1. The London Business School/ECGI Paper: Returns to Shareholder Activism& 2007 Global Issues Presentation by Peter R Butler Founding Partner & Chief Executive Governance for Owners LLP www.g4owners.com Governance for Owners Company Directors Conference 2007 Australian Institute of Directors Shanghai May 2007

2. What is relational investing?

Investing in underperforming public companieswhere value can be added through exercising share owners rights

Engaging with the executive and non-executive teams of investee companies onstrategicandstructuralgovernance issues

Consulting with other investors and share owners on ownership issues

Engagement by informed, responsible owners providing the catalyst for change that can unlock value in underperforming companies

Created by Bob Monks when he launched the LENS fund in the US in 1992

The ultimate active investment strategy but it requires a rare mix of skills and experience

3. Relational Investing - Matters on which to engage

Board composition

Strategy

Capital structure

Internal controls

Executive remuneration

Corporate responsibility

But owners must not micro-manage Strategic governance Structural governance 4. Is relational investing simply activism?

No.Some overlap but significant distinctions

Responsible share owning, not shareholder agitation

Relationship with companies we look to workwithboards and management

Applies private equity techniques to public equity investments

Timeframe we expect each engagement process to take 2-3 years

Act with the long-term interests of all shareholders in mind

Confidentiality we prefer to work privately with companies

5. Relational Investing requires a rare combination of skills and experience

Skills mix : corporate, investment analysis, strategic analysis, M&A, regulation, corporate finance, institutional relations, corporate governance and press relations

Diverse background : board experience, consultancy, investment banking, investment research, portfolio management, legal; with a range of nationalities

Independence : enabling us to resist pressure from influential parties and avoid conflicts of interest

Networking : broad-based contacts in business, finance and media on a global basis

Alignment of financial interest : between fund executives and long term owners

6. The LBS/EGCI Paper : Returns to Shareholder Activism (4 thDecember 2006)

A clinical study of the Hermes UK Focus Fund investment approach and results

Undertaken by four distinguished business school academics

Covers the period 1998 to 2004 when Peter Butler and Steve Brown set up and ran the Fund

A rigorous and fiercely independent analysis of the Funds performance

Paper can be downloaded without charge from the Social Science Research Network Electronic Paper Collection at:http://ssrn.com/abstract=934712

7. Why is the paper so significant?

Provides the first robust evidence that shareholder engagement can be effective

Confirms it can have a substantial influence on corporate activities

and that it can generate significant excess returns (alpha)

Shows that collaborative engagements are no less effective than hostile episodes, and are a lot swifter to execute

Suggests that the engagements studied had a lasting positive effect on corporate performance

8. Background

There has been only a limited amount of activism observed in the pastWhy?

• Fund managers historically have not undertaken extensive engagement due to free ride effect and conflicts of interests

• The US legal and regulatory frameworks make it difficult to influence Board behaviour

Majority voting and relative ease of calling EGMs in the UK make it a more fruitful environment

Institutional investors in the UK are well organised and practised in collaboration (e.g. ABI, NAPF)

9. The Hermes UK Focus Fund

Created by Peter Butler and Steve Brown with help and support of Bob Monks and launched in 1998

The Fund bought additional stakes in underperforming UK companies already held by Hermes indexed fund (which typical held 1% of each UK stock)

Engagement with the boards and management teams was then undertaken to bring about change and eventual share price re-rating

The Fund outperformed the FTSE All Share index by 4.9% per annum net of fees over the 6 year period 1998-2004

10. What factors did the study analyse?

The study estimates that 90% of the Funds out-performance came from the engagement activities

Documented the teams stated objectives of the engagements

• board changes

• financial goals

• capital expenditure

• payouts to shareholder

• capital structure changes

Categorised style of engagement (which was driven by companies reactions to the engagement)

• collaborative

• confrontational

• mixed

41 investments, 30 engagements

11. What were the objectives of the engagements?

28 out of the 30 involved restructuring of diversified conglomerates

In more than half of cases a change of Chairman or CEO was sought

Also in more than half, increased cash payouts were sought, often related to specific divestments

12. More detail on the engagements undertaken

41 investments; 3 not in the Fund long enough to measure; 8 sold swiftly due to out-performance caused by exogenous events

Differing reactions led to three styles of engagement:

• confrontational: disagreement about the Funds objectives from the outset; often led to changes of chairman/CEO

• collaborative: target agreed with objectives and implemented changes in co-operation with the team

• mixed: attitude was neither collaborative nor wholly confrontational

Engagement with other shareholders also important largest three shareholders averaged nearly 20% of the equity, highest in confrontational episodes

Confrontational engagements took, on average, nearly 3 times as long to complete as collaborative

13. Some interesting observations

Exceptional high number of meetings with companies average over 9 times in each engagement, highest 48

Contacted other shareholders in 80% of cases; corporate brokers in 70% and headhunters in 26% of cases

In only one case was a question or agenda item raised at an AGM

In only two cases were votes against management solicited

Three EGMs were planned but none actually requisitioned

Only one US style class action, but the Fund chose not to take part

Two rights issues were blocked

Of seven press campaigns, only 2 were initiated by the Fund

Of four takeovers seen, none were induced or facilitated by the Fund

14. Event studies on outcomes

Detailedstudies on individual events to identify whether the Funds engagements were value enhancing

