The case study ‘Hermes Fund Management, Total and Premier Oil: the responsibility and accountability of business’ documents that in 2008, Hermes Equity Ownership Service (EOS) considers whether they should support Total, one of its clients, a giant French oil company operates a business in Burma/Myanmar and should they accept Total’s invitation to visit Burma/Myanmar. David Pitt Watson, founder of Hermes EOS has said:
“Hermes’ philosophy is different from most founds. It seeks to create value for our clients in the companies in which it invests, not just trying to pick winners.
Hermes aimed to be a responsible owner of the company and its decision needed to have a view about whether Total was acting properly. Hermes considering that Total is facing some issues since a decade ago, and they are in an unusual situation; Total lost their great reputation due to its involvement in a large oil spill and this makes Total, as a company not takes Corporate Social Responsibility (CSR) issues serious enough.
Furthermore, Hermes was successful persuaded Premier Oil to disinvest from Burma in 2001 because Premier Oil was facing some problems of its trading in Burma and the military dictatorship in there is another concern.
SWOT Analysis Hermes Fund Manager established in 1983, it is a principal manager for the BT Pension Scheme and managers investment on behalf of other pension plans. Hermes Equity Ownership Services (EOS) is a subsidiary of Hermes Fund Managers. it is launched in 2004 and is a pioneering advisory service, which enables its clients to be responsible investors and owners of companies. Its key aim is to support pension schemes, insurance funds and other long-term investors to meet their fiduciary responsibilities and become active owners of public companies. Hermes manages £24. billion* assets on behalf of clients across these investment areas. Additionally, its supports pension funds and other global institutional investors in meeting their ESG responsibilities through its market leading Hermes Equity Ownership Services (EOS), which takes on a stewardship role engaging on more than £89 billion* of assets worldwide. Strengths: Hermes is one of Britain’s most influential fund managers with around?40 billion under management and it is also one of the few large pension fund managers not owned by a bank or other large financial institution.
Hermes has the largest stewardship resource of any fund manager in the world and strong commonality of interests with the global coalition of investors it represents. Hermes provides services and advises more than 20 clients globally on over EUR80 billion of assets. Weaknesses: the shareholders and found managers of Hermes may have different suggestions on one issue. Some of the shareholders do not take seriously their role as owners, they focus on make profit for themselves rather than the whole company. In addition, it is hard for Hermes to balance the relationship between profit and social responsibility of shareholders occasionally.
Opportunities: Hermes is just under 1 percent in the shares of most British companies, and about 0. 3 percent of those in continental European companies. Hermes Fund Manager has a growing global presence. Its head office is located in London, while they are also supported by established offices in Boston, New York, Sydney and Singapore. Threats: The threat of Hermes is from corporate social responsibility. The social responsibility relate to reputation of Hermes or its clients. Main issues When Hermes think about Total’s invitation and the idea of operate a business in Burma/Myanmar, it has to consider in two different aspects.
One aspect is Total has different situation to Premier; Total has made a competitive advantage of operating in trouble regions, but not for Premier. Another aspect is Total is likely to face same problems in Burma that Premier had. In addition, Hermes is facing three issues. The first issue is whether Total will have a different result by operating business in Burma. When Premier was trading in Burma, it faced some problems; Premier did not have much percent of the shares because most shares controlled by Amerada Hess, Us company and Petronas, Malaysian Oil company.
Premier’s share price had dramatically underperformed the market for several years due to no clear strategy, a restrictive capital structure and the involvement in Burma was not being managed. Especially, the military dictatorship controlled the business all the time. The second issue is whether Total will reverse their bad reputation by operating business in Burma. Total had never had a good reputation for Corporate Social Responsibility (CRS). Total was marked as a part of not taking CRS issues seriously. Even though it is been pleased by
Total’s adoption of a more public commitment to social responsibility, how to ensure their implementation on it? The third issue is risk and profit in Burma. Since Burma is a military dictatorship system, the regular results of democratic elections are not accepted. Summary arrest, force labour and torture were widely reported. It will affect a company’s profit by doing business in a pariah company. Recommendation In order for Hermes to respond Total’s operation in Burma without affecting the Total’s current market performance, the following recommendation is essential for Hermes:
Based on the historical record, Hermes had successfully helped Premier out of the bad situation by set up an engagement of Premier withdraw the operation in Burma. David had said: “Premier oil company becomes established as a strong independent E&P company with a real opportunity to continue to add value for its shareholders” For Total, Hermes could also seek to persuade Total to disinvest the operation in Burma. Hermes could indicate three advantages to Total: To withdraw the operation in Burma could help Total avoid the financial risk.
Since Burma is a military dictatorship system, their regime or sanctions may changes sometime by the UN or the EU due to political issues. Change in regime will affect Total’s business to a difficult situation. Since Burma is a difficult area in technical and political, disinvest the operation could be strategically problematic and potentially undermine the relationship between Total Oil company and Burma government; However, Hermes could suggest Total to do the exactly same approach as Premier did, “swap assets for shares” with other company.
This approach could help Total avoid the potential problem with government. Hermes can also indicate that disinvest the operation in a pariah state would lead their share price goes up and increase its reputation. According to Premier’s case, set up an engagement with Hermes helped its share price doubled; Hermes clients also get an excess return. This imply that disinvest in a pariah state would be an acceptable decision for most shareholders and clients, and the reputation been increased.
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