The New Focus for Global Investors: Responsible Investment and Active Share Ownership 26 th September 2006

1. The New Focus for Global Investors: Responsible Investment and Active Share Ownership26th September 2006 CIBC Centre for Corporate Governance and Risk Management Colin MelvinChief 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 Authority.

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. Aligned with pension fund goals and objectives 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 30th June 2006 Source: Hermes ** Source FTFM Survey 05/06/06

4. Issues for Trustees as equity investors LEGISLATION/ REGULATION FUNDING DISCLOSURE STEWARDSHIP PERFORMANCE MEMBER AWARENESS TIME SINGLE ISSUE ACTIVISTS Stewardship is central to the Trustees’ role

5. Stewardship, Value and Engagement – Overview • 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) **** • 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 * ** London Business School (2006) *** Gompers et al (2004) **** Deutsche Bank (2004a), (2004b), (2003) *see Appendix 1 Investment in stewardship adds value

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. 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.

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 • 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 approvedby 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 • 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 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. Overview of EOS Activities High Intensityof involvement Additional investment and engagement on strategic issues etc Focus Funds 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 Contact driven by company consultation (on pay and other issues) Voting activity, related discussions, letters and meetings AllCompanies Low Government and regulatory engagement to ensure best possible backdrop for shareholder rights

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 industry’s 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 • Insight • Hermes’ knowledge, expertise and advice • Reporting on activities and engagement • Feedback on market developments Value • Activities designed to add economic value • Alignment with fiduciary duty • Engagement on financially material issues EOS Control • Retain ultimate voting control of your shares • Ability to initiate engagement on your issues • Input to direction and development of EOS Access • Dedicated relationship manager • Regular formal and informal communication • Regular meetings

20. Conclusion • 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 investors

21. Shareholder Engagement Funds’ Performance • Stewardship Staff • Case Studies Appendices

22. Appendix 1 Shareholder Engagement Funds • Launched February 2002 • Investment universe: European stocks (European Economic Area ex-UK, plus Switzerland) • FUM(1) €1.5bn • Managed by Hermes Focus Asset Management Europe Ltd(2) Nissay Hermes Stewardship Fund European Focus Fund • Launched March 2005 • Investment universe: 550 Japanese listed stocks • FUM(1)¥32bn • Managed by Nissay Asset Management Corporation • Advisors: Hermes Focus Asset Management(2) • Launched October 1998 • Investment universe: FTSE 350 • FUM(1) £977m • Managed by Hermes Focus Asset Management Ltd(2) • Relational investors LLC formed in 1996 • Investment universe: US listed stocks with equity market capitalisations in excess of $1bn • FUM(1) $6.2bn • Managed by Relational Investors LLC • Launched March 2002 • Investment universe: UK companies outside FTSE 350 (ex-Investment Trusts Index) • FUM(1) £143m • Managed by Hermes Focus Asset Management Ltd(2) UK Focus Fund Relational Investors LLC(3) 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 ownership interest in RILLC and RILLC is fully independent of Hermes. This Fund has reached its capacity and is currently closed to new investments.

23. Focus Funds in PractiseThe Focus Funds’ performance has been positive, supporting our view that good ownership adds value Performance (p.a.) (3) (2) (1) (launched 1 October 1998) (launched 4 March 2002) (launched 25 February 2002) • UK Focus Fund benchmark is FTSE All Share Total Return Index • European Focus Fund benchmark is FTSE World Series Europe (ex UK) Total Return Index • UK Small Companies Focus Fund benchmark is FTSE Small Cap (ex Investment Trusts) Total Return Index • All performance figures are annualised and relative performance is calculated on a geometric basis

24. Annualised Investment Performance Since Inception for other Hermes-related Shareholder Engagement Funds Performance (p.a.) (2) (1) (launched 1 July 1997) (launched 16 March 2005) • Nissay Hermes Stewardship Fund benchmark is TOPIX • Relational Investors LLC benchmark is S&P 500 • Relative performance is calculated on a geometric basis

