International Company Secretaries Conference

Robert A.G. Monks

Institutional Investors, Competitiveness and Legitimacy

"Shareholder Activism"

Hong Kong
22-24 November 1998

1. A company having informed and effectively involved owners is worth more than one without
· Nesbitt – Wilshire Associates – Performance of CalPERS “focus companies”
· Warren Buffett and Salomon Bros.
· McKinsey Quarterly 1996-4 – 11% premium
· Millstein + MacAvoy 1998 Columbia Law Review analysis – “significant correlation between independence and quality of board and performance.”

2. Why, therefor, are there so few “activist investors”
· If activism so clearly is profit making, why doesn’t everybody do it?
· The principles are simple - value investing + the ability to act immediately and decisively in value potential areas
· There have periodically been many kinds of investors applying these principles –
· management buyouts - Michael Jensen – Harvard Business Review – 1989 – “The end of the publicly owned corporation”
· Arbitrageur - Guy Wyser- Pratte
· Take Over – the class of 1980s – Icahn et al.

3. Conflict of Interest
· The largest shareholders are trustees for pension plans and mutual fund holders
· The trustee organizations are preponderantly financial conglomerates having many business relationships with large companies
· In many situations, a “trustee” will find that an underperforming company whose stock is held in trust portfolios is also a client for other – more lucrative - financial services
· The trustees decline to act
· There has not been found either enthusiasm or law to force them to act.

4. LENS
· LENS has had a six year record managing an activist fund in the United States – http://www.lens-inc.com – with our money, that of major investors, like George Soros and large public pension funds like SWIB.
· We hold no more than half a dozen securities at a time and have been involved with many of the most prominent companies in the U.S. - Sears Roebuck, Westinghouse, Eastman Kodak, American Express, Waste Management, Scott Paper.
· We deliberately chose companies that have underperformed for a long period of time and which have characteristics that are suitable for effective shareholder involvement – promiscuous conglomeration, excess cash, egregiously unsatisfactory management and board.
· We have outperformed the S&P index by more than 200 basis points during this period, even though the markets have not generally been competitively favorable for “value” investors.
· Our style is to work with management so long as such is constructive, then to turn to the board, other shareholders and ultimately the public.
· Our style is that of “institutional activism”. We work with other shareholders, we never own enough to make changes on account of our own holdings. We only take fees from our own clients, no investment banking fees, no greenmail. We feel that – even though many get a “free ride” – that we are able to leverage our position only because we have earned the support of the major institutions. Companies know this, so we can be effective.

5. HERMES / LENS Asset Management – “HLAM”
· You will have heard from Hermes’ CEO - Alastair Ross Goobey
· Hermes manages the pension funds for its parent company British Telephone and for the British Post Office System – It is the largest pension fund manager in the United Kingdom. It has no other business - it has no conflict of interest
· LENS and Hermes decided that the opportunities for a joint venture in the United Kingdom were favorable and since October 1, 1998 we have invested more than £100 million in “focus companies”
It is too early for more than anecdotal results. But indications are highly favorable.

6. Global governance fund
- Hermes and LENS will jointly conduct an activist fund in the United States;
- We are planning to establish governance funds in major markets around the world in order to take advantage of the demand for effective owners without conflicted interests.
- HLAM is a simple concept - we believe that companies can get access to capital world wide on the cheapest basis only if they are open with their accounts and can demonstrate that managements are effectively accountable to shareholders for the maximization of value.