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					CIBC Centre for Corporate Governance and Risk Management
The New Focus for Global Investors:
Responsible Investment and Active Share Ownership

26th September 2006

  Colin Melvin
  Chief Executive, EOS

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


 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


    Aligned with   Introduction to Hermes
    pension fund
    goals and
                    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 30th June 2006   Source: Hermes ** Source FTFM Survey 05/06/06

Issues for Trustees as equity investors


           FUNDING                                   DISCLOSURE

     MEMBER                  STEWARDSHIP                       PERFORMANCE

                                               SINGLE ISSUE

                Stewardship is central to the Trustees’ role

Stewardship, Value and Engagement – Overview

Practical                                         Academic
 Hermes Focus Funds outperformed since            LBS “Shareholder Activism in the UK - A
  inception                                         Clinical Study” ** found value created through
                                                    shareholder engagements

 CalPERS                                          Gompers found a fund taking long positions in
  “Corporate Governance has been best alpha         top decile Governance ranked companies and
  driver over last 5 years, 2000 – 2004”            short positions on bottom decile would have
    – Mark Anson, former CIO                        outperformed the market by 8.5% p.a.
                                                    throughout the 1990s ***
 Relational Investors LLC (US) outperformed       Deutsche Bank research shows a positive
  by 6.3% per annum *                               relationship between historic governance
                                                    assessment and profitability (ROE) ****
                                                   ** London Business School (2006)
                                                   *** Gompers et al (2004)
*see Appendix 1                                    **** Deutsche Bank (2004a), (2004b), (2003)

                               Investment in stewardship adds value

Best Practice in Responsible Investment

     Institutional Shareholders‟ Committee Statement

     ICGN Statement of Principles on Institutional Shareholder Responsibilities

     UN Principles for Responsible Investment


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


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


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


     UNPRI Timeline

      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.




     “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:”


The Principles

1.   We will incorporate ESG issues into investment analysis and decision-making

2.   We will be active owners and incorporate ESG issues into our ownership policies and

3.   We will seek appropriate disclosure on ESG issues by the entities in which we invest.

4.   We will promote acceptance and implementation of the Principles within the investment

5.   We will work together to enhance our effectiveness in implementing the Principles.

6.   We will each report on our activities and progress towards implementing the Principles.


Best Practice and Hermes Equity Ownership Service

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

Equity Ownership Service and Responsible Investment

 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

             Comprehensively address the needs of fund fiduciaries

  Overview of EOS Activities


                                   Additional investment and engagement
                                          on strategic issues etc
                                               Focus Funds
  Intensity of involvement

                                      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
                                               Contact driven by company consultation (on pay and other issues)
                                                                 ‘Tier 2’ engagement

                                                    Voting activity, related discussions, letters and meetings

                                                                        All Companies
Low                          Government and regulatory engagement to ensure best possible backdrop for shareholder rights


Equity Ownership Service – Process

 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

                  A process designed to protect clients’ interests

Equity Ownership Service – People

 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
 Governance expertise
     – Team includes some of the industry‟s foremost governance experts
 Ownership culture
     – We act on our clients‟ behalf as an owner rather than a service-provider


What EOS Provides to Pension Fund Trustees

 Insight                                           Value
  Hermes‟ knowledge, expertise and advice          Activities designed to add economic value
  Reporting on activities and engagement           Alignment with fiduciary duty
  Feedback on market developments                  Engagement on financially material issues

     Control                                       Access
  Retain ultimate voting control of your shares    Dedicated relationship manager
  Ability to initiate engagement on your issues    Regular formal and informal communication
  Input to direction and development of EOS        Regular meetings



 Responsible investment is linked to corporate value

 Conflicts of interest in the chain of ownership can impede accountability and the
  effectiveness of investors

 Nevertheless, active share ownership represents a new focus for global and local



1. Shareholder Engagement Funds’ Performance

2. Stewardship Staff

3. Case Studies

                                                                                                                                                                               Appendix 1

   Shareholder Engagement Funds

                                                                                                         • Launched March 2005
                                                             • Launched February 2002
                                                                                                         • Investment universe:
                                                             • Investment universe: European                550 Japanese listed stocks
                                                               stocks (European Economic Area                   (1)
                                                               ex-UK, plus Switzerland)                  • FUM        ¥32bn

