Hermes Fund Management Total and Premier Oil Case Study

7/22/2019 Hermes Fund Management Total and Premier Oil Case Study

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BUSINESS STRATEGY CASE STUDY| Nayomi Ekanayake

Hermes Fund ManagementTotal and Premier Oilase Study


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Summary

InHermes Fund Management, Total and Premier Oil: the responsibility andaccountability of business case study it has been reported in the year 2008,

That whether EOS (Hermes Equity Ownership Service) should consider to

support total, one of its clients. A large scale French oil company which

operates a business in Burma/Myanmar and whether they should accept

the Total invitation to visit the business in Burma/Myanmar. "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." Stated the founder of Hermes EOS Mr.

David Pitt. Hermes tends to be the responsible owner of the company andits decisions needed to have a broad view about whether Total was acting

precisely. Hermes taking account that Total is facing some issues since a

decade ago, and that they are in an uncommon situation, Total was

considered as a company which does not take corporate social

responsibility (CSR) issues serious enough because of their involvement in

a large oil spill and lost their reputation.

Moreover, Hermes was successful in influencing Premier Oil to disinvest

from Burma in 2001 because Premier oil was facing some problemsregarding its trading in Burma and the military dictatorship.

Question 01 Is the role of institutional investors to influence the strategy of

companies in which they invest? If yes, under what circumstances and how? If no,

why not? Justify your answer by referring to the case study.

Question 02 Should the strategic purpose of an organization be determined by a

particular stakeholder or group of stakeholders? Justify your answer by referring to

the case study.

Question 03 Based on your readings of the case study, what insights can you

gather about the behavior of large shareholders and institutional investors?

Question 04 When dealing with total, what recommendations would

you offer Hermes?


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Question 01

Is the role of institutional investors to influence the strategy of

companies in which they invest? If yes, under what circumstances

and how? If no, why not? Justify your answer by referring to thecase study.

Yes, they are influential on the strategy of the company. Hermes Fund

Management is no doubt an institutional investor. Hermes Fund Management also

has high equity ownership in most organizations including Total and Premier Oil.

It would be ludicrous to say that a business can function without finance. There is

always money involved in every business activity. However development of

business operations has changed in the capital globalize markets. People with theintention of getting returns invest on businesses. Therefore it is essential for

individuals as well as institutions to invest. Before the development of the capital

markets it was the individuals who made their own decisions in investment.

Presently it is clear that the individual investors are replaced by the institutional

investors. This procedure is also recognized by the term shareholding.

Total has some business challenges in Burma/ Myanmar and therefore needs some

advice, guidance, proactive measures towards investment. There are opportunities,

great one in the new market; however, Total requires some kind of decision from

the financial stakeholders to dealing with these current challenges. Bearing in mind

that Total had never had any form of encouraging reputation on for corporate

Social Responsibility (CSR). The public however see Total as a laggard in this

regard. For Total to however, make hay in Burma/ Myanmar, it has to improve on

its Corporate Social Responsibility which too many, became a pleasant surprise.

David Pitt Watson, the founder of Hermes EOS, and its senior advisor as at 2009,

was a little bit confused as he saw it as controversial for anyone to visit

Burma/Myanmar considering the fact that years back, the same Hermes have

persuaded Premier Oil not to invest in the country.

Burma had for a long time, had a military dictatorship. What this means is , no free

press, callous violation of human rights, gross impunity which makes international

investments especially in the oil sector nearly impossible.


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Now the contradiction is, Total is making improvement in their operations, and

mostly known in operating in troubled areas, so it may not be too strong to

persuade Total not to invest in Burma, even if it is the right thing to do. Whereas

some years back, Hermes, while working with Premier Oil, a leading western

investor in Burma had persuaded it (Premier Oil) to disinvest from Burma.

