Columbia Business School | Columbia Law School Research: Shareholder Activism and Predictive Analytics

Shareholder Activism & Corporate Defense
December 2017
MANAGEMENT PRACTICES IN AN AGE
OF ENGAGED INVESTORS
Shane C. Goodwin, PhD
Senior Fellow and Project Director,
Richman Center for Business, Law and Public Policy
Columbia University

Setting the Stage and Project Objective
2
For society as a whole, further empowering
hedge funds with short-term holding periods
subjects Americans to lower long-term growth
and job creation…due to excessive risk
taking…when corporations maximize short-
term profits.
Leo Strine, Chief Justice of the Delaware Supreme Court
Columbia Law Review, March 2014
Hedge-fund activism destroys jobs….such short-term strategies may be good for
shareholders, but aren’t good for employees — or the economy as a whole.
Larry Fink, CEO BlackRock
December 12, 2014
“[Long-term shareholders in public companies
are being undermined] by a gaggle of activist
hedge funds who troll through S.E.C. filings
looking for opportunities to demand a change in a
company’s strategy or portfolio that will create a
short-term profit without regard to the impact on
the company’s long-term prospects.”
Martin Lipton, Wachtell, Lipton, Rosen & Katz
February 2013
Create practical reference material that can be applied by business
leaders to address “engaged investors” issues and actions with the
goal to create the “best outcome” for all shareholders
Project Objective

The Era of Engaged Investors
3
• Active and Passive investors are more engaged
• CEOs and Directors need to be prepared
Frequently asked questions by CEOs and Directors:
1. How do I “proactively” avoid a campaign by an engaged investor?
2. Are there “early warning” indicators at least 1-2 years in advance?
3. How do I avoid common management mistakes/misjudgments?
4. What skills are required during different phases of engagement?
5. What data is needed to help make sound decisions?
The Evolving “Engaged” Investor Landscape

Current Trends of Shareholder Engagement
4
1. Prominent activists have ramped up their activity, raising
capital and launching campaigns against blue chip targets;
2. Activists are increasingly looking beyond the United States
and investing significant resources globally;

5
3. Index owners are proactively engaging in contested situations,
delivering on their promises to become more assertive;
Investor Stewardship Group framework goes into effect on January 2018. ISG
members represent over $20 trillion in the U.S. equity markets.
"In the past, some have mistakenly assumed that our predominantly passive
management style suggests a passive attitude with respect to corporate governance.
Nothing could be further from the truth.“
"We take this seriously…the firm believes it has an obligation to protect investors’
interests, respond to the changing corporate-governance environment, appreciate the
importance of ‘responsible activism,’ engage in three phases of interaction (ongoing
dialogue, proxy voting and direct engagement)…”
“Those activists who focus on long-term value creation sometimes do offer better
strategies than management. In those cases, BlackRock’s corporate governance team
will support activist plans.”
We are in the midst of a significant shift in investor and board relations… In the
future, direct dialogue between investors and directors will be the expected norm
and investors will evaluate board quality and governance practices…”

6
Directors need to be educated, trained and prepared to
engage with and to respond to Engaged Investors.
“The BEST time to make friends is before you need them”
4. Activists were successful in securing management change,
with numerous high-profile CEO exits following relentless
activist scrutiny and proxy campaigns; and
5. Continued flows out of actively-managed strategies and into
index funds have provided activists with outsized influence in
an environment of increasing shareholder concentration.

Active Engagement by All Stakeholders
7
Hedge
Funds
PMs /
Analysts
Labor /
Pension
Funds
Activists
Public Governance
Teams
Sellside
Research
Proxy
Advisors
Retail
Comp anies
Public
Company
Stakeholders in today’s shareholder engagement environment are pushing
for more engagement while expanding their own spheres of influence by
interacting and collaborating with each other.