                                                             • FUM
                                                                           €1.5bn                        • Managed by Nissay Asset
                                                                                                           Management Corporation
                                                             • Managed by Hermes Focus Asset
                                                               Management Europe Ltd
                                                                                     (2)                 • Advisors: Hermes Focus Asset
                                                                                                                                • Relational investors LLC formed
                                        • Launched October 1998                                                                   in 1996

                                        • Investment universe: FTSE 350                                                         • Investment universe: US listed
                                               (1)                                                                                stocks with equity market
                                        • FUM        £977m                                                                        capitalisations in excess of $1bn
                                        • Managed by Hermes Focus Asset                                                         • FUM
                                          Management Ltd
                                                                                    • Launched March 2002                       • Managed by Relational Investors
                                                                                    • Investment universe: UK companies           LLC
                                                                                      outside FTSE 350 (ex-Investment
                                                                                      Trusts Index)
                                                                                    • FUM        £143m
                                                                                    • Managed by Hermes Focus Asset
                                                                                      Management Ltd

                                                                            UK Small Companies Focus Fund
(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 ow nership interest in RILLC and RILLC is fully independent of Hermes. This Fund has reached its capacity and is currently closed to new investments.


Focus Funds in Practise
The Focus Funds’ performance has been positive, supporting our view that good ownership adds value

                                     Absolute Fund Performance
                                     Relative Performance
                      10%                                                                                                     11.0%


 Performance (p.a.)




                                   Hermes UK Focus Fund (1)                           Hermes European Focus Fund(2)           Hermes UK Small Companies Focus Fund(3)

                                  (launched 1 October 1998)                            (launched 25 February 2002)                     (launched 4 March 2002)

   (1)                 UK Focus Fund benchmark is FTSE All Share Total Return Index
   (2)                 European Focus Fund benchmark is FTSE World Series Europe (ex UK) Total Return Index
23 (3)                 UK Small Companies Focus Fund benchmark is FTSE Small Cap (ex Investment Trusts) Total Return Index
   (4)                 All performance figures are annualised and relative performance is calculated on a geometric basis

Annualised Investment Performance Since Inception for other
Hermes-related Shareholder Engagement Funds
                                             Absolute Fund Performance
                                             Relative Performance

                                    25%   28.6%
               Performance (p.a.)





                                          Nissay Hermes Stewardship Fund(1)           Relational Investors LLC (2)

                                                  (launched 16 March 2005)                  (launched 1 July 1997)

     (1) Nissay Hermes Stew ardship Fund benchmark is TOPIX                                                                                    24
24   (2) Relational Investors LLC benchmark is S&P 500
     (3) Relative performance is calculated on a geometric basis
                                                                                                                                                    Appendix 2

EOS Provided by Team with Unparalleled Experience and Ability

PLC Board experience:

                                                                         David Pitt-Watson, Chairman
John Leach 30+ years: ex-CEO Brent Walker                                20+ years strategy: ex-co founder & MD, Braxton/Deloitte
Paul Harrison 10 years: ex-CEO Hi-Tech Sports                            Colin Melvin, Chief Executive
                                                                         12 years governance experience; ex-Baillie Gifford, Standard Life
Senior strategy consultancy experience:
Wouter Rosingh 20+ years: ex-Director, Booz Allen Hamilton               Paul Munn, Commercial Director
Leon Kamhi 15 years: ex-Braxton/Deloitte                                 9 years PLC Board experience; ex-CEO Dawson International

                                                                         Paul Lee
                                                                         5 years governance and English law
Corporate finance experience:
                                                                         Makoto Seta
Stephan Howaldt 16 years: ex-Warburgs, Siemens Corporate                 9 years professional experience; ex-Arthur Andersen

                                                                         Karin Ri

Investment experience:                                                   7 years professional experience; ex-Morgan Stanley; Nomura

