Description
This is document describes about hermes - corporate governance issues.
Premier Oil & Hermes
Table of Contents
Introduction ................................................................................................................................ 3 Hermes ................................................................................................................................... 3 Premier Oil ............................................................................................................................. 3 Issues .......................................................................................................................................... 5 Corporate Governance Issues ................................................................................................. 5 Social, Ethical and Environmental Issues (SEE Issues) ......................................................... 5 Strategic issues ....................................................................................................................... 5 Theoretical Background ............................................................................................................. 7 Expectations and Purposes ..................................................................................................... 7 The role of Expectations and Purposes in a Strategy Framework.......................................... 7 Corporate Governance............................................................................................................ 8 The Chain of Corporate Governance .................................................................................. 8 Forms of Ownership ............................................................................................................... 9 Stakeholder Expectations ....................................................................................................... 9 External Stakeholders ......................................................................................................... 9 Analysis.................................................................................................................................... 10 1. 2. 3. 4. 5. 6. 7. 8. 9. Timeline ........................................................................................................................ 10 Stakeholders .................................................................................................................. 10 Stakeholder Mapping .................................................................................................... 11 Why does Hermes want to reform Premier oil?............................................................ 13 Why was the share price of Premier Oil going down initially? .................................... 13 What's in it for Petronas and Amerada to go for the 'swap assets for shares'? ............. 13 Impact on share price after the „reforms? ...................................................................... 14 Strategies followed by Hermes ..................................................................................... 14 Strategies followed by Premier Oil ............................................................................... 15
Conclusion ............................................................................................................................... 15 Bibliography ............................................................................................................................ 16 Annexure I ............................................................................................................................... 17
2
Introduction
Hermes Hermes Investment Management is one of the largest pension fund managers in London. It is owned by, and is the principal fund manager for, the BT Pension Scheme, the UK's largest. Hermes also manages portfolios on behalf of over 200 other major corporate and public pension funds. (Hermes) Hermes aims at looking beyond the short term focus of the financial markets, which are entirely concentrated on the next quarter's earnings and other immediate financial measures. Hermes believes that good stewardship contributes to superior long?term performance of companies. As a global pioneer in the field of responsible investment Hermes was the first major institutional investor to establish shareholder engagement programmes. Hermes indulges in business oriented dialogue which empowers companies to develop their focus on long term growth. Hermes?s engagements help businesses to understand and mitigate against the costs of poor social and environmental practices by highlighting the business case for an integrated approach to the management of risks. By framing social, environmental and ethical risk within the wider context of sustainable, long term business performance, Hermes is able to achieve real change for the better through its engagements with investee companies. Premier Oil Premier Oil started life as the Caribbean Oil Company, which was registered in the UK in 1934 to pursue oil and gas exploration and production activities in Trinidad. Two years later, it was publicly floated as Premier (Trinidad) Oilfields. For the next two decades, the company concentrated its attention on oil production in Trinidad. Having acquired its first interest in the North Sea in 1971, Premier gradually expanded its presence on the UK continental shelf, merging with the Ball and Collins North Sea