The case study ‘Hermes Fund Management, Total and Premier Oil: the responsibility and accountability of business’ discusses the deliberations of Hermes Equity Ownership Service (EOS) in 2008 regarding their stance on supporting Total, a major French oil company that operates in Burma/Myanmar. Specifically, it examines their consideration of whether or not to accept Total’s invitation to visit Burma/Myanmar. David Pitt Watson, the founder of Hermes EOS, shared his perspective on this matter.
Hermes has a unique philosophy that focuses on creating value for clients in invested companies, rather than simply trying to identify winners. It aims to be a responsible owner, considering whether Total is acting appropriately given its current challenges. Total has experienced issues for the past decade, including a significant oil spill that tarnished its reputation and raised questions about its commitment to Corporate Social Responsibility (CSR) issues. Additionally, Hermes successfully urged Premier Oil to divest from Burma in 2001 due to trading problems and concerns about the military dictatorship in the country.
SWOT Analysis: Hermes Fund Manager, established in 1983, is a principal manager for the BT Pension Scheme and manages investments on behalf of other pension plans. Hermes Equity Ownership Services (EOS), a subsidiary of Hermes Fund Managers, was launched in 2004. It is a pioneering advisory service that enables clients to be responsible investors and owners of companies. The key aim of EOS is to support pension schemes, insurance funds, and other long-term investors in meeting their fiduciary responsibilities and becoming active owners of public companies. Hermes manages £24 billion* assets across various investment areas on behalf of clients. In addition, Hermes supports pension funds and other global institutional investors in meeting their ESG (Environmental, Social, and Governance) responsibilities through its market-leading Hermes Equity Ownership Services (EOS). EOS takes on a stewardship role by engaging on more than £89 billion* assets worldwide.
Strengths: Hermes is one of Britain’s most influential fund managers with around £40 billion under management. It is also one of the few large pension fund managers not owned by a bank or other large financial institution.
Hermes is the world’s largest fund manager with a significant stewardship resource and a shared interest with the global coalition of investors it serves. Currently, Hermes advises and provides services to over 20 clients worldwide, managing assets worth more than EUR80 billion. However, Hermes faces weaknesses in terms of differing suggestions from its shareholders and fund managers. Some shareholders prioritize personal profit rather than the overall company’s interests, which can hinder progress. The challenge for Hermes lies in striking a balance between profitability and fulfilling the social responsibilities of its shareholders.
Opportunities: Hermes holds positions of just under 1 percent in the shares of most British companies and about 0.3 percent in continental European companies. Hermes Fund Manager is expanding its global presence, with its head office in London and additional offices in Boston, New York, Sydney, and Singapore.
Threats: The main threat faced by Hermes is related to corporate social responsibility, particularly regarding the reputation of Hermes and its clients.
Main Issues: When considering Total’s invitation to operate a business in Burma/Myanmar, Hermes must evaluate the opportunity from two different perspectives.
One aspect is that Total and Premier have different situations. Total has gained a competitive advantage by operating in troubled regions, unlike Premier. Another aspect is that Total is likely to encounter similar problems in Burma as Premier did. Additionally, Hermes is currently dealing with three issues. The first issue pertains to whether Total will experience different outcomes from operating in Burma. When Premier traded in Burma, it faced difficulties due to not having a significant percentage of shares. The majority of shares were controlled by Amerada Hess, a US company, and Petronas, a Malaysian Oil company.
The share price of Premier has consistently underperformed the market for a number of years due to the absence of a clear strategy, a restrictive capital structure, and mismanagement of their involvement in Burma, particularly in relation to the military dictatorship’s control over the business. Additionally, there is concern about whether Total can improve its negative reputation in Corporate Social Responsibility (CRS) by conducting business in Burma. Total has historically been criticized for not taking CRS issues seriously and has been labeled as a company that neglects these responsibilities. Despite this, there is some satisfaction with their actions.
Total’s adoption of a more transparent commitment to social responsibility raises the question of how to ensure implementation. The third concern relates to the risks and profits associated with doing business in Burma. Due to Burma’s military dictatorship, democratic election results are not recognized, and widespread reports of summary arrests, forced labor, and torture have been made. These factors can have a negative impact on a company’s profitability when operating in a pariah country. Therefore, in order for Hermes to address Total’s operations in Burma without adversely affecting Total’s current market performance, the following recommendation is crucial:
According to history, Hermes assisted Premier in resolving a difficult situation by arranging for Premier to withdraw its operations in Burma. David stated that as a result, Premier oil company became a strong independent company with the potential to create value for its shareholders. Additionally, Hermes could also attempt to convince Total to divest from their operations in Burma. They could present three advantages to Total, including the avoidance of financial risk.
Due to political issues, the regime or sanctions in Burma, a military dictatorship system, may change at times by the UN or the EU. Such changes in the regime could pose difficulties for Total’s business. Burma is a complex area both technically and politically, making it strategically problematic for Total to disinvest from its operations. Moreover, such a move could potentially damage the relationship between Total Oil company and the Burmese government. Hermes, however, could recommend Total to adopt the same approach as Premier did, which is to “swap assets for shares” with another company.
This strategy may assist Total in avoiding issues with the government. Hermes can affirm that divesting from operations in a pariah state would result in an increase in share price and improve their reputation. Premier’s experience shows that engaging with Hermes caused their share price to double and provided extra returns for Hermes clients. This suggests that most shareholders and clients would view divesting from a pariah state as a favorable decision, ultimately enhancing the company’s reputation.