Mike Weston 14 years: ex-Merrill Lynch                                   Jennifer Walmsley
Marco Ricci 14 years: ex-Deutsche                                        5 years professional experience; former journalist
Phil Harris 14 years: ex-Credit Suisse                                   Ian Greenwood
Nigel Davies 17 years: ex-West LB                                        5 years professional experience; ex-NAPF; RREV

Other experience:                                                        Elena Tedesco
                                                                         5 years governance; ex-Deminor
Corinna Arnold 14 years corporate governance & institutional relations
Tim Bush 12 years accounting and public relations                        Hans Hirt
Mark O’Connor 12 years investor relations & marketing                    4 years professional experience; English and German law
                                                                         Hege Sjo
                                                                         9 years professional experience; ex-CFO Norwegian Börs

Additional support from:
                                                                         Bess Joffe
Mark Anson CEO, Hermes                                                   4 years professional experience; lawyer; ex ISS Canada
Tony Good ex- Norwich Union
Mike Bishop ex- Morley                                                   Naheeda Rashid
Mike Connors ex Barclays & Fleming                                       2 years governance; ex-Baillie Gifford; RBoS

                       Appendix 3

Case Studies

 Hanson
 BAE Systems
 Premier Oil


Case study – Hanson

Background                                          Engagement Issues
 Board in need of refreshment and renewal           Encourage board change, particularly
                                                      succession to the chair
 Management appears overly focused on               Encourage focus on operational effectiveness,
  financials to the apparent detriment of             if need be by changing management
  operational efficiency
 Capital structure inefficient with insufficient    Ensure that buybacks are restarted to
  debt                                                increase debt/equity ratio
 Non-core businesses dragging down returns          Consider sale of non-core businesses in Asia-
  and distracting management                          Pacific and continental Europe
 Unclear whether there is value-added from          Test management thinking regarding a
  combining aggregates with building                  possible sale
  materials (particularly brick) businesses

                              Engagement addresses strategy

 Case study – Hanson (cont’d)
                   Hanson                                                                              1    21 Sep 04      Meeting with new non-executive
                                                                                                  10                       (and possible future chair) on
0.50               Hanson Relative to the FTSE Europe Construction & Building Index                                        succession, capital structure and
                                                                                                                           strategic issues
                                                                                                       2    27 Sep 04      Meeting with SID Simon Keswick
                                                                                                                           on succession, capital structure
                                                                                                                           and strategic issues
0.46                                                                                                   3    15 Oct 04      Share buyback programme
                                                                                                       4    17-24 Nov 04   Discussions with Simon Keswick
0.44                                                                                                                       on potential candidates for the
                                                                                                                           chair role
                                                                                                       5    15 Dec 04      Discussion with chairman
0.42                                                                               9                                       Christopher Collins, taken inside
                                                                                  8                                        on succession decision
                                                     6                                                 6    17 Dec 04      Announcement of succession to
                                                 5       7
0.40                                                                                                                       chair
                                         4                                                             7    11 Jan 05      Meeting with outgoing chair
                                                                                                                           Christopher Collins
0.38                                                                                                   8    19 Apr 05      AGM, departure of Collins and
                                                                                                                           two other long-standing non-
                           2                                                                                               executives, appointment of Mike
0.36                      1                                                                                                Welton as chair
                                     3                                                                 9    20 Apr 05      Strategy presentation afternoon,
                                                                                                                           with intensified focus on
0.34                                                                                                                       operational efficiency
                                                                                                       10   04 Aug 05      Meeting with management to
                                                                                                                           discuss strategy, capital structure
                                                                                                                           and operations
               Q3'O4                  Q4'04                  Q1'05                     Q2'05   Q3'05

       Chart dates from 1 July 2004 to 4 August 2005
       Source: DATASTREAM and Hermes Investment Management Ltd

                                         Managing investments to create value

Case study – BAE Systems

Background                                       Engagement Issues
 Public breakdown of key client relationship     Encourage board focus on rebuilding key
  with MoD following problems with Astute and      relationships, without involving press
  Nimrod contracts                                 headlines

