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<ul><li> 1. The New Focus for Global Investors:Responsible Investment and Active Share Ownership 26 thSeptember 2006 The Hermes Group operates through a variety of separate and distinct legal entities, including Hermes Investment Management, Hermes Focus Asset Management and Hermes Property Asset Management. Issued and approved by Hermes Investment Management Limited, authorised and regulated by the Financial Services Authority. CIBC Centre for Corporate Governance and Risk Management Colin Melvin Chief Executive, EOS</li></ul><p> 2. Agenda </p> <ul><li>Introduction </li></ul><ul><li>Best Practice in Responsible Investment </li></ul><ul><li><ul><li>Institutional Shareholders Committee Statement </li></ul></li></ul><ul><li><ul><li>ICGN Statement of Principles on Institutional Shareholder Responsibilities </li></ul></li></ul><ul><li><ul><li>UN Principles for Responsible Investment </li></ul></li></ul><ul><li>Responsible Investment in Action: Hermes Equity Ownership Service </li></ul><ul><li>Conclusion </li></ul><p> 3. Introduction to Hermes </p> <ul><li>Hermes is unique in the investment industry </li></ul><ul><li>Independent investment manager of c.63bn*. 3rd largest Pension Fund Manager in UK** </li></ul><ul><li>Hermes is the executive arm of the largest UK pension scheme, the British Telecom Pension Scheme </li></ul><ul><li>Heritage and ownership aligns Hermes with long-term orientated pension funds and other investors </li></ul><ul><li>Performance is the key - not asset/revenue growth driven </li></ul><p>* As at 30 thJune 2006Source: Hermes** Source FTFM Survey 05/06/06 Aligned with pension fund goals and objectives 4. Issues for Trustees as equity investors STEWARDSHIP PERFORMANCE MEMBERAWARENESS TIME SINGLE ISSUEACTIVISTS FUNDING LEGISLATION /REGULATION DISCLOSURE Stewardship is central to the Trustees role 5. Stewardship, Value and Engagement Overview </p> <ul><li>Practical </li></ul><ul><li>Hermes Focus Funds outperformed since inception </li></ul><ul><li>CalPERS Corporate Governance has been best alpha driver over last 5 years, 2000 2004 Mark Anson, former CIO </li></ul><ul><li>Relational Investors LLC (US) outperformed by 6.3% per annum * </li></ul><ul><li>Academic </li></ul><ul><li>LBS Shareholder Activism in the UK - A Clinical Study ** found value created through shareholder engagements </li></ul><ul><li>Gompers found a fund taking long positions in top decile Governance ranked companies and short positions on bottom decile would have outperformed the market by 8.5% p.a. throughout the 1990s *** </li></ul><ul><li>Deutsche Bank research shows a positive relationship between historic governance assessment and profitability (ROE) **** </li></ul><p>Investment in stewardship adds value *see Appendix 1 ** London Business School (2006) *** Gompers et al (2004) **** Deutsche Bank (2004a), (2004b), (2003) 6. Best Practice in Responsible Investment </p> <ul><li>Institutional Shareholders Committee Statement</li></ul><ul><li>ICGN Statement of Principles on Institutional Shareholder Responsibilities </li></ul><ul><li>UN Principles for Responsible Investment </li></ul><p> 7. Institutional Shareholders Committee </p> <ul><li>Best Practice</li></ul><ul><li>Statement of responsible investment policy </li></ul><ul><li>Monitor performance of and have dialogue with investee companies </li></ul><ul><li>Intervene where necessary </li></ul><ul><li>Escalate intervention on a case-by-case basis </li></ul><ul><li>Evaluate impact of responsible investment activity </li></ul><p> 8. ICGN Statement of Principles </p> <ul><li>Best Practice</li></ul><ul><li>Institutional shareholders have internal and external responsibilities </li></ul><ul><li>Understanding the chain of ownership </li></ul><ul><li>Dealing with conflicts of interest </li></ul><ul><li>Responsibilities with respect to companies </li></ul><ul><li>The benefits of good internal governance </li></ul><p> 9. United Nations PRI objective </p> <ul><li>To develop and implement a set of global principles that facilitates the integration of environmental, social and governance (ESG) issues into mainstream investment practices </li></ul><p> 10. June/July 2004 Klaus Toepfer of UNEP announces Principles for Responsible Investment process in London and UN Global Compact publishes first"Who Cares Wins"report. April 2005 First PRI Expert Group meeting in Paris. June 2005 UN Secretary-General Kofi Annan convenes first PRI Investor Group meeting at UN Headquarters, New York. 21 asset owners representing USD 1.7 Trillion. Subsequent meetings in Toronto, London, Boston. April 27/ May 2 2006 UN SG Annan rings bell and opens NYSE. PRI launched supported by 34 asset owners and 18 investment managers from nine countries representing more than USD 4 Trillion. UNPRI Timeline 11. 