Rupert Clarke: A corporate crusader at Hermes?

He begs to differ, telling James Moore the fund manager's 'sustainability' mantra makes cold, hard financial sense
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The Independent Online

"I am not talking about hugging trees, particularly. There is a genuine financial objective in pursuing this. Unless we get this right, we will create a self-destruct financial environment. If you look around, we're quite close to that. It's time for investors to stand up and start behaving responsibly with a view to the longer term."

Not really the sort of statements you would expect from a corporate financier (specialising in property) turned fund management boss. But Rupert Clarke, the chief executive of Hermes, talks like a true believer when we touch on issues such as responsible investment, keeping a lid on environmental damage, cracking down on the exploitation of child labour and reducing energy use. However, he denies that means he has become some sort of latter-day City beatnik, arguing that it simply makes financial common sense.

Given the massive oil slick that is destroying not just the environment, but also the economy of the south- eastern US, maybe he has a point.

"There is a strong financial case to be made that addressing environmental and social issues will produce financial returns in the long term," Mr Clarke argues. "Now that may not help this quarter's earnings but, in terms of the culture of the organisation, having that focus will produce more sustainable, more long-term performance – the kind of performance our investors want."

For Mr Clarke, that is still mainly the BT Pension Scheme, which is Hermes's 100 per cent owner. Gone are the days when the company ran all the scheme's money, however. The index tracking portion of the scheme's shares have been outsourced to Legal & General and the scheme has also started to use more external fund managers.

At the same time, Hermes has been seeking business from external sources. It means that over the past couple of years, Mr Clarke's main focus has been on "re-engineering" the business to reflect the new reality. He is confident that the work is now largely done, and the relatively low profile Hermes has kept in recent years is about to end.

"The last two or three years were making sure we could do it," he says. "The next two or three years are going to be about telling people we can do it. Are we going to get on the bandwagon and start beating up companies visibly? Probably not, even though that would be an easy win for me. I could get mileage out of that. We could use equity ownership services [EOS] to be in the press every week, complaining about a company. But, while we'll do a bit of that, we'll do a bit more, we'll stick to our principles and try to work with boards rather than in confrontation."

The EOS he mentions amounts to Hermes's little sideline – its 27-strong engagement team that now acts for fund managers with assets totalling £60bn, advising them on how to vote and using their clout to get companies to the table when they have governance issues, or just behave badly.

It doesn't make money "but that's not really the intention," says Mr Clarke. "EOS is getting stronger. It has more client backing. It has the potential to be an investor collective, to engage on a wide range of issues. Its not something we're doing for profit."

He wants that collective to expand its horizons. Mr Clarke has already talked about extending its influence to his specialism, property, using its clout to persuade developers to make their buildings more energy efficient. Then there is private equity and the hedge funds, which in many respects still operate as the amoral buccaneers of the financial world. One wonders how they will feel about EOS calling up and asking them to behave better.

But Mr Clarke, who despite his corporate finance background and the typical arrogance of that tribe, is a confident and engaging talker, believes EOS (whose name he is considering changing to reflect the fact its ambitions extend beyond equities listed on public markets) can effect real change. "If you're complaining about private equity or hedge funds, the only reason they are like they are is because investors have invested with them and given them the licence to do what they do; given them the returns and the rewards for doing that," Mr cCarke explains.

"If we want the world to be more sustainable and deliver longer-term financial returns, we have to engage on these issues and we have to encourage others, and we have to persuade others to come along with us. If we are doing this on our own then we're not going to make a difference. Now, if ever there was a time to get traction on this as a concept, it probably is now. Everyone is all too painfully aware of the consequence of not engaging."

That would be the financial crisis he's referring to, which has recently seen the fund management industry facing up to some harsh criticism. Sir David Walker, in a review of banking governance sponsored by the last government, memorably described money managers as behaving like "absentee landlords" in relation to the companies in which they invest.

"That's a good headline," says Mr Clarke. "It makes people wake up because they have to respond to that charge. He's right that the way the market is set up has left companies without enough connectivity between the shareholder and board, partly because of dispersion of ownership.

"The messages that are sent to a board from ownership collectively are very incoherent because no one can agree. We hold regular sessions with non-execs and chairmen and ask they how it feels. They say that on any one issue we will have a whole spectrum of views. Does that give us a key message? No."

This being the case, Mr Clarke says it is important to get the right people on boards so they can give the the right sort of guidance to the company bosses they oversee. Presumably, that also means no situations where banks have ineffective chairmen who allow their executives to lead them to ruin – like the chemist who chaired Royal Bank of Scotland or the science writer who sat at the head of Northern Rock, perhaps?

Mr Clarke does not disagree. 'That's the bit that shareholders need to engage on and boards need to take seriously," he says. Even though Hermes has been quietish, it has still been around and was instrumental in persuading a German company called Infineon to seek an outside chairman after taking the nuclear option by putting up its own candidate at the annual meeting.

Mr Clarke would prefer to deal with such issues behind closed doors but, if that fails, he has no problem with going public. He adds: "You will probably be hearing a bit more from us."

The CV: Rupert Clarke

* Mr Clarke, 52, has been chief executive of Hermes since December 2007, leading its development into a multi-boutique asset manager.

* He is president of the British Property Federation and a past chairman of the Investment Property Forum

* Hr joined Hermes in January 2004 as the chief executive of its property operation, Hermes Real Estate

1991-2004 Served as managing director of Jones Lang LaSalle Corporate Finance. Grew business from team of four to 25 professionals.

1985-1991 Founder and director of Woolgate Property Finance, which emerged from Chase.

1981-1985 Vice-president and lending officer at Chase Manhattan Real Estate Finance

* A graduate of Durham University, he is married with three daughters.

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