 Governance: Board dominated by                  Improve transparency and rebuild confidence
  executives, particularly with a long-serving     following Nimrod and Astute failures
  executive chair and executive vice chair

 Lack of transparency and so market              We expected that these aims would require
  confidence in management and the                 a significant reshaping of the board

 Concern that intended to merge into US rival    Ensure solved own problems before rushing
  at undervalue, before solved own problems        into any substantial deal
                         Engagement addresses board renewal

Case study (cont.) – BAE Systems

260                 PRICE                                                                                             24 June 04
                                                                                                                      Meeting with Dick
                                                                                                                      Olver to agree agenda
240                                                   24 April 03                            H2 03
          10 Feb 03
                                                      Meeting with Sir                       Ongoing contact with
          Ensured could speak f or
                                                      Peter Mason, chair                     Sir Peter to reinforce
          inv estors holding c15%                                                                                                                           7 Mar 05
220       of the shares                               of nominations                         comments
                                                      committee, on                                                                                         Announcement of acquisition
                                                      requirements for
                                                                         1 May 03
                                                                                                                                                            of United Defense industries
              11 Feb 03                               next chair         Facilitated meeting                                                                for £2.2bn
200           Phone conv ersation                                        with Sir Peter for
                                       6 Mar 03
              with Sir Robin                                             10% holder
              Biggam, SID              Meeting with
180                 14 Feb 03          management

                    Follow-up letter
                    which was
160                 shared with the
                                                                                                                                              1 July 04
140                                                            14 July 03                                                                     Olver takes over as
                                                                                                        24 Mar 04                             chairman
                                                               Meeting with Michael
                                                               Hartnall, chair audit                    Announcement of Dick
120                                                            committee                                Olver, former BP
                               20 Feb 03                                                                deputy CEO, as next
                                                                                                        chair of BAE
                               Significant board changes announced
                               and follow-up meeting with Sir Robin
                                              2003                                                                             2004                                           2005

      Source: DATASTREAM/Hermes

                                                      Managing investments to create value


Case study – Premier Oil

Background                                       Engagement Issues
 Capital structure: two dominant shareholders    Find route to give company independence
  (each 25%) and overburdened with debt            from dominant holders as intended strategy
                                                   now abandoned; cut debt
 Governance: Six of eight non-executives not     Remove some, add new independent
  independent                                      directors
 Risk management: largest UK investor in         Justify the risk taken by being present there,
  Myanmar (Burma)                                  or exit the country
 Strategic: locked into mature assets, not       Exit mature assets, slim down and refocus on
  lightweight explorer where could have            fleet-of-foot exploration and production
  competitive advantage                            activities
 Long-term share price underperformance          Improvement to come from addressing
                                                   agenda issues above

                  Engagement addresses CSR and its value impact

Case study (cont.) – Premier Oil


     45               PRICE REL. TO FTSE OIL & GAS SECTOR

     40                          26 Oct 00                                          19 Dec 01                                               9 Jul 03
                                 First meeting of group of                          Frank meeting w ith Sir                                 Court approval for
                                 fund managers and                                  David John & Charles                                    reconstruction scheme
                                 campaigning groups                                 Jamieson (CEO) covering                                 of arrangement
                                                      16 May 01 AGM                 the barriers to reaching a                              (effective 15/7/03)
                                                                                                                              16 Sep 02
                                                      Public acceptance that tw o   solution
           29 June 00                                                                                                         Corporate restructuring
                                                      major holders w eigh on
           First face-to-face discussion                                                                                      agreed in principle w ith tw o
     30                                               share price
           w ith company                                                                                                      major shareholders
           on risk management


                                                                                                      13 Mar 02
                                           9 Jan 01                                                   Public announcement of
     15                                    Constructive first meeting                                 detailed discussions w ith
                                           w ith chair, Sir David John                                tw o major holders on a
                                                                           18 Oct 01 EGM
                                                                                                      resolution to the problem
                                                                           Agreement to slim dow n
                                                                           asset base
               2000                                   2001                                               2002                                   2003
          Source: DATASTREAM/Hermes 22/7/03