History of Institutional Activism
Corporate “raiders”
strike fear into
corporations
Relatively
benign
shareholder
environment
Activist AUM
reaches new
highs
 Activists use war
chests to expand
into new sectors
(energy, mining)
 Target larger
targets (Apple,
Microsoft)
1990s
1980s
Early2000s
Late2003
2006—2007
2012—present
Late1990s—2000
Tyco/WorldCom
/Enron scandals
 Investors
and
governments
begin to
focus on
“corporate
governance”
 The profile
of ISS rises
A new asset
class is born
as some
hedge funds
begin to re-
brand
themselves as
“activists”
Bill Ackman launches
Pershing Square Capital
November2005
Nelson Peltz launches
Trian Fund Management
September15,2006
Trian wins
seminal proxy
fight against
large cap U.S.
target Heinz
thanks to the
support of ISS
and
“mainstream”
investors
Activists have high success
rate in affecting change,
especially at US targets
Europe is seen as a
new frontier for
activism
 High-profile activist
campaigns (Cadbury
Schweppes and
HSBC)
May29,2008
Pardus Capital wins
seminal proxy fight at
Atos Origin, a French
target
Global
Recession
Global financial
meltdown
causes activists
to retrench,
especially from
Europe
2008—2009
Recovery and expansion: Activists
restructure and the asset class matures
May17,2012
Pershing
Square
defeats "Club
Canada" in
seminal proxy
fight against
Canadian
Pacific
Activists
re-enter
Europe
and target
Asia and
Australia
2014
May14,2013
Third Point
targets
Sony
July1,2011
Australia
establishes the
“two strike” rule to
hold directors
accountable for
executive salaries
and bonuses
December2012
Shinzō Abe
establishes “three
arrows” Japanese
economic policy of
fiscal stimulus,
aggressive monetary
easing and structural
reforms
Source: FactSet and news articles.
Macro event
Micro event
8
~30% Institutional Ownership >70%
1980s Today
January2017
New Trump
Administration
PROXY
ACCESS
2015-Present
Increase in
Settlements
2015-Present
The Growth of
Index Funds
(Active to Passive)
Short-termism
Debate

Shareholder Activism & Corporate Defense 9
Era of the “Engaged Investor”
Era of Governance-focused Investor
1985 – 2000
Era of Economically-motivated Investor
2000 – Present
ISS founded
1985
“ENGAGED INVESTORS”
Council of Institutional
Investors Formed
Institutional investors support
dismantling of defenses and have
supported changes in the C-suite and
in the board room
Increase in Shareholder
Proposals
Emergence of “Corporate Raider”
(i.e. Carl Icahn, T. Boone Pickens)
Focus of the Research
Project
Governance-focused activism facilitated the proliferation for the economically-motivated
activist to launch successful campaigns

“In God we trust...
10
▪ All Original 13D Filings
▪ Activist campaigns from
1990 – 2017 (Q3)
▪ Over 50,000
“engaged Investor”
interventions
Engaged Investor
Dataset
Compustat / CapIQ
(Standard & Poors)
Center for Research
in Security Prices
Other Models
▪ Information pulled from
other third-party firms:
▪ ISS, I/B/E/S, First Call
estimates, EDGAR,
Lionshare, Dow Jones, IRRC
▪ Monthly data from
1990 – 2017 Q3
▪ Data contains publicly
available information
(Stock Prices, Total
Shareholder Returns,
Indices, Betas, etc.
▪ Data on publicly traded
companies (1990–2017)
▪ ~ 30,000 companies
▪ Quarterly financial info
taken from public filings
(10Q, 10K, 8K, etc.)
▪ Segment data
MERGED MERGED
MERGED
“Engaged Investor” Dataset
▪ Governance
▪ Takeover Defenses
▪ Analyst
Recommendations
▪ Ownership information
(Institutional, Insider)
▪ Short Interest
▪ ESG
Over 50,000 “Engaged Investor” Interventions (Dataset 1990 – 2017)
Over 30,000 companies (millions of monthly company data over 25 years)
~ 3,000 variables (billions of data points)
MERGED
All others must bring DATA”
Over 50,000 “Engaged Investor” Interventions (Dataset 1990 – 2017)
Over 30,000 companies (millions of monthly company data over 25 years)
~ 3,000 variables (billions of data points)