Identified detailed objectives that led to specific announcements

98 individual events identified across the 30 engagements

Event windows around the announcements used to measure the abnormal returns

Event windows varied from 3 to 11 day periods

15. Results of the event studies

Mean cumulative abnormal returns (CARs) ranged from 3 to 4%

When events containing other corporate news were excluded, the mean CAR was higher at 5.3%

The largest CARs (6%+) were associated with restructurings, asset or division sales and changes of CEO and chairman

Mixed and collaborative engagements produced events with higher CARs than confrontational engagements

Limited evidence suggests that company performance (measured by ROA) was better one year after engagements than before

16. Smith & Nephew -a case study

1998 a healthcare conglomerate with five disparate divisions

October 1998 stake bought; action plan to reduce conglomerate discount identified in advance

December 1998 meeting with new CEO revealed similarity of views on actions required; letter sent outlining concerns about Chairman succession and excess free-cash flow

1999 several non-core businesses disposed of; Chairman retired and replaced by outsider

2000 further significant disposals and return of 415 million to shareholders followed by a letter from Fund to congratulate

August 2001 letter confirming sale of stake by the Fund

17. Linking out-performance to engagement

Detailed attribution regressions used to disaggregate results

Results support view that performance was associated largely with the reversal of previous corporate under-performance

Aggregating the returns from each event indicates that 92% of the Funds out-performance was derived from the effects of the events ie from the engagements

14.4% of the out-performance came from collaborative engagements; 30.5% from confrontational and 55.1% from mixed engagements

But collaborative engagements were on average much quicker to execute

18. Conclusions

The paper concludes:In contrast to much of the previous literature, this paper has reported substantial effects and benefits associated with shareholder activism in the form of private engagements by an activist fund

The study provides robust evidence that our style of engagement changes companies behaviours and delivers exceptional investment returns

Bulk of the out-performance comes from engagement meaning the results are largely uncorrelated with other investment styles and therefore a great source of diversification

This approach has now progressed at GO and is being successfully applied by the same senior team to pan-European companies where the opportunities are huge

We also expect the approach to be successful over time in Asia.A brief case study on the recent ISETAN (Singapore) engagement follows

19. Isetan Singapore event-driven strategic engagement

Isetan Singapore retailer womens apparel - 61% owned by Isetan Japan

Minority shareholder concerns spanning several years and raised at AGMs

• No indication as to how or if the S$60m tax credit would be used

• Independent directors had adopted an increasingly partisan management attitude

• 2 independent directors brothers, on the board since 1981 and family ties to Isetan

Group of 43 minority shareholders request an EGM which board calls for Jan 10

Resolutions to remove the incumbent independents and replace them with shareholder nominated directors ( Tan Lye Huat , Eng Guan Siah, Soh Suwe) => Tan Lye Huat is GOs partner on governance and engagement in S.E. Asia

Resolutions voted down (unsurprisingly) but company committed to address special dividend/tax credit issue (in cooperation with controlling shareholder)

Feb 7 Isetans announcement that it was working with advisors on a solution => +3% in share price at a time when the wider Singapore market going down

Feb 27 Isetan proposed S$1.50 special and final dividend but no rights issue

Several other Singaporean companies subsequently made similar commitments

Isetan share price rose 41%, from S$4.72 to S$6.65 over period of engagement

20. Isetan comment and share price performance I feel it's important to be part of the process that promotes greater shareholder activism in Singapore, which will eventually lead to improved standards of corporate governance. minorities can influence outcomes if they act in the right spirit and intentions. Tan Lye Huat, Business Times Singapore, 29 Dec 06 Mr Tan, who is a well respected expert in the field of corporate governance, deserves special commendation for being willing to stand up for the minority shareholders although he was himself not a shareholder of the company.Isetan also deserves kudos as they showed a willingness to engage and compromise with the minority shareholder community. Ang Hao Yao, Business Times Singapore, 6 Mar 07 Isetan Singapore share price vs Straits Times Index Oct 06 Mar 07 21. Team of experienced investors and engagement specialists Paola Perotti, ManagingDirector 13 years as an investment banker, engagement specialist for 3 yearsPeter Butler,CEO 20 years corporate experience, 10 years as an engagement specialistSteve Brown, CIO Over 20 years as a fund manager, broad experience of UK and European markets. 14 years in engagement Diverse backgrounds working on investment and engagement Robert Machell,InvestmentDirector Fund manager for over 12 years, extensive knowledge of European equities Robin Hindle Fisher, ManagingDirector Over 23 years investment management experience with extensive engagement involvement Michelle Edkins,Managing Director Over 9 years experience in corporate governance, institutional relations and engagement 22. Issues for discussion 2007

Proxy Voting

One Share One Vote

Long term v short term

Development of Principles for Responsible Investment (UN initiative)

Bribery and corruption in Europe

23. For more information contact

Robin Hindle Fisher

Managing Director

Tel: +44 20 7614 4773

Email: r.hindle_fisher@g4owners.com

Hattie Burgess

Marketing Manager

Tel: +44 20 7614 4759

Email: h.burgess@g4owners.com

Governance for Owners

26 Throgmorton Street

London EC2N 2AN

Tel: +44 20 7614 4750

Or visit Governance for Owners website:www.g4owners.com

Or contact our regional advisor Tan Lye Huat, HIM Governance Pte Ltd

E-mail: lyehuat.tan@himgovernance.com