25. Appendix 2 EOS Provided by Team with Unparalleled Experience and Ability PLC Board experience: John Leach 30+ years:ex-CEO Brent WalkerPaul Harrison 10 years:ex-CEO Hi-Tech Sports David Pitt-Watson, Chairman 20+ years strategy: ex-co founder & 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 Lee 5 years governance and English law Makoto Seta9 years professional experience; ex-Arthur Andersen Karin Ri7 years professional experience; ex-Morgan Stanley; Nomura Jennifer Walmsley5 years professional experience; former journalist Ian Greenwood5 years professional experience; ex-NAPF; RREV Elena Tedesco5 years governance; ex-Deminor Hans Hirt4 years professional experience; English and German law Hege Sjo 9 years professional experience; ex-CFO Norwegian Börs Bess Joffe4 years professional experience; lawyer; ex ISS Canada Naheeda Rashid2 years governance; ex-Baillie Gifford; RBoS E O S Senior strategy consultancy experience: Wouter Rosingh 20+ years: ex-Director, Booz Allen Hamilton Leon Kamhi 15 years: ex-Braxton/Deloitte Corporate finance experience: Stephan Howaldt 16 years: ex-Warburgs, Siemens Corporate Investment experience: Mike Weston 14 years: ex-Merrill LynchMarco Ricci 14 years: ex-Deutsche Phil Harris 14 years: ex-Credit Suisse Nigel Davies 17 years: ex-West LB Other experience: Corinna Arnold 14 years corporate governance & institutional relations Tim Bush 12 years accounting and public relations Mark O’Connor 12 years investor relations & marketing Additional support from: Mark Anson CEO, Hermes Tony Good ex- Norwich Union Mike Bishop ex- Morley Mike Connors ex Barclays & Fleming

26. Appendix 3 • Hanson • BAE Systems • Premier Oil Case Studies

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

28. 0.52 Hanson Hanson Relative to the FTSE Europe Construction & Building Index 0.50 0.48 0.46 0.44 0.42 0.40 0.38 0.36 0.34 0.32 Q3'O4 Q1'05 Q4'04 Q2'05 Q3'05 10 3 6 7 8 5 2 4 1 9 Case study – Hanson (cont’d) Chart dates from 1 July 2004 to 4 August 2005 Source: DATASTREAM and Hermes Investment Management Ltd Managing investments to create value

29. Case study – BAE Systems • Engagement Issues • Encourage board focus on rebuilding key relationships, without involving press headlines • Improve transparency and rebuild confidence following Nimrod and Astute failures • We expected that these aims would require a significant reshaping of the board • Ensure solved own problems before rushing into any substantial deal • Background • Public breakdown of key client relationship with MoD following problems with Astute and Nimrod contracts • Governance: Board dominated by executives, particularly with a long-serving executive chair and executive vice chair • Lack of transparency and so market confidence in management and the company • Concern that intended to merge into US rival at undervalue, before solved own problems Engagement addresses board renewal

30. 24 June 04 Meeting with Dick Olver to agree agenda H2 03 Ongoing contact with Sir Peter to reinforce comments 24 April 03 Meeting with Sir Peter Mason, chair of nominations committee, on requirements for next chair 10 Feb 03 Ensured could speak for investors holding c15% of the shares 280 7 Mar 05 Announcement of acquisition of United Defense industries for £2.2bn 260 1 May 03 Facilitated meeting with Sir Peter for 10% holder 11 Feb 03 Phone conversation with Sir Robin Biggam, SID 240 6 Mar 03 Meeting with executive management 220 14 Feb 03 Follow-up letter which was shared with the board 200 180 1 July 04 Olver takes over as chairman 160 14 July 03 Meeting with Michael Hartnall, chair audit committee 24 Mar 04 Announcement of Dick Olver, former BP deputy CEO, as next chair of BAE 140 20 Feb 03 Significant board changes announced and follow-up meeting with Sir Robin 120 100 2003 2004 2005 Case study (cont.) – BAE Systems PRICE REL. TO FTSE ALL SHARE - PRICE INDEX PRICE Source: DATASTREAM/Hermes Managing investments to create value

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

32. 50 45 40 26 Oct 00 First meeting of group of fund managers and campaigning groups 19 Dec 01 Frank meeting with Sir David John & Charles Jamieson (CEO) covering the barriers to reaching a solution 9 Jul 03 Court approval for reconstruction scheme of arrangement (effective 15/7/03) 35 16 May 01 AGM Public acceptance that two major holders weigh on share price 16 Sep 02 Corporate restructuring agreed in principle with two major shareholders 29 June 00 First face-to-face discussion with company on risk management 30 25 20 13 Mar 02 Public announcement of detailed discussions with two major holders on a resolution to the problem 9 Jan 01 Constructive first meeting with chair, Sir David John 15 18 Oct 01 EGM Agreement to slim down asset base 10 2000 2001 2002 2003 Case study (cont.) – Premier Oil PRICE REL. TO FTSE ALL SHARE - PRICE INDEX PRICE REL. TO FTSE OIL & GAS SECTOR Source: DATASTREAM/Hermes 22/7/03 Managing investments to create value

33. Important InformationThis 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 which this communication relates is only available to and will only be engaged in with such persons and any other persons who 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 within the Hermes Group. The main operating companies within 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 (with 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 between the Committee of Management and the Trustee both of which 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 which 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 own examination of the legal, taxation, financial and other consequences of an investment in the funds, including the merits of investing and the risks involved. 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 own 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 otherwise 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 with the fund listing particulars when available which will 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 considered fully. Investors may not get back the full amount originally invested. The value of overseas investments will be influenced by the rate of exchange. The value and risks of underlying investment may be difficult to verify independently. 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