The Intervention Matrix
11
M&A
Activism
Balance
Sheet
Activism
Governance
Activism
Operational
Activism
The easiest activist strategy – quick capture of a takeover
premium provides attractive returns over a short term
▪ Demand strategic alternatives review (“sell the company”
activism)
▪ Spin-off divisions to unlock “hidden” value
▪ Influence merger (“bumpitrage”) or block deals
An easy strategy – run a simple screen to identify targets
▪ Return capital to shareholders (share buyback, special dividend)
▪ Relies on accommodating markets
▪ Sell-side studies on record high cash on balance sheet
A means to an end – not an end in itself
▪ Remove structural defenses (classified board, pill, etc.)
▪ Majority voting, proxy access, director tenure and diversity
▪ ESG / Sustainability
The hardest strategy, and hence rarest – requires industry
experience and patience
▪ Improve top and bottom lines
▪ Change management, including direct attack on CEO
▪ Focus on cost structure (SG&A, R&D), and ROIC
Activists look for opportunities to effect change that can result in
short or long term increases in shareholder value
ExAnte–Pendency–ExPostIntervention

Engaged Investor Intensity Index™
12
We assigned weighted values for 11 tactics that are frequently used by activist
investors during a campaign. Our weighted scale was predicated on the
increasing “intensity” of the tactic employed by an investor.

Stewardship Vulnerability IndexTM
13
Coefficient Odds Ratio t-Statistic Coefficient Odds Ratio t-Statistic Coefficient t-Statistic Coefficient t-Statistic
Capital Structure & Deployment Efficacy
· Excess Cash 0.0637** 1.07 2.53 0.106*** 1.11 2.62 0.000641 1.21 -0.0401 -1.08
· Leverage -0.00217 1.00 -1.25 -0.00211 1.00 -0.89 -0.0000278 -0.63 -0.00102 -0.40
· ROIC -0.260** 0.77 -2.03 -0.794*** 0.45 -4.27 -0.00522* -1.69 0.185 1.00
· ROIC vs WACC -0.134** 0.87 -2.51 -0.236*** 0.79 -3.21 -0.00380*** -3.18 -0.141* -1.73
Return of Capital
· Buyback Ratio 0.142 1.15 1.21 0.0444 1.05 0.11 0.00710 1.35 0.609 1.45
· Dividend Yield -0.0122*** 0.99 -3.50 -0.0224*** 0.98 -3.89 -0.000250*** -3.01 0.00199 0.36
Relative Valuation
· Market-to-Book Value -0.0788*** 0.92 -5.76 -0.121*** 0.89 -6.98 -0.00168*** -6.97 -0.0442** -2.52
· Total Shareholder Return (TSR) -0.276*** 0.76 -7.13 -0.315*** 0.73 -5.66 -0.00710*** -8.02 -0.138** -2.55
