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BUSINESS STRATEGY CASE STUDY | Nayomi Ekanayake

Hermes Fund Management


Total and Premier Oil
Case Study
Summary
In Hermes Fund Management, Total and Premier Oil: the responsibility and
accountability 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 and
its 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 problems
regarding 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?
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.
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 the
intention 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.
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 to
intervene 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
became a minority shareholder hence could no longer influence the BOD on strong
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 also
believes 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.






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's
employees.












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 of
Hermes 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).
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 manager
investment 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 with
company 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.
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 a
very 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 they
look 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 host
government.
4. Total has acknowledged their shareholders and directors about the current
market 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.

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 Totals operation in Burma/Myanmar.