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HERMES PENSIONS MANAGEMENT LIMITED

A Presentation toThird South-Eastern Europe Corporate Governance Roundtable

21 November 2002

Lloyds Chambers 1 Portsoken Street London E1 8HZ t: 020 7702 0888 f: 020 7702 9452 www.hermes.co.uk

Hermes Investment Management Limited is regulated by the FSA

The Role of Institutional Investors in Corporate Governance

Colin Melvin Director of Corporate Governance

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Overview

• Shareholder interests and expectations

• Codes, activism and voting

• Linking governance and social responsibility

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Shareholders’ interest in governance

• Ownership and control – mind the gap!

agency costs, aligning interests, remuneration

• Share ownership confers rights and responsibilities

clients/regulation, fiduciary duty, voting

• Assessing quality of mgt.

CG as a proxy; shareholder focus, independence

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What to expect of your fund manager...

• …and how to get it!

• Expect – A separate full-time resource; a policy statement with voting guidelines; integration with the investment process; intelligent voting (i.e. not outsourced to an information provider)

• Get it by -Asking questions at investment meetings; demanding regular reports on voting and engagement; asking for an annual meeting with the corp. gov. personnel

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Codes and activism

• The benefits of self-regulatory codification

but have we reduced the risk of corruption?

• Investor Codes

do they confuse the issue?

• UK initiatives: Myners, Higgs and the ISC…

are they adding much to the debate?

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Chain of corporate accountability

Board

Employees

Pensionbeneficiaries

Trustees

Shareholders& their agents

(fund managers)

Delegated authority

Directors

Accountability

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Voting

• Votes are valuable - but do investors care?

increased interest and influence (Prudential, ?BoS)

• Understanding the issues and justifying the costs

market variations and remuneration (Vodafone)

• The vote as a lever for change

is ‘positive abstention’ an oxymoron?

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Governance and social responsibility

• Making the connection via risks and opportunities

financial rather than moral

• Exercising our (clients’) rights and responsibilities

interpreted in the context of fiduciary duty

• But implementation is a matter for companies

the problems of ‘micro-management’

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Socially responsible investment and engagement

• We look at policy, process and internal control

companies to assess and address significant risks

• We support sensible disclosure (and the ABI guidelines)

pragmatic, value-based, shareholder-relevant

• But can we solve the world’s problems?

NGO’s, pressure groups and the political dimension

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Summary

• CG and SRI are concerned with ownership and control client requirements and investment processes

• Shareholder activism and voting are increasingin the UK guided by ‘best practice’ not legislation

• SRI engagement focuses on risk management‘good’ companies make better investments