· Short Interest Ratio 0.166 1.18 1.07 -0.0723 0.93 -0.31 0.00469 1.28 0.0330 0.13
Relative Financial Performance
· Revenue Growth 0.0269 1.03 0.62 0.0203 1.02 0.32 -0.000642 -0.58 -0.0755 -1.20
· Operating Margin -0.00275 1.00 -1.26 -0.00195 1.00 -0.63 -0.0000572 -1.07 0.00500 1.45
· Free Cash Flow Yield -0.638*** 0.53 -3.77 -1.123*** 0.33 -3.84 -0.0196*** -4.69 -0.471* -1.75
Wall Street Perspective
· Analyst Sell Recommendation 0.285*** 1.33 6.27 0.161** 1.18 2.50 0.00738*** 6.69 0.0833 1.16
· Management Credibility (Earnings Miss) 0.233*** 1.26 3.18 0.0874 1.09 0.80 0.00881*** 4.47 0.237** 2.03
Industry Dynamics
· Industry Vulnerability 58.86*** 3.64 7.04 - - - 1.835*** 8.45 49.61*** 3.67
· Herfindahl-Hirschman Index 0.667 1.95 1.13 0.882 2.42 0.98 0.00965 0.73 -1.302 -1.45
Firm Size and Diversification
· Log Market Capitalization -0.286*** 0.75 -16.40 - - - -0.00391*** -11.24 -0.0800*** -3.32
· Multiple Segments 1.177*** 3.25 15.20 0.768*** 2.16 5.63 0.0442*** 15.36 1.342*** 8.54
Corporate Governance
· Poison Pill 0.136*** 1.15 2.62 0.134* 1.14 1.74 0.00582*** 4.28 0.478*** 5.46
· Classified Board2
0.2422*** 1.27 9.44 0.5726** 1.77 4.47 -0.0452*** -3.04 -0.1380** -2.59
Ownership
· Institutional Ownership 0.0168*** 1.02 16.61 0.00987*** 1.01 6.67 0.000290*** 11.39 0.0228*** 13.91
· Institutional Shareholder Concentration 0.0946* 1.10 1.79 0.479** 1.61 2.27 0.00603** 2.19 0.140 1.04
· Passive Index Ownership 0.427** 1.37 1.97 -0.517 0.59 -0.58 0.0616*** 4.92 11.43*** 11.78
Constant -4.656*** 0.01 -35.13 -0.643*** 0.53 -4.43 0.0401*** 12.36 2.165*** 10.36
Observations
* p<0.10 ** p<0.05 *** p<0.01 = statistically significant predictor variable
1. The Pseudo R-square for Model I is 5.3%, Model II is 6.0% and the R-square for Model IV is 19.8%. Model III did not have a meaningful coefficient of determination.
2. The Classified Board independent variable was determined using a subsample of events via a separate logit regression model due to limited data.
MODEL IV
Conditional
MODEL I
Engagement
MODEL III
Engagement
MODEL II
Engagement Vulnerability
5,475
Balance Sheet Efficiency
Operational Performance and Valuation Discrepancy
Mergers & Acquisitions
Corporate Governance & Ownership
481,813481,813 9,558
(Based on Matched Firms) Severity IndexSeverity IndexVulnerability Index