Hermes Investment Belief. Hermes believes that companies at all times should be

active. This means that engaged and active owners are more productive. Hermes

believes also that the BOD, of any organization should have entrepreneurial skill,

expertise while being independent. This Hermes believes will put the company on

a high plain of value and dignity. For Hermes, successful stewardship involved

using vote in approving the board of directors, but also intervening in companies

which were failing to resolve crucial issues, such as board structure, strategic

direction, capital structure and corporate governance. According to David,

Hermes Philosophy is different from most funds. It seeks to create value for our

client in the companies in which it invests not just trying to pick winners. I wonder,

was it in our clients interest for Premier Oil to have been in Burma/ Myanmar, and

for Total to be there today? And being pragmatic should we be devoting resource

to this? Hermes business approach therefore, is basically to relate interactively

with owners and management of companies where they have investments. Herms

believe in the maximization of its investments in organizations. This was why

Hermes, while intervening in Premier Oil decision making, decided not tointervene in the managerial decisions of Total.

Hermes and Premier Oil: No society strives in a state of rancor and acrimony.

When a particular environment is lawless, it becomes unlit for investment,

especially for international investors. Burma was at that time of Premier Oil

supposed investment, facing some grave leadership challenges. Its laws were

deteriorating. There was no order in that part of the world. The military

dictatorship has kept its duly elected leader Aung San Sun Ky; under house amest.

This could cause chaos and lawlessness. The inability of Premier Oil to invest in

Burma made it share price dwindle for many years. Hermes therefore became a

major player as it was invited to proffer solution on the dwindling state of premier

finance. Premier Oil however, gave out its assets for shares hence debt burden

were lowered and shareholding and governance issues were resolved. Hermes


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became a minority shareholder hence could no longer influence the BOD onstrong

business challenges. Hermes in this regard, had limited rights and responsibility.

Hermes and Total: Total already had investment success in troubled areas. Total

had improved drastically on its corporate social responsibility (CSR). Hermes alsobelieves that continuous practice or full corporate social Responsibility by Total

for the good of the society is a spring board to business triumph. Hermes however

agrees with Total in the current business scenario. Hermes therefore, refused to

suggest disinvestment of business operations in Burma since the BOD of Total is

performing well hence occupying the best position in the current market. Hermes

intervention at this stage becomes purely an advisory as in ways to cope with

current market situation instead of interfering in the managerial affairs.

Hermes, Premier Oil and Total: Totals case is not the same with Premier Oil.What they had as a problem may be the same, but the managerial position of Total

is completely different. This was why Hermes considered different parameters in

suggesting the most appropriate business advice for Total.

Total had a very strong capital base; it had a committed, active, never going back

managerial team. It also implemented fully, its Corporate Social Responsibility.

Total however, had invited its shareholders and directors and briefed them on the

current market position and made analysis of the market parameters which may

help to stabilize the environment for business growth for a long term. This Premier

Oil did not do. It will however be awesome and wonderful for David to attend the

conference and show appreciation to Total for taking the investment stance

because if Total had withdrawn, shareholders would have lost out.


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Question 02

Should the strategic purpose of an organization be determined by a

particular stakeholder or group of stakeholders? Justify your

answer by referring to the case study.

A person, group or organization that has interest or concern in an organization.

Stakeholders can affect or be affected by the organization's actions, objectives and

policies. Some examples of key stakeholders are creditors, directors, employees,

government (and its agencies), owners (shareholders), suppliers, unions, and the

community from which the business draws its resources.

Not all stakeholders are equal. A company's customers are entitled to fair trading

practices but they are not entitled to the same consideration as the company'semployees.


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The major stakeholders that can be identified in the case are:

Hermes

Individual Investors

PETRONAS Amerada Hess

Social Groups

Totals Top Management

Premiers Top Management

Hermes Intervention in Prime Oil was extremely helpful for the corporate and it

had been not restricted to extend the performance of the corporate however they

conjointly increase the fare worth and also the image of the company.

External stakeholders are mainly,

Customers

Society

Suppliers

Government

Creditors etc.

Arguments in support to the case

For Hermes, successful stewardship involved using its vote in approving the

board of directors, but also intervening in companies which were falling to resolve

crucial issues, such as board structure, strategic direction, capital structure and

corporate governance.

Hermes engagement with Premier, resulting in its withdrawal from

Burma/Myanmar in 2003 and the positive response of the share price that had

seemed not only to be a step forward for the company, but also a vindication ofHermes approach to Fund Management.