Consortium in 1977 to gain significant interests in the North Sea as well as properties in Sudan and West Africa. (Premier Oil) In 1995, Premier acquired Pict Petroleum. As a consequence, Amerada Hess which had a substantial stake in Pict came to hold 25% of Premier's enlarged equity. From this point, Premier was participating in numerous North Sea oil and gas fields. Supported by production revenue from the UKCS, the company turned its attention to the Far East with a view to developing energy resources to serve this region's rapidly expanding economies. To consolidate its position as a leading independent production company in the south-east Asian energy markets, Premier formed a strategic alliance with the Malaysian oil company Petronas and Amerada Hess in 1999, within which both Petronas and Amerada Hess owned a 25% stake in Premier. The company was dominated by two major shareholders. This raised concerns on the governance side pertaining to the appointment of non-executive directors who were not regarded as independent due to certain conflicts of interests. In addition, the company had allowed itself to become exposed to major ethical and reputational risks as a result of being the lead investor in the Yetagun gas field in Burma, a country ruled by a military dictatorship. Premier's involvement in the country had brought 3
public criticism of the company from a range of sources including Burmese campaigners, Amnesty International, trade union groups and, not least, the UK government. Its share price was languishing and it appeared unable to deliver on its stated strategy. Premier being a part of Hermes?s investment portfolio, Hermes decided to engage with the company, with other shareholders, and with NGOs to resolve these issues. (Burma Campaign)
4
Issues
The case broadly highlights three major issues that Premier Oils faced before Hermes? active engagement 1. Corporate Governance Issues 2. Social, Ethical and Environmental Issues (SEE Issues) 3. Strategic issues
Corporate Governance Issues
1. The biggest problem for Premier was that it was dominated by two major shareholders Amerada Hess a US company and Petronas a Malaysian oil company; each of which had a 25% stake in Premier. 2. The Company board structure was skewed in favour of the two biggest shareholders as each of them appointed two non executive directors each on Premier?s board. These directors were widely considered to be non-independent. Their re-election on the board also drew a lot of flak from Hermes. 3. Two other non executive directors were deemed unfit by Hermes because one received substantial consultancy fees from Premier and the other was a former executive. The composition of the board of a company and the power it wields over the executive are signs of good health of the company. Having a powerful and independent board sends a strong message to all stakeholders. Premier failed on this aspect and saw its share prices in a downward spiral before Hermes? active engagement. (Refer Exhibit I in Annexure I) Having a strong corporate governance structure is at the core of Hermes and therefore Hermes endorses the recommendations of the Cadbury committee?s definition of independence of non executive directors. (Edkins, 1999)
Social, Ethical and Environmental Issues (SEE Issues)
Premier Oils was majorly exposed to ethical and reputational risks by being the lead investor in the Yetagun gas field in Myanmar (Burma). Premier?s involvement in the country brought in a lot of public criticism of the company by a range of sources like Amnesty International, the UK government etc.
Strategic issues
1. After the entry of Petronas in 1991, it was decided that Premier Oil was to be a primary investment vehicle for Asian upstream investment by Amerada Hess and Petronas. Unfortunately, this strategy was not being followed and Premier seemed to be in a „strategic hole? and no clear alternative strategy was made visible to investors. 2. Premier was not large enough to compete in production and downstream work with emerging super-major oil companies as it required large amounts of capital expenditure on investment. 3. It was also not as fleet of foot as it ought to be so as to fully exploit the exploration opportunities opened up by the super major?s focus on larger scale fields. 5
4. Premier?s freedom of action was also limited by the company?s high level of gearing.(high D/E ratio) 5. Premier oils had taken steps to overcome the ethical and reputational risks of being in Burma but it failed to make its shareholders aware of steps taken. Premier tried to mitigate risks of being in Burma by building schools, funding teachers and AIDS education and environmental remediation. But Premier?s board had not publicly stated that it believed it was effectively managing all the risks that were associated with its presence in Myanmar. Nor did Hermes have the confidence that the board as currently constituted could give the shareholders the reassurance that they needed in this regard.
6
Theoretical Background
(Johnson, Scholes, & Whittington)
Expectations and Purposes
The role of Expectations and Purposes in a Strategy Framework
7
Corporate Governance
Corporate governance is about how principal-agent problems within companies can be mitigated. (Hermes, Postma, & Zivkov, 2007) The governance framework is concerned with the following aspects: ? ? ? ? Whom does the organization serve? How should the purposes and priorities be decided? How should an organization function? How power is distributed among stakeholders?