12. Preamble </p> <ul><li> As institutional investors, we have a duty to act in the best long-term interests of our beneficiaries. In this fiduciary role, we believe that environmental, social, and corporate governance (ESG) issues can affect the performance of investment portfolios (to varying degrees across companies, sectors, regions, asset classes and through time). We also recognise that applying these Principles may better align investors with broader objectives of society. Therefore, where consistent with our fiduciary responsibilities, we commit to the following:</li></ul><p> 13. The Principles </p> <ul><li>We will incorporate ESG issues into investment analysis and decision-making processes. </li></ul><ul><li>We will be active owners and incorporate ESG issues into our ownership policies and practices. </li></ul><ul><li>We will seek appropriate disclosure on ESG issues by the entities in which we invest. </li></ul><ul><li>We will promote acceptance and implementation of the Principles within the investment industry. </li></ul><ul><li>We will work together to enhance our effectiveness in implementing the Principles. </li></ul><ul><li>We will each report on our activities and progress towards implementing the Principles. </li></ul><p> 14. Best Practice and Hermes Equity Ownership Service </p> <ul><li>Best Practice </li></ul><ul><li>Statement of responsible investment policy </li></ul><ul><li>Monitor performance of and have dialogue with investee companies </li></ul><ul><li>Intervene where necessary </li></ul><ul><li>Escalate intervention on a case-by-case basis </li></ul><ul><li>Evaluate impact of responsible investment activity </li></ul><ul><li>EOS </li></ul><ul><li>Hermes Principles </li></ul><ul><li>Vote all shares </li></ul><ul><li>Discussion with companies </li></ul><ul><li>Inclusion in core engagement programme where future intervention is required </li></ul><ul><li>Intervention on basis of formal proposal approved by Responsible Ownership Committee </li></ul><ul><li>Regular meetings with directors </li></ul><ul><li>Work with other investors as appropriate </li></ul><ul><li>Public vote is last resort </li></ul><ul><li>Contact and actions recorded </li></ul><ul><li>Report progress to clients on regular and ad hoc basis </li></ul><p>EOS represents best practice for responsible investors 15. </p> <ul><li>Engagement designed to enhance value </li></ul><ul><li><ul><li>Proprietary screening system </li></ul></li></ul><ul><li><ul><li>Identifies potential for improvement in long term value </li></ul></li></ul><ul><li>Intelligent voting </li></ul><ul><li><ul><li>Vote all holdings in all markets (where possible) </li></ul></li></ul><ul><li><ul><li>Voting rational communicated to companies </li></ul></li></ul><ul><li><ul><li>Lever for change </li></ul></li></ul><ul><li>Global coverage </li></ul><ul><li><ul><li>Over 3,500 company meetings worldwide </li></ul></li></ul><p>Equity Ownership Service and Responsible Investment Comprehensively address the needs of fund fiduciaries 16. Additional investment and engagement on strategic issues etc Focus Funds Intensity of involvement All Companies Contact driven by company consultation (on pay and other issues) Overview of EOS Activities Government and regulatory engagement to ensure best possible backdrop for shareholder rights High Low Core engagement on strategic, capital structure issues etc1 Tier 1 engagement </p> <ul><li>Engagement on structural governance </li></ul><ul><li>Board structure </li></ul><ul><li>Pay </li></ul><ul><li>Succession planning </li></ul><ul><li>Social, ethical and environmental issues </li></ul><ul><li> Tier 2 engagement </li></ul><p>Voting activity, related discussions, letters and meetings 17. </p> <ul><li>Effective controls </li></ul><ul><li><ul><li>Senior Hermes staff involvement (CEO, CIO) </li></ul></li></ul><ul><li>Integrated approach </li></ul><ul><li><ul><li>Fund Managers EOS Focus Funds </li></ul></li></ul><ul><li>Rigorous monitoring and assessment </li></ul><ul><li><ul><li>Financial evaluation </li></ul></li></ul><ul><li><ul><li>Engagement trail maintained on database </li></ul></li></ul><p>Equity Ownership Service Process A process designed to protect clients interests 18. </p> <ul><li>Unrivalled resource </li></ul><ul><li><ul><li>Over