HERMES PENSIONS MANAGEMENT LIMITED A Presentation to Third

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

The Role of Institutional Investors in Corporate Governance Colin Melvin Director of Corporate Governance Lloyds Chambers 1 Portsoken Street London E 1 8 HZ t: 020 7702 0888 f: 020 7702 9452 www. hermes. co. uk Hermes Investment Management Limited is regulated by the FSA

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

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 4

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 5

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? 6

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

Voting • Votes are valuable - but do investors care? increased interest and influence (Prudential, ? Bo. S) • Understanding the issues and justifying the costs market variations and remuneration (Vodafone) • The vote as a lever for change is ‘positive abstention’ an oxymoron? 8

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’ 9

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 10

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 11