The Chain of Corporate Governance
Source: Adapted from David Pitt-Watson, Hermes
8
Characteristics of Chain of Corporate Governance: ? ? ? Chain or hierarchy of control This is concerned with the separation of ownership and management control Accountability and responsiveness Depicts wider range of stakeholders Principal – agent relationships
Issues with the governance chain ? ? ? ? Conflict of interest Director?s responsibilities to shareholders Accountability to stakeholders Structures of targets, budgets and rewards
Forms of Ownership
Ownership has a fundamental effect on organizational purpose and strategies ? ? ? Private/public ownership of equity Public equity is often required for growth. Sale of all or part of the company Boards may decide to sell the company to a more suitable corporate parent. Targets for acquisitions Boards can compare offer which is more attractive to the shareholders in terms of the returns. Mutual Ownership In some business like building societies, banks etc customers are owners rather than shareholders. Privatization of public sector bodies Governments privatized companies to face up to market forces, be aware of customer needs and to provide them access to private sector capital.
?
?
Stakeholder Expectations
Stakeholders are those individuals or groups who depend on the organisation to fulfil their own goals and on whom the organisation depends. External Stakeholders Stakeholders Examples Market Social/political Technological Suppliers, competitors, distributors, shareholders Policy Makers, regulators, government agencies Key adopters, standards agencies, owners of competitive technologies
Influence Economic value creation Social legitimacy Diffusion of new technology/ adoption of standards 9
Analysis
1. Timeline
The timeline below shows a pictorial representation of major incidents highlighted in the case.
Timeline
September 2002 January 2001
September 2000 January 2000
Hermes takes up Premier's Issue
Hermes Takes up Engagement
Meeting with John David
Swap for assets
Figure 1 - Timeline
2. Stakeholders
The major stakeholders we identified are: a. b. c. d. e. f. Hermes Individual Investors Petronas Amerada Hess Social Groups Premier?s Top Management
10
3. Stakeholder Mapping
To map the stakeholders were have used the Power / Interest Matrix (Mendelow, 1991) a. Before Hermes took up the Corporate Governance Issues
Level of Interest
Low ? Individual Investors Low
? Social Groups
High
Power
? Premier?s Top Management ? Hermes
High
? Petronas ? Amerada Hess
b. After Hermes took up the engagement (September 2000)
Level of Interest
Low ? Individual Investors Low
? Social Groups
High
Power
? Premier?s Top Management
High
? Petronas ? Amerada Hess ? Hermes
11
c. After the positive meeting with John David (January 2001)
Level of Interest
Low ? Individual Investors Low
? Social Groups
High
Power
?
High
? Petronas ? Amerada Hess ? Hermes ? Premier?s Top Management
d. After the ‘swap assets for shares’ announcement (September 2002)
Level of Interest
Low ? Individual Investors Low
? Social Groups
High
Power
? Hermes
High
? Premier?s Top Management
12
4. Why does Hermes want to reform Premier oil?
Hermes radical departure from the famous „Wall Street Walk? was because of the philosophy it believed in. Hermes? CEO Alastair Ross-Goobey said “If you are a shareholder you don?t just own a security, you own a company. Companies with good owners will be worth more to their shareholders and are more likely to deliver for other stakeholders too”. Since Hermes was holding Premier?s stock in its portfolio it had the legitimate right to ask questions of Premier's management and Hermes also felt responsible for Premier?s poor performance. It decided to change the Corporate Governance structure and also the existing shareholding pattern at Premier which was biased towards the two biggest investor companies. The reform includes exchanging Premier?s assets for shares of the two biggest investors. Premier Oil was a highly geared firm. The swap for assets would provide Premier with the necessary cash to pay of its debts and operate as a „fleet of foot? company; something Premier was originally expected to be so as to exploit the exploration opportunities opened up by the large scale fields.
5. Why was the share price of Premier Oil going down initially?
The share price of the company is determined by the Net Present Value of its expected growth opportunities. Since the market was not confident of Premier's future growth prospects because of its shaky corporate governance structure and its presence in Myanmar, its share price fell continuously. The non executive directors were not independent of the executive and therefore the financial statements of the company could not be relied upon.
