

Establishing trust

Trust and confidence are central to the investment chain but have been eroded by a culture prioritising transactions over relationships. The review proposes that all participants should act according to the principles of stewardship. It recommends that the Stewardship Code be developed to incorporate strategic issues as well as corporate governance, and that high-level Statements of Good Practice be established for asset holders, managers, and directors.

Strengthening the investment chain

To address fragmented shareholding, the review recommends establishing an investors’ forum to facilitate collective engagement by institutional investors. Active asset managers should be encouraged to hold more concentrated portfolios judged on long-term absolute performance. Passive managers should also recognise a responsibility to improve the performance of the indices they track.

The business environment

Directors are stewards of company assets, and their duties are to the company rather than its share price. The review recommends that companies consult major long-term investors over board appointments and disengage from managing short-term earnings expectations. It expresses concern that the openness of the UK acquisition market makes companies vulnerable to disruptive attention from predators focused on deal-making over operational development.

Fiduciary duty

The report asserts that fiduciary standards of care should apply to all relationships in the investment chain involving discretion or advice. It recommends that the Law Commission review the legal concept of fiduciary duty to address uncertainties and ensure that the interests of ultimate savers are prioritised. Stewardship should imply the management of funds to fiduciary standards of loyalty and prudence.

The information users need

Reporting should focus on clear, relevant, and timely information directed at long-term value creation. The review recommends removing mandatory quarterly reporting (IMS) obligations and strongly encouraging succinct narrative reporting. It highlights that metrics such as earnings per share and return on equity can be misleading if they ignore capital reinvestment or are influenced by financial engineering like share buybacks.

Establishing the right incentives

Incentives throughout the chain should reflect long-term value creation rather than transaction volumes. Companies should structure directors’ remuneration so that long-term incentives are provided only as company shares held until after the executive has retired. Similarly, asset manager pay should be linked to the long-term performance of the funds they manage rather than short-term relative performance.

Regulating equity markets

Regulation should adopt the perspective of market users—companies and savers—rather than intermediaries. It should focus on market structures and incentives rather than detailed rules of conduct. The review calls for a regulatory philosophy that avoids prescribing specific valuation or risk assessment models and instead encourages informed judgment.

Markets for users

The review concludes that rebuilding the equity investment chain on trust relationships is essential. It visualises a shorter investment chain where asset managers act as mentors to a narrower range of companies. While the task will be difficult, the report stresses that changing the structure and incentives of the industry is the only way to restore the function of equity markets in supporting high-performing businesses and delivering returns to savers.