fifty people directly involved in governance and engagement </li></ul></li></ul><ul><li>Comprehensive skills </li></ul><ul><li><ul><li>Team includes a blend of skills from business strategy, consulting and investment banking.Allows engagement from position of knowledge and understanding </li></ul></li></ul><ul><li>Governance expertise </li></ul><ul><li><ul><li>Team includes some of the industrys foremost governance experts </li></ul></li></ul><ul><li>Ownership culture </li></ul><ul><li><ul><li>We act on our clients behalf as an owner rather than a service-provider </li></ul></li></ul><p>Equity Ownership Service People 19. What EOS Provides to Pension Fund Trustees </p> <ul><li>Insight </li></ul><ul><li>Hermes knowledge, expertise and advice </li></ul><ul><li>Reporting on activities and engagement </li></ul><ul><li>Feedback on market developments </li></ul><ul><li>Control </li></ul><ul><li>Retain ultimate voting control of your shares </li></ul><ul><li>Ability to initiate engagement on your issues </li></ul><ul><li>Input to direction and development of EOS </li></ul><ul><li>Access </li></ul><ul><li>Dedicated relationship manager </li></ul><ul><li>Regular formal and informal communication </li></ul><ul><li>Regular meetings </li></ul><ul><li>Value </li></ul><ul><li>Activities designed to add economic value </li></ul><ul><li>Alignment with fiduciary duty </li></ul><ul><li>Engagement on financially material issues </li></ul><p>EOS 20. Conclusion </p> <ul><li>Responsible investment is linked to corporate value</li></ul><ul><li>Conflicts of interest in the chain of ownership can impede accountability and the effectiveness of investors </li></ul><ul><li>Nevertheless, active share ownership represents a new focus for global and localinvestors </li></ul><p> 21. </p> <ul><li>Shareholder Engagement Funds Performance </li></ul><ul><li>Stewardship Staff </li></ul><ul><li>Case Studies </li></ul><p>Appendices 22. Shareholder Engagement Funds </p> <ul><li>Launched October 1998</li></ul><ul><li>Investment universe:FTSE 350</li></ul><ul><li>FUM (1)977m </li></ul><ul><li>Managed by Hermes Focus AssetManagement Ltd (2) </li></ul><ul><li>Launched February 2002 </li></ul><ul><li>Investment universe: Europeanstocks (European Economic Areaex-UK, plus Switzerland) </li></ul><ul><li>FUM (1)1.5bn </li></ul><ul><li>Managed by Hermes Focus Asset Management Europe Ltd (2) </li></ul><ul><li>Launched March 2002 </li></ul><ul><li>Investment universe: UK companies outside FTSE 350 (ex-Investment Trusts Index) </li></ul><ul><li>FUM (1)143m </li></ul><ul><li>Managed by Hermes Focus Asset Management Ltd (2) </li></ul><ul><li>Relational investors LLC formed in 1996 </li></ul><ul><li>Investment universe: US listed stocks with equity market capitalisations in excess of $1bn </li></ul><ul><li>FUM (1)$6.2bn</li></ul><ul><li>Managed by Relational Investors LLC </li></ul><p>(1)Funds under management as at 30/6/06 (2)Relational Investors LLC (RILLC) is a Registered Investment Adviser in the USA. RILLC and Hermes Focus Asset Management Limited (HFAM) have a strategic marketing alliance.HFAM does not have an ownership interest in RILLC and RILLC is fully independent of Hermes. This Fund has reached its capacity and is currently closed to new investments. Nissay Hermes Stewardship Fund Relational Investors LLC (3) European Focus Fund UK Small Companies Focus FundUK Focus Fund </p> <ul><li>Launched March 2005</li></ul><ul><li>Investment universe:550 Japanese listed stocks </li></ul><ul><li>FUM (1) 32 bn </li></ul><ul><li>Managed by Nissay AssetManagement Corporation </li></ul><ul><li>Advisors: Hermes Focus AssetManagement (2) </li></ul><p>Appendix 1 23. </p> <ul><li>UK Focus Fund benchmark is FTSE All Share Total Return Index</li></ul><ul><li>European Focus Fund benchmark is FTSE World Series Europe (ex UK) Total Return Index </li></ul><ul><li>UK Small Companies Focus Fund benchmark is FTSE Small Cap (ex Investment Trusts) Total Return Index </li></ul><ul><li>All performance figures are annualised and relative performance is calculated on a geometric basis </li></ul><p>Performance (p.a.) (launched 1 October 1998) (launched 25 February 2002) (launched 4 March 2002) (1) (2) (3) Focus Funds in Practise The Focus Funds performance has been positive, supporting our view that good ownership adds value 24. Annualised Investment Performance Since Inception for other Hermes-related Shareholder Engagement Funds</p> <ul><li>Nissay Hermes Stewardship Fund benchmark is TOPIX </li></ul><ul><li>Relational Investors LLC benchmark