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New Age of Shareholder Activism Ross School of Business at the University of Michigan Independent Study Project Report TERM : Winter 2015 COURSE : ES 750 PROFESSOR : William K. Hall STUDENT : Javier Castellanos, MBA, Gabriel Craft, MBA Erick Goihman, MBA Brandon Meloche, MBA, Erica Sivertson, MBA, MPP, Tim Zepp, MBA TITLE : New Age of Shareholder Activism Final Report - ES750 New Age of Shareholder Activism Description, Analysis and Prescriptive Recommendations for Executives and Directors Authors Javier Castellanos, MBA Gabriel Craft, MBA Erick Goihman, MBA Brandon Meloche, MBA Erica Sivertson, MBA, MPP Tim Zepp, MBA Faculty Sponsor Adjunct Professor Dr. William K. Hall April 2015 New Age of Shareholder Activism Table of Contents Tables & Figures ........................................................................................................................................... 5 Executive Summary ...................................................................................................................................... 6 SECTION I: INTRODUCTION ................................................................................................................... 7 Introduction ............................................................................................................................................... 8 Background for the Research ................................................................................................................ 8 Defining Key Terms Used in the Research ........................................................................................... 8 Methodology ........................................................................................................................................... 10 Research Design .................................................................................................................................. 10 Review of Academic Literature and Published Articles in Business Press ........................................ 10 Interviews with Key Opinion Leaders ................................................................................................ 11 Interview Approach ............................................................................................................................. 11 Research Sponsorship ......................................................................................................................... 11 History of Activist Investing ................................................................................................................... 12 Origins of Shareholder Activism ......................................................................................................... 12 Era of the “Corporate Raiders” ........................................................................................................... 12 Rise of the “White Knights” ................................................................................................................ 13 The Emergence of Contemporary Activism (“Activism 2.0”) ............................................................ 14 SECTION II: DRIVING FORCES BEHIND ACTIVISM ......................................................................... 16 Why is Shareholder Activism on the Rise? ............................................................................................. 17 Why Does Shareholder Activism Work? ................................................................................................ 19 Factors Accelerating Shareholder Activism ............................................................................................ 23 SECTION III: PROFILE OF THE ACTIVIST INVESTOR IN 2015 ........................................................ 28 Profile of the Activist Investor in 2015 ................................................................................................... 29 Who are the Activists? ........................................................................................................................ 30 Activists are Value Investors ............................................................................................................... 30 Characterization of Activist Investors ..................................................................................................... 31 The Partner .......................................................................................................................................... 32 The Agitator ........................................................................................................................................ 33 Page | 2 New Age of Shareholder Activism SECTION IV: HOW ACTIVISTS ENGAGE ............................................................................................ 36 How Shareholder Activists Engage With Companies ............................................................................. 37 Phase One – Peacetime Activities ....................................................................................................... 37 Phase Two – Diplomacy ..................................................................................................................... 40 Phase Three – Engaging in Battle ....................................................................................................... 42 Phase Four – The Aftermath of Battle ................................................................................................ 49 Phase Five – Repeat with the Next Company ..................................................................................... 50 SECTION V: RECOMMENDATIONS TO EXECUTIVE LEADERSHIP ............................................. 51 Adapting to the Emergence of Shareholder Activism ............................................................................. 52 Recommendations to Corporate Leadership ........................................................................................... 53 [1] Boards of Directors – Internal – Define Performance ................................................................... 53 [2] Boards of Directors – External – Communicate Directly with Shareholders ................................ 56 [3] Executive Leadership Team – Internal – Create a Culture of Gate-Opening ................................ 58 [4] Executive Leadership Team – External – Communicate Strategically ......................................... 60 All or Nothing? The Complementary Nature of These Recommendations ........................................ 62 SECTION VI: FUTURE OF ACTIVIST INVESTING ............................................................................. 65 Implications of Activism for the Economy and Financial Markets ........................................................ 66 Future for Activist Investors ................................................................................................................... 68 Shareholder Activism’s Public Policy Landscape .................................................................................. 69 Overview of Political and Public Policy Landscape ........................................................................... 69 Shareholder Proxy Advisory Services Firms ...................................................................................... 70 Focus on the Tactics Employed .......................................................................................................... 72 Oversight on Hedge Funds: Registration ............................................................................................ 73 Other Considerations: SEC & Beyond ................................................................................................ 75 Conclusions & Areas for Further Study .................................................................................................. 76 APPENDICES ............................................................................................................................................. 78 Appendix A - Review of Academic Literature & Published Articles in Business Press ........................ 79 Academic Research ............................................................................................................................. 79 Harvard Business Review ................................................................................................................... 81 Media & Online Publications Articles ................................................................................................ 82 Page | 3 New Age of Shareholder Activism Books ................................................................................................................................................... 85 Congressional Hearings & Government Documents .......................................................................... 85 Appendix B - Case Studies ...................................................................................................................... 86 Appendix C- Interviews .......................................................................................................................... 87 Appendix D - About the Authors ............................................................................................................ 92 Page | 4 New Age of Shareholder Activism Tables & Figures Figures Figure 1 - Activist Hedge Fund Performance 2009-2014 ......................................................................... 177
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