1. 1 Click to edit Master title style HERMES PENSIONS MANAGEMENT LIMITED A Presentation to Third South-Eastern Europe Corporate Governance Roundtable 21 November 2002

2. 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

3. 3 Overview Shareholder interests and expectations Codes, activism and voting Linking governance and social responsibility

4. 4 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

5. 5 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

6. 6 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?

7. 7 Chain of corporate accountability Board Employees Pension beneficiaries Trustees Shareholders & their agents (fund managers) Delegated authority Directors Accountability

8. 8 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?

9. 9 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’

10. 10 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

11. 11 Summary CG and SRI are concerned with ownership and control client requirements and investment processes Shareholder activism and voting are increasing in the UK guided by ‘best practice’ not legislation SRI engagement focuses on risk management ‘good’ companies make better investments