6. What's in it for Petronas and Amerada to go for the 'swap assets for shares'?
Both Amerada and Petronas? non executive directors on the board of Premier did not want to take into account minority interests. Hermes decided to intervene and arm twisted these two big shareholders by threatening to use its contacts at a global level against them. This would in turn affect the other companies these so called non executive directors were associated with because these companies would start facing fund raising problems. Hermes also highlighted that what Amerada was doing by not allowing its non executive directors to take care of minority interests was against UK company law. Also Premier?s board was now increasingly independent of the executive and any resolution would have to be approved by independent directors. Therefore, any deal would have to offer the minority stakeholders full value. Amerada and Petronas found them increasingly isolated and decided that moving out of Premier made strategic sense.
13
7. Impact on share price after the ‘reforms’
(Refer Annexure I Exhibit 2)
? ? ?
Between June 2000 and July 2003, the share price grew at a CAGR of 55.6% After the Jan 2001 meeting with John David and Premier?s acceptance that the two major shareholders were a weight on the company, the share price rose by 71% The September 2002 decision of restructuring sent the share price roaring by 55% in a period of just 1 month
Relative Price with FTSE All Price Index on June 1
47
29 23 13
2000
2001
2002
2003
Figure 2 - Relative Price of Premier with FTSE
8. Strategies followed by Hermes
Timeline Early 2000 Strategy Move to reform Premier ? ? Reasons for Introduction Long term strategic sense In line with Hermes? Philosophy
September 2000
Making contact with NGOs active in To gain a wholesome view of the Myanmar, other institutional investors, situation in Myanmar UK government, academics etc Engagement management with Premier?s top To convince Sir John David to speed up reforms like adding independent directors Arm twisting the two major shareholders to give into minority interests and allow for the true independence of non executive independent directors
January 2001
Early 2002
Sending a forthright letter to Sir John David expressing concerns over the actions of the major shareholders and offer to lend him support in the negotiations
14
9. Strategies followed by Premier Oil
Timeline Strategy Reasons for Introduction Started Dec Remove some directors and add new Make Premier?s board independent of 2000 independent directors the executive September 2002 Exit mature assets; Swap assets for Slim down and refocus on fleet-ofshares of Amerada and Petronas foot exploration and production activities
Conclusion
1. Premier Oil successfully mitigated its twin risks of high debt and its presence in Myanmar by swapping its assets for shares of the two largest shareholders. 2. Hermes was successful in turning around the corporate governance structure at Premier Oil. 3. A strong corporate governance structure sends positive signals to investors in the market and is therefore the need of the hour. 4. Responsible investment is linked to corporate value. 5. Conflicts of interest in the chain of ownership can impede accountability and effectiveness of investors. 6. Active share ownership represents a new focus for global and local investors.
15
Bibliography
Burma Campaign. (n.d.). Retrieved February 04, 2010, from Burma Campaign:http://burmacampaign.co.uk Edkins, M. (1999, May). Transatlantic Governance: UK Developments through the Eyes of Hermes. Corporate Governance Advisor , p. 19. Hermes. (n.d.). Retrieved February 04, 2010, from Hermes UK Website:http://www.hermes.co.uk Hermes, N., Postma, T. J., & Zivkov, O. (2007). Corporate governance codes and their contents: An analysis of Eastern European codes. Journal for East European Management Studies . Johnson, G., Scholes, K., & Whittington, R. Exploring Corporate Strategy. Mendelow, A. (1991). Second International Conference on Information Systems. Cambridge,MA. Premier Oil. (n.d.). Retrieved February 04, 2010, from Premier Oil:http://www.premier-oil.com
16
Annexure I
Exhibit 1 - Premier Oil's Share Price before Hermes' Engagement
17
Exhibit 2 - Premier Oil's Share Price after Hermes' Engagement
18
doc_579530763.docx
This is document describes about hermes - corporate governance issues.