is S&amp;P 500 </li></ul><ul><li>Relative performance is calculated on a geometric basis </li></ul><p>Performance (p.a.) (launched 1 July 1997) (launched 16 March 2005) (1) (2) 25. EOS Provided by Team with Unparalleled Experience and Ability David Pitt-Watson, Chairman 20+ years strategy: ex-co founder &amp; MD, Braxton/Deloitte Colin Melvin, Chief Executive 12 years governance experience; ex-Baillie Gifford, Standard Life Paul Munn, Commercial Director 9 years PLC Board experience; ex-CEO Dawson International Paul Lee5 years governance and English lawMakoto Seta 9 years professional experience; ex-Arthur Andersen Karin Ri 7 years professional experience; ex-Morgan Stanley; Nomura Jennifer Walmsley 5 years professional experience; former journalist Ian Greenwood 5 years professional experience; ex-NAPF; RREV Elena Tedesco 5 years governance; ex-Deminor Hans Hirt 4 years professional experience; English and German law Hege Sjo 9 years professional experience; ex-CFO Norwegian Brs Bess Joffe 4 years professional experience; lawyer; ex ISS Canada Naheeda Rashid 2 years governance; ex-Baillie Gifford; RBoS E O S PLC Board experience: John Leach30+ years: ex-CEO Brent Walker Paul Harrison10 years: ex-CEO Hi-Tech Sports Additional support from: Mark AnsonCEO, Hermes Tony Good ex- Norwich Union Mike Bishopex- Morley Mike Connorsex Barclays &amp; Fleming Senior strategy consultancy experience: Wouter Rosingh20+ years: ex-Director, Booz Allen Hamilton Leon Kamhi15 years: ex-Braxton/Deloitte Investment experience: Mike Weston14 years: ex-Merrill Lynch Marco Ricci14 years: ex-Deutsche Phil Harris14 years: ex-Credit Suisse Nigel Davies17 years: ex-West LB Other experience: Corinna Arnold14 years corporate governance &amp; institutional relationsTim Bush12 years accounting and public relations Mark OConnor12 years investor relations &amp; marketing Corporate finance experience: Stephan Howaldt16 years: ex-Warburgs, Siemens Corporate Appendix 2 26. </p> <ul><li>Hanson </li></ul><ul><li>BAE Systems </li></ul><ul><li>Premier Oil </li></ul><p>Case Studies Appendix 3 27. </p> <ul><li>Background </li></ul><ul><li>Board in need of refreshment and renewal </li></ul><ul><li>Management appears overly focused onfinancials to the apparent detriment of operational efficiency </li></ul><ul><li>Capital structure inefficient with insufficientdebt </li></ul><ul><li>Non-core businesses dragging down returns and distracting management </li></ul><ul><li>Unclear whether there is value-added from combining aggregates with building materials (particularly brick) businesses </li></ul><ul><li>Engagement Issues </li></ul><ul><li>Encourage board change, particularlysuccession to the chair </li></ul><ul><li>Encourage focus on operational effectiveness, if need be by changing management </li></ul><ul><li>Ensure that buybacks are restarted to increase debt/equity ratio </li></ul><ul><li>Consider sale of non-core businesses in Asia-Pacific and continental Europe </li></ul><ul><li>Test management thinking regarding a possible sale </li></ul><p>Case study Hanson Engagement addresses strategy 28. Case study Hanson (contd) Chart dates from 1 July 2004 to 4 August 2005 Source: DATASTREAM and Hermes Investment Management Ltd Managing investments to create value 3 4 6 7 8 9 Q3'O4 0.32 0.34 0.36 0.38 0.40 0.42 0.44 0.46 0.48 0.50 0.52 Q4'04 Q1'05 Q2'05 Q3'05 Hanson Hanson Relative to the FTSE Europe Construction &amp; Building Index 2 1 10 5 29. </p> <ul><li>Background </li></ul><ul><li>Public breakdown of key client relationshipwith MoD following problems with Astute andNimrod contracts </li></ul><ul><li>Governance: Board dominated byexecutives, particularly with a long-servingexecutive chair and executive vice chair </li></ul><ul><li>Lack of transparency and so marketconfidence in management and thecompany </li></ul><ul><li>Concern that intended to merge into US rivalat undervalue, before solved own problems </li></ul><ul><li>Engagement Issues </li></ul><ul><li>Encourage board focus on rebuilding keyrelationships, without involving pressheadlines </li></ul><ul><li>Improve transparency and rebuild confidencefollowing Nimrod and Astute failures </li></ul><ul><li>We expected that these aims would requirea significant reshaping of the board </li></ul><ul><li>Ensure solved own problems before rushinginto any substantial deal </li></ul><p>Case study BAE Systems Engagement addresses board renewal 30. Managing investments to create value PRICE PRICE REL. TO FTSE ALL SHARE - PRICE INDEX Source:DATASTREAM/Hermes Case study (cont....</p>