City University - London November 9, 1998

OUTLINE

Summary

1. Anglo American Pension Fund Hegemony 2. The American "spin" 3. Activism = empowering NEDs = Value Adding 4. Revolution in Ownership - the middle class 5. Repeal of the law of Trusts

1. Central and universal theme - - End of history - democratic capitalism - Fukayama - the impact of large corporations in a free society - challenge is to reap the benefits while assuring that other societal interests are not neglected - balance - restraint on economic hegemony - The ERAMET case - Move towards the "left" in Europe and reassertion of political hegemony.

2. Different cultures of Capitalism - Charles Hamden Turner - US / UK - market place systems - Europe / Japan - central planning influence - Drucker - FORBES - 7/9/98 - " In Europe and Japan today most big business is still run to maximize market share or to guarantee lifetime employment or even to further government policies. Managements pay relatively little heed to shareholders."

3. Informing discipline is emerging - Capital is available on preferential terms to those perceived as having good governance - Transparent accounts - increasing concern with GAAP - need for disclosure - cash based systems - Accountability - effective alignment of management and ownership interests. (Stakeholder interests are important, but not paramount to institutional investors.)

4. Alignment - U.S. relies on shareholder pressure ECONOMIST - " No other rich country gives companies quite such a free hand to lay off worker and shift resources from declining industries into growing ones. |No other country refreshes itself in quite the same way by continuous waves of immigration… the special characteristic of American business is ' a willingness to reinvent itself and a willingness to see things disappear, an almost intuitive belief in Schumpeterianism.' People do not like it, but by and large they accept it. For as long as Americans are willing to put up with the mass lay-offs and accompanying social dislocation, there are incomparable wealth-creating advantages." - U.K. relies primarily on directors with a back up from institutions - Japan - consensus of national interests - France, Germany, Italy - continuing renegotiations with government - Again, Drucker: " Naturally, the |Italians do not invest in Italian securities. They buy London-based mutual funds, which invest largely outside of Italy. The same is true for Germans, French, Japanese. Whether in Germany or in Italy or in France, companies are not being managed for return to shareholders but for return to insiders."

5. Generally Accepted Standards of "activism" + "governance" - There has been no demonstrated correlation between particular governance characteristics and performance. Millstein & MacEvoy - "Significant increase in 'economic profit' -operating earnings in excess of other costs of capital - where a professional board was present." - Informed and involved shareholders have consistently made a difference - LENS, Buffett = profit - There are no general standards applicable to everyone - We do not know today whether there is too little or too much activism, we do not know what is the optimal "creative tension" in governance - The only certainty is the desirability of inducing institutions to become informed and active. The ultimate goal is to energize, ground and make accountable non-executive directors. They need "someone" for whom they are working in order to justify the confrontation aspects of monitoring.

6. The New Owners -Meet the New Owners - Over 60% of largest US and UK - Major holder in ALL PUBLIC Companies all over the world, long term - indexed, concerned with future

Two areas of great importance - Controlling shareholders of US / UK - Increasingly active and important force in public companies everywhere in the world.

7. The New Owners are Trustees - NOT individuals. Their nature is fundamentally different. - "scaling up" problems and conflict of interest - risk / reward of trustees' taking the lead, emphasis on the "prudent" -The disinclination of the major financial conglomerate trustees to be "activist"- - Cahouet Quotation " We are very reticent to position ourselves as an activist shareholder in domestic or international securities. The problem for us is how we are perceived by our customer base. The risks are such that it probably does not make sense for us to take an aggressive position. I can imagine that many of your partners do have a lot more freedom since they apparently have not other business interests with portfolio companies." - This represents a de facto repeal of the law of trusts in the U.S. The same elements appear to be present in the UK - Hampel Commission report Sec 5.7.

8. The Revolution of Middle Class Ownership - There has been a "sea change" in ownership of major corporations. Now the middle class - the pensioners - 100 million Americans have a real interest in the performance of the economy and in its proxy - the stock market. - The beneficial owners have not yet organized so as to express their "power". Predictably, they will not forever be satisfied with the present system of trustee dysfunction. A sustained period of market decline will inevitable cause these issues to be raised.

ICGN - INTERNATIONAL CORPORATE GOVERNANCE PRINCIPLES - SUMMER 1998 - Proposed Code "Those investing on behalf of others have a responsibility to maximize the returns earned on the capital entrusted to them. This goes beyond allocating capital prudently among diversified asset classes; investors must also monitor the performance of the corporations in which they invest as agents of the underlying providers of capital."

- need for government involvement to clean up the constraints on a market place in shareholder activism.

9. Demographic Pressures - Who is going to pay for retirement with vastly decreased birth rates in Western Europe ? - Not the government - Not the employer - It must come from the performance of the funded pension scheme. U.S. experience. - The security of retirement income will become an increasingly important political issue - This ensures that there will be an increasing world wide emphasis on

* ACTIVSM BY SHAREHOLDERS * PRESSURE FOR PERFORMANCE BY PUBLIC COMPANIES