Premier Oil & Hermes
Table of Contents
Introduction ................................................................................................................................ 3 Hermes ................................................................................................................................... 3 Premier Oil ............................................................................................................................. 3 Issues .......................................................................................................................................... 5 Corporate Governance Issues ................................................................................................. 5 Social, Ethical and Environmental Issues (SEE Issues) ......................................................... 5 Strategic issues ....................................................................................................................... 5 Theoretical Background ............................................................................................................. 7 Expectations and Purposes ..................................................................................................... 7 The role of Expectations and Purposes in a Strategy Framework.......................................... 7 Corporate Governance............................................................................................................ 8 The Chain of Corporate Governance .................................................................................. 8 Forms of Ownership ............................................................................................................... 9 Stakeholder Expectations ....................................................................................................... 9 External Stakeholders ......................................................................................................... 9 Analysis.................................................................................................................................... 10 1. 2. 3. 4. 5. 6. 7. 8. 9. Timeline ........................................................................................................................ 10 Stakeholders .................................................................................................................. 10 Stakeholder Mapping .................................................................................................... 11 Why does Hermes want to reform Premier oil?............................................................ 13 Why was the share price of Premier Oil going down initially? .................................... 13 What's in it for Petronas and Amerada to go for the 'swap assets for shares'? ............. 13 Impact on share price after the „reforms? ...................................................................... 14 Strategies followed by Hermes ..................................................................................... 14 Strategies followed by Premier Oil ............................................................................... 15
Conclusion ............................................................................................................................... 15 Bibliography ............................................................................................................................ 16 Annexure I ............................................................................................................................... 17
2
Introduction
Hermes Hermes Investment Management is one of the largest pension fund managers in London. It is owned by, and is the principal fund manager for, the BT Pension Scheme, the UK's largest. Hermes also manages portfolios on behalf of over 200 other major corporate and public pension funds. (Hermes) Hermes aims at looking beyond the short term focus of the financial markets, which are entirely concentrated on the next quarter's earnings and other immediate financial measures. Hermes believes that good stewardship contributes to superior long?term performance of companies. As a global pioneer in the field of responsible investment Hermes was the first major institutional investor to establish shareholder engagement programmes. Hermes indulges in business oriented dialogue which empowers companies to develop their focus on long term growth. Hermes?s engagements help businesses to understand and mitigate against the costs of poor social and environmental practices by highlighting the business case for an integrated approach to the management of risks. By framing social, environmental and ethical risk within the wider context of sustainable, long term business performance, Hermes is able to achieve real change for the better through its engagements with investee companies. Premier Oil Premier Oil started life as the Caribbean Oil Company, which was registered in the UK in 1934 to pursue oil and gas exploration and production activities in Trinidad. Two years later, it was publicly floated as Premier (Trinidad) Oilfields. For the next two decades, the company concentrated its attention on oil production in Trinidad. Having acquired its first interest in the North Sea in 1971, Premier gradually expanded its presence on the UK continental shelf, merging with the Ball and Collins North Sea Consortium in 1977 to gain significant interests