Stewardship Vulnerability ScoreTM
14
“Value, Volatility, Vertical and Votes”
Balance Sheet Efficiency 9
· Excess Cash
· Leverage
· ROIC
· ROIC vs WACC
Return of Capital
· Buyback Ratio
· Dividend Yield
Corporate Governance & Ownership 6
· Poison Pill
· Classified Board
Ownership
· Institutional Ownership
· Institutional Shareholder Concentration
· Passive Index Ownership
Performance and Valuation Discrepancy 6
Relative Valuation
· Market-to-Book Value
· Total Shareholder Return (TSR)
· Short Interest Ratio
· Revenue Growth
· Operating Margin
· Free Cash Flow Yield
· Analyst Sell Recommendation
· Management Credibility (Earnings Miss)
Mergers & Acquisitions 2
Industry Dynamics
· Industry Vulnerability
· Herfindahl-Hirschman Index
· Log Market Capitalization
· Multiple Segments
Customized assessment using our Stewardship Vulnerability ScoreTM
Stewardship
Vulnerability ScoreTM
Lower Risk Higher Risk
Academic-quality Research and Proprietary Predicative Analytics

Stewardship Vulnerability ScoreTM (Version 2.0)
15
“Value, Volatility, Vertical and Votes”
Customized assessment using our Stewardship Vulnerability ScoreTM
Academic-quality Research and Proprietary Predicative Analytics
ConstituencyManagement
Performance and Valuation Discrepancy 6
Relative Valuation
· Market-to-Book Value
· Total Shareholder Return (TSR)
· Short Interest Ratio
· Revenue Growth
· Operating Margin
· Free Cash Flow Yield
· Analyst Sell Recommendation
· Management Credibility (Earnings Miss)
Board Composition & Governance 6
Board Composition
· Tenure
· Diversity
· Independence
· Poison Pill
· Classified Board
Ownership 5
Institutional Ownership
· Institutional Ownership
· Institutional Shareholder Concentration
· Passive Index Ownership
· Activist Positions
Management & Board Ownership
· Insider Ownership
Compensation & Sustainability 3
Management Compensation
· LT Pay For Performance
· Equity-based Compensation
· Total Compensation
ESG
· Bloomberg Sustainability Metric
· Environmental
· Social
Stewardship
Vulnerability ScoreTM
Lower Risk Higher Risk
Balance Sheet Efficiency 9
· Excess Cash
· Leverage
· ROA
· ROIC
· ROIC vs WACC
Return of Capital
· Buyback Ratio
· Dividend Yield
Mergers & Acquisitions 2
Industry Dynamics
· Industry Vulnerability
· Herfindahl-Hirschman Index
· Market Capitalization (Logarithmic Scale)
· Multiple Business Segments

Investor Vulnerability “Management” Framework
16
Investor Vulnerability “Management” Framework
Engagement Phases
ConstituencyManagement
Management Insights
Pre-Engagement
• Vulnerability Index
✓ Balance Sheet
✓ Strategic &
Operational
✓ M&A
✓ Governance
and Ownership
• References
• Avoid/Mitigate
Contact & Assessment
• Engaged Investor
Motivation
• Suitability of
Demands
Management Decision
• Cooperate
• Resist
• Fight
Resolution
• Management Wins
• Constructive Change
• Settle
• Hangover Effect
In collaboration with participating CEOs, Directors and our Board of Stewards,
we established “Clear Day” and “Engagement” Principles to provide insight and
guidance for Management and Directors

Key Research Takeaways
17
“The BEST time to make friends is before you need them”
1. 80% of engaged investor interventions are at mid-cap companies
2. Customized “Stewardship Vulnerability ScoreTM” with
individual Peer, Matching Firm and Control Group analysis required
3. Going global
4. ESG / Sustainability
RESEARCH TAKEAWAYS
1. “Be proactive, prepared…
2. “The Board will never be the same”
3. “There are critical skills that may need to be learned”
4. “Focus on the long-term”
5. “Know and communicate with all shareholders”
MANAGERIAL TAKEAWAYS
and engage”

APPENDIX

Target Firm Outcome Ex Post Intervention
19
Hedge Fund Activism vs. HF Board Representation
CEOChangeSaleorMerger
Hedge Fund Activism HF Board Representation

Active Hedge Fund Monitoring – Long-term Returns
20
Treatment Group: Board representation by Hedge Fund Activists (582 Target Firms): only includes hedge funds that sought and won board representation to
actively monitor management of a Target Firm;
Control Group I: Target Firms that “won" the proxy fight against Hedge Fund Activists (115 Target Firms): this group is the primary Control Group since it's
comprised of Target Firms that faced the “threat" of hedge fund board representation but the majority of the shareholders supported the incumbent management
team and board. Therefore, this group did not receive active monitoring by a hedge fund activist nor it's collateral effects as a disciplinary mechanism; and
Control Group II: Board representation by Non-Hedge Fund Activists (121 Target Firms): includes corporations, public pension funds, mutual funds, labor
unions, religious groups and individuals (excludes hedge funds) that sought and won board representation to actively monitor management of a Target Firm.

Following Heckman et al (1998), Matched Firms are determined by Log Market Capitalization, Log Assets,
Market Value / Book Value (Tobin’s Q), Institutional Ownership and fixed effects for both four-digit SIC
industry and year. Matching is assigned using nearest neighbor propensity scoring methodology, following
Dehejia and Wahba (2002), Smith and Todd (2005) and Abadie and Imbens (2006).

22
Calendar-time Portfolio Approach
Coefficients marked