Case clearly shows that Hermes intervention in Premier Oil was highly

beneficial for the company. Not only did they increase the performance of the

company but they also increased the share price and image of Premier Oil (through

disengagement in Burma/Myanmar).


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Question 03

Based on your readings of the case study, what insights can you

gather about the behavior of large shareholders and institutional

investors?

Large shareholders Large shareholders can easily be affected by the companys actions,

objectives, policies and can affect the company the same way around. These shareholders have

the most authority because they inject monetary wise to the company large scale.

Institutional investorsLarge organizations (such as banks, finance companies, insurance

companies, labor union funds, mutual funds or unit trusts, pension funds) which have

considerable cash reserves that needs to be invested. Institutional investors are by far the biggest

participants in securities trading and their share of stock market volumes have consistently

grown over the years. For example, on a typical day, about 70 percent of the trading on the

NYSE is on the behalf of institutional investors. Because they are considered knowledgeable and

strong enough to safeguard their own interests, institutional investors are relatively less restricted

by the security regulations designed to protect smaller investors.

Arguments in support to the case

Much like every other company their main aim is to maximize the returns to its

shareholder.

Hermes is the principle manager for the BT pension scheme and managerinvestment on behalf of other pension plans. It is one of Britains most influential

fund managers with around $40 billion under management. Just under 1%in the

shares of most British companies and about 0.3%continental European companies

.It is one of the few large pension fund managers not owned by a bank or other

large financial Institution. And hence believe it offers a service which is

independent of the conflicts of interest experienced in most large financial

institutions. For many years it had taken a lead in promoting better management

and governance and in intervening where there were continuing problems withcompany performance.

Hermes was in contact with pension funds in the United States. These pension

funds held holdings in Amerada Hess, a 25% owner of Premier. They used these

pension funds to place pressure on Amerada Hess with the aim of dissolving

Ameradas holdings in Premier Oil.


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Question 04

When dealing with total, what recommendations would

you offer Hermes?

Hermes should not withdraw from Burma/Myanmar hens they should go back to

be in the situation. Hermes should show the companys appreciation towards Total

for taking over the investment role, if it wasnt for them the shareholders may have

lost out.

Totals case is different from Premier Oil case even though the issue seems a bit

similar.

1. Total being a French company has a stable financial performance and also avery favorable capital base. Hermes shareholding role was very minor in Total.

They were politically stable enough and have a government foundation too.

Taking all these in to consideration it would be strategically not appropriate to

leave Burma/Myanmar.

2. The managerial team they had was basically up for any matter never did theylook back on anything but grasped an opportunity out of it. Total already had a

competitive advantage since they were successful even during flops.3. Total had radically improved in the corporate social responsibility area, so

leaving Burma/Myanmar could gain a bad reputation from the other hostgovernment.

4. Total has acknowledged their shareholders and directors about the currentmarket positions and the statistics of the market which helps to stabilize the

businesses environmental growth. Even though Total acknowledged their

shareholders Premier Oil didnt follow such method, This is the main reason

why Hermes had to consider different strategies in selecting the most suitable

advice for Total, and it would have been costly for shareholders to put pressure

on the institute.

Hermes should definitely come to terms with Total in the current business outline

in Burma/Myanmar.


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Following are the extracts from the case study in support to the

arguments.

But Natacha also had made some good points; Total was larger, Hermes

shareholding smaller, it was a French company with Good financial performance

and underlying government support.

Its business model was based on its skills to access and exploit oil and Gas

reserves in technically or politically difficult areas.

Total has made a competitive advantage of operating in troubled regions. And

we cant possibly persuade them to get out, even if it is the right thing to do: we

only have a small shareholding.

Total, the giant French oil company, was inviting selected shareholders to look at

some of the initiatives it was taking in promoting corporate responsibility. How

should Hermes respond?

Historically, Total had never had a great reputation for Corporate Social

Responsibility CSR). Its environmental record, for example, had been tarnished by,

among other things, its involvement in a large oil spill a decade ago, which had

devastated the French coast and was only now being decided by the courts.

But the Invitation to shareholders which Hermes had received was not to visit

any operations. It was to visit Totalsoperation in Burma/Myanmar.

Hermes Fund Management Total and Premier Oil Case Study

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