in the North Sea as well as properties in Sudan and West Africa. (Premier Oil) In 1995, Premier acquired Pict Petroleum. As a consequence, Amerada Hess which had a substantial stake in Pict came to hold 25% of Premier's enlarged equity. From this point, Premier was participating in numerous North Sea oil and gas fields. Supported by production revenue from the UKCS, the company turned its attention to the Far East with a view to developing energy resources to serve this region's rapidly expanding economies. To consolidate its position as a leading independent production company in the south-east Asian energy markets, Premier formed a strategic alliance with the Malaysian oil company Petronas and Amerada Hess in 1999, within which both Petronas and Amerada Hess owned a 25% stake in Premier. The company was dominated by two major shareholders. This raised concerns on the governance side pertaining to the appointment of non-executive directors who were not regarded as independent due to certain conflicts of interests. In addition, the company had allowed itself to become exposed to major ethical and reputational risks as a result of being the lead investor in the Yetagun gas field in Burma, a country ruled by a military dictatorship. Premier's involvement in the country had brought 3
public criticism of the company from a range of sources including Burmese campaigners, Amnesty International, trade union groups and, not least, the UK government. Its share price was languishing and it appeared unable to deliver on its stated strategy. Premier being a part of Hermes?s investment portfolio, Hermes decided to engage with the company, with other shareholders, and with NGOs to resolve these issues. (Burma Campaign)
4
Issues
The case broadly highlights three major issues that Premier Oils faced before Hermes? active engagement 1. Corporate Governance Issues 2. Social, Ethical and Environmental Issues (SEE Issues) 3. Strategic issues
Corporate Governance Issues
1. The biggest problem for Premier was that it was dominated by two major shareholders Amerada Hess a US company and Petronas a Malaysian oil company; each of which had a 25% stake in Premier. 2. The Company board structure was skewed in favour of the two biggest shareholders as each of them appointed two non executive directors each on Premier?s board. These directors were widely considered to be non-independent. Their re-election on the board also drew a lot of flak from Hermes. 3. Two other non executive directors were deemed unfit by Hermes because one received substantial consultancy fees from Premier and the other was a former executive. The composition of the board of a company and the power it wields over the executive are signs of good health of the company. Having a powerful and independent board sends a strong message to all stakeholders. Premier failed on this aspect and saw its share prices in a downward spiral before Hermes? active engagement. (Refer Exhibit I in Annexure I) Having a strong corporate governance structure is at the core of Hermes and therefore Hermes endorses the recommendations of the Cadbury committee?s definition of independence of non executive directors. (Edkins, 1999)
Social, Ethical and Environmental Issues (SEE Issues)
Premier Oils was majorly exposed to ethical and reputational risks by being the lead investor in the Yetagun gas field in Myanmar (Burma). Premier?s involvement in the country brought in a lot of public criticism of the company by a range of sources like Amnesty International, the UK government etc.
Strategic issues
1. After the entry of Petronas in 1991, it was decided that Premier Oil was to be a primary investment vehicle for Asian upstream investment by Amerada Hess and Petronas. Unfortunately, this strategy was not being followed and Premier seemed to be in a „strategic hole? and no clear alternative strategy was made visible to investors. 2. Premier was not large enough to compete in production and downstream work with emerging super-major oil companies as it required large amounts of capital expenditure on investment. 3. It was also not as fleet of foot as it ought to be so as to fully exploit the exploration opportunities opened up by the super major?s focus on larger scale fields. 5
4. Premier?s freedom of action was also limited by the company?s high level of gearing.(high D/E ratio) 5. Premier oils had taken steps to overcome the ethical and reputational risks of being in Burma but it failed to make its shareholders aware of steps taken. Premier tried to mitigate risks of being in Burma by building schools, funding teachers and AIDS education and environmental remediation. But Premier?s board had not publicly stated that it believed it was effectively managing all the risks that were associated with its presence in Myanmar. Nor did Hermes have the confidence that the board as currently constituted could give the shareholders the reassurance that they needed in this regard.
6
Theoretical Background
(Johnson, Scholes, & Whittington)
Expectations and Purposes
The role of Expectations and Purposes in a Strategy Framework
7
Corporate Governance
Corporate governance is about how principal-agent problems within companies can be mitigated. (Hermes, Postma, & Zivkov, 2007) The governance framework is concerned with the following aspects: ? ? ? ? Whom does the organization serve? How should the purposes and priorities be decided? How should an organization function? How power is distributed among stakeholders?