                                             Managing investments to create value

Important Information
This communication is directed only at Market Counterparties or Intermediate Customers, as defined in the Glossary of the Financial Services and Markets Act 2000. Any investment or
investment activity to w hich this communication relates is only available to and w ill only be engaged in w ith such persons and any other persons w ho receive this communication should not rely
on or act upon this communication.
This communication is issued and approved for the purposes of section 21 of the Financial Services and Markets Act 2000 by Hermes Investment Management Limited (“HIML”). HIML has its
registered office at Lloyds Chambers, 1 Portsoken Street, London E1 8HZ.
Hermes Pensions Management Limited is the parent company of a number of companies falling w ithin the Hermes Group. The main operating companies w ithin the Hermes Group are Hermes
Investment Management Limited (“HIML”), Hermes Administration Services Limited (“HASL”), Hermes Property Asset Management Limited (“HPAML”), Hermes Focus Asset Management
Limited (“HFAM”), Hermes Focus Asset Management Europe Limited (“HFAME”), Hermes UOB Capital Asset Management Limited (“HUCM” ), Hermes Private Equity Limited (“HPEL”) and
Hermes Assured Limited (“HAL”). All of the above named companies (w ith the exception of Hermes Property Asset Management Limited) are separately authorised and regulated by the
Financial Services Authority.
The Hermes Property Unit Trust (“HPUT”) is constituted by an amended and restated trust deed betw een the Committee of Management and the Trustee both of w hich are authorised and
regulated by the Financial Services Authority. The Committee of Management appoints the trust manager (HIML) and the property managers (Hermes Property Asset Management Limited)
and has overall responsibility for the trust.
Please note that the Financial Services Authority does not generally regulate any activities referred to in this document w hich are not regulated activities under the Regulated Activities
Order 2000.
Hermes Absolute Return Fund (Guernsey) Limited is authorised by the Guernsey Financial Services Commission and is listed on the Irish Stock Exchange.
This document has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. This document is published solely for informational purposes
and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Prospective investors must rely on their ow n examination of the legal,
taxation, financial and other consequences of an investment in the funds, including the merits of investing and the risks inv olved. Prospective investors should not treat the contents of this
document as advice relating to legal, taxation or investment matters. Before entering into an agreement in respect of an investment referred to in this document, you should consult your ow n
professional and/or investment advisers as to its suitability for you and should understand that statements regarding future prospects may not be realised. No action should be taken or omitted
to be taken in reliance upon information in this document. Figures, unless otherw ise indicated, are sourced from Hermes.
The opportunities described in this document have unique risks that may make them unsuitable for certain investors and past performance may not be indicative of future results. Also, certain
returns shown in this document are compared against returns for the relevant benchmark index during similar periods. It is important to note that the underlying volatility and risk of the funds‟
portfolios and that of their benchmark indices vary materially. Property is an illiquid investment and may result in deferment of redemption of units. The value of the property is a matter of a
valuer's opinion rather than fact.
This document should be read in conjunction w ith the fund listing particulars w hen available w hich w ill exclusively form the basis of any application. A comprehensive list of risk factors appears
in the fund listing particulars and an investment should not be contemplated until the risks of investment have been consider ed fully.
Investors may not get back the full amount originally invested. The value of overseas investments w ill be influenced by the rate of exchange. The value and risks of underlying investment may
be difficult to verify independently.
The provision of the information does not constitute an offer to purchase securities to any person in the United States or to any U.S. Person as such term is defined under the Securities Act of
Any person w ishing to subscribe for any interest should satisfy himself as to the observance of the law s of any relevant terr itory, including the obtaining of any requisite governmental or other
consent and the observing of any other formalities.
This document may include a list of Hermes Pensions Management Limited‟s clients. Please note that inclusion on this list should not be construed as an endorsement of Hermes Pensions
Management Limited‟s services. Should you w ish to contact a client for reference purposes, please let Hermes know in advance.


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