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  • 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

2. Agenda

  • Introduction
  • Best Practice in Responsible Investment
    • Institutional Shareholders Committee Statement
    • ICGN Statement of Principles on Institutional Shareholder Responsibilities
    • UN Principles for Responsible Investment
  • Responsible Investment in Action: Hermes Equity Ownership Service
  • Conclusion

3. Introduction to Hermes

  • Hermes is unique in the investment industry
  • Independent investment manager of c.63bn*. 3rd largest Pension Fund Manager in UK**
  • Hermes is the executive arm of the largest UK pension scheme, the British Telecom Pension Scheme
  • Heritage and ownership aligns Hermes with long-term orientated pension funds and other investors
  • Performance is the key - not asset/revenue growth driven

* 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

  • Practical
  • Hermes Focus Funds outperformed since inception
  • CalPERS Corporate Governance has been best alpha driver over last 5 years, 2000 2004 Mark Anson, former CIO
  • Relational Investors LLC (US) outperformed by 6.3% per annum *
  • Academic
  • LBS Shareholder Activism in the UK - A Clinical Study ** found value created through shareholder engagements
  • 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 ***
  • Deutsche Bank research shows a positive relationship between historic governance assessment and profitability (ROE) ****

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

  • Institutional Shareholders Committee Statement
  • ICGN Statement of Principles on Institutional Shareholder Responsibilities
  • UN Principles for Responsible Investment

7. Institutional Shareholders Committee

  • Best Practice
  • Statement of responsible investment policy
  • Monitor performance of and have dialogue with investee companies
  • Intervene where necessary
  • Escalate intervention on a case-by-case basis
  • Evaluate impact of responsible investment activity

8. ICGN Statement of Principles

  • Best Practice
  • Institutional shareholders have internal and external responsibilities
  • Understanding the chain of ownership
  • Dealing with conflicts of interest
  • Responsibilities with respect to companies
  • The benefits of good internal governance

9. United Nations PRI objective

  • To develop and implement a set of global principles that facilitates the integration of environmental, social and governance (ESG) issues into mainstream investment practices

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

  • 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:

13. The Principles

  • We will incorporate ESG issues into investment analysis and decision-making processes.
  • We will be active owners and incorporate ESG issues into our ownership policies and practices.
  • We will seek appropriate disclosure on ESG issues by the entities in which we invest.
  • We will promote acceptance and implementation of the Principles within the investment industry.
  • We will work together to enhance our effectiveness in implementing the Principles.
  • We will each report on our activities and progress towards implementing the Principles.

14. Best Practice and Hermes Equity Ownership Service

  • Best Practice
  • Statement of responsible investment policy
  • Monitor performance of and have dialogue with investee companies
  • Intervene where necessary
  • Escalate intervention on a case-by-case basis
  • Evaluate impact of responsible investment activity
  • EOS
  • Hermes Principles
  • Vote all shares
  • Discussion with companies
  • Inclusion in core engagement programme where future intervention is required
  • Intervention on basis of formal proposal approved by Responsible Ownership Committee
  • Regular meetings with directors
  • Work with other investors as appropriate
  • Public vote is last resort
  • Contact and actions recorded
  • Report progress to clients on regular and ad hoc basis

EOS represents best practice for responsible investors 15.

  • Engagement designed to enhance value
    • Proprietary screening system
    • Identifies potential for improvement in long term value
  • Intelligent voting
    • Vote all holdings in all markets (where possible)
    • Voting rational communicated to companies
    • Lever for change
  • Global coverage
    • Over 3,500 company meetings worldwide

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

  • Engagement on structural governance
  • Board structure
  • Pay
  • Succession planning
  • Social, ethical and environmental issues
  • Tier 2 engagement

Voting activity, related discussions, letters and meetings 17.

  • Effective controls
    • Senior Hermes staff involvement (CEO, CIO)
  • Integrated approach
    • Fund Managers EOS Focus Funds
  • Rigorous monitoring and assessment
    • Financial evaluation
    • Engagement trail maintained on database

Equity Ownership Service Process A process designed to protect clients interests 18.

  • Unrivalled resource
    • Over fifty people directly involved in governance and engagement
  • Comprehensive skills
    • Team includes a blend of skills from business strategy, consulting and investment banking.Allows engagement from position of knowledge and understanding
  • Governance expertise
    • Team includes some of the industrys foremost governance experts
  • Ownership culture
    • We act on our clients behalf as an owner rather than a service-provider

Equity Ownership Service People 19. What EOS Provides to Pension Fund Trustees