The Chain of Corporate Governance
Source: Adapted from David Pitt-Watson, Hermes
8
Characteristics of Chain of Corporate Governance: ? ? ? Chain or hierarchy of control This is concerned with the separation of ownership and management control Accountability and responsiveness Depicts wider range of stakeholders Principal – agent relationships
Issues with the governance chain ? ? ? ? Conflict of interest Director?s responsibilities to shareholders Accountability to stakeholders Structures of targets, budgets and rewards
Forms of Ownership
Ownership has a fundamental effect on organizational purpose and strategies ? ? ? Private/public ownership of equity Public equity is often required for growth. Sale of all or part of the company Boards may decide to sell the company to a more suitable corporate parent. Targets for acquisitions Boards can compare offer which is more attractive to the shareholders in terms of the returns. Mutual Ownership In some business like building societies, banks etc customers are owners rather than shareholders. Privatization of public sector bodies Governments privatized companies to face up to market forces, be aware of customer needs and to provide them access to private sector capital.
?
?
Stakeholder Expectations
Stakeholders are those individuals or groups who depend on the organisation to fulfil their own goals and on whom the organisation depends. External Stakeholders Stakeholders Examples Market Social/political Technological Suppliers, competitors, distributors, shareholders Policy Makers, regulators, government agencies Key adopters, standards agencies, owners of competitive technologies
Influence Economic value creation Social legitimacy Diffusion of new technology/ adoption of standards 9
Analysis
1. Timeline
The timeline below shows a pictorial representation of major incidents highlighted in the case.
Timeline
September 2002 January 2001
September 2000 January 2000
Hermes takes up Premier's Issue
Hermes Takes up Engagement
Meeting with John David
Swap for assets
Figure 1 - Timeline
2. Stakeholders
The major stakeholders we identified are: a. b. c. d. e. f. Hermes Individual Investors Petronas Amerada Hess Social Groups Premier?s Top Management
10
3. Stakeholder Mapping
To map the stakeholders were have used the Power / Interest Matrix (Mendelow, 1991) a. Before Hermes took up the Corporate Governance Issues
Level of Interest
Low ? Individual Investors Low
? Social Groups
High
Power
? Premier?s Top Management ? Hermes
High
? Petronas ? Amerada Hess
b. After Hermes took up the engagement (September 2000)
Level of Interest
Low ? Individual Investors Low
? Social Groups
High
Power
? Premier?s Top Management
High
? Petronas ? Amerada Hess ? Hermes
11
c. After the positive meeting with John David (January 2001)
Level of Interest
Low ? Individual Investors Low
? Social Groups
High
Power
?
High
? Petronas ? Amerada Hess ? Hermes ? Premier?s Top Management
d. After the ‘swap assets for shares’ announcement (September 2002)
Level of Interest
Low ? Individual Investors Low
? Social Groups
High
Power
? Hermes
High
? Premier?s Top Management
12
4. Why does Hermes want to reform Premier oil?
Hermes radical departure from the famous „Wall Street Walk? was because of the philosophy it believed in. Hermes? CEO Alastair Ross-Goobey said “If you are a shareholder you don?t just own a security, you own a company. Companies with good owners will be worth more to their shareholders and are more likely to deliver for other stakeholders too”. Since Hermes was holding Premier?s stock in its portfolio it had the legitimate right to ask questions of Premier's management and Hermes also felt responsible for Premier?s poor performance. It decided to change the Corporate Governance structure and also the existing shareholding pattern at Premier which was biased towards the two biggest investor companies. The reform includes exchanging Premier?s assets for shares of the two biggest investors. Premier Oil was a highly geared firm. The swap for assets would provide Premier with the necessary cash to pay of its debts and operate as a „fleet of foot? company; something Premier was originally expected to be so as to exploit the exploration opportunities opened up by the large scale fields.
5. Why was the share price of Premier Oil going down initially?
The share price of the company is determined by the Net Present Value of its expected growth opportunities. Since the market was not confident of Premier's future growth prospects because of its shaky corporate governance structure and its presence in Myanmar, its share price fell continuously. The non executive directors were not independent of the executive and therefore the financial statements of the company could not be relied upon.
6. What's in it for Petronas and Amerada to go for the 'swap assets for shares'?
Both Amerada and Petronas? non executive directors on the board of Premier did not want to take into account minority interests. Hermes decided to intervene and arm twisted these two big shareholders by threatening to use its contacts at a global level against them. This would in turn affect the other companies these so called non executive directors were associated with because these companies would start facing fund raising problems. Hermes also highlighted that what Amerada was doing by not allowing its non executive directors to take care of minority interests was against UK company law. Also Premier?s board was now increasingly independent of the executive and any resolution would have to be approved by independent directors. Therefore, any deal would have to offer the minority stakeholders full value. Amerada and Petronas found them increasingly isolated and decided that moving out of Premier made strategic sense.
13
7. Impact on share price after the ‘reforms’
(Refer Annexure I Exhibit 2)
? ? ?
Between June 2000 and July 2003, the share price grew at a CAGR of 55.6% After the Jan 2001 meeting with John David and Premier?s acceptance that the two major shareholders were a weight on the company, the share price rose by 71% The September 2002 decision of restructuring sent the share price roaring by 55% in a period of just 1 month
Relative Price with FTSE All Price Index on June 1
47
29 23 13
2000
2001
2002
2003
Figure 2 - Relative Price of Premier with FTSE
8. Strategies followed by Hermes
Timeline Early 2000 Strategy Move to reform Premier ? ? Reasons for Introduction Long term strategic sense In line with Hermes? Philosophy
September 2000
Making contact with NGOs active in To gain a wholesome view of the Myanmar, other institutional investors, situation in Myanmar UK government, academics etc Engagement management with Premier?s top To convince Sir John David to speed up reforms like adding independent directors Arm twisting the two major shareholders to give into minority interests and allow for the true independence of non executive independent directors
January 2001
Early 2002
Sending a forthright letter to Sir John David expressing concerns over the actions of the major shareholders and offer to lend him support in the negotiations
14
9. Strategies followed by Premier Oil
Timeline Strategy Reasons for Introduction Started Dec Remove some directors and add new Make Premier?s board independent of 2000 independent directors the executive September 2002 Exit mature assets; Swap assets for Slim down and refocus on fleet-ofshares of Amerada and Petronas foot exploration and production activities
Conclusion
1. Premier Oil successfully mitigated its twin risks of high debt and its presence in Myanmar by swapping its assets for shares of the two largest shareholders. 2. Hermes was successful in turning around the corporate governance structure at Premier Oil. 3. A strong corporate governance structure sends positive signals to investors in the market and is therefore the need of the hour. 4. Responsible investment is linked to corporate value. 5. Conflicts of interest in the chain of ownership can impede accountability and effectiveness of investors. 6. Active share ownership represents a new focus for global and local investors.
15
Bibliography
Burma Campaign. (n.d.). Retrieved February 04, 2010, from Burma Campaign:http://burmacampaign.co.uk Edkins, M. (1999, May). Transatlantic Governance: UK Developments through the Eyes of Hermes. Corporate Governance Advisor , p. 19. Hermes. (n.d.). Retrieved February 04, 2010, from Hermes UK Website:http://www.hermes.co.uk Hermes, N., Postma, T. J., & Zivkov, O. (2007). Corporate governance codes and their contents: An analysis of Eastern European codes. Journal for East European Management Studies . Johnson, G., Scholes, K., & Whittington, R. Exploring Corporate Strategy. Mendelow, A. (1991). Second International Conference on Information Systems. Cambridge,MA. Premier Oil. (n.d.). Retrieved February 04, 2010, from Premier Oil:http://www.premier-oil.com
16
Annexure I
Exhibit 1 - Premier Oil's Share Price before Hermes' Engagement
17
Exhibit 2 - Premier Oil's Share Price after Hermes' Engagement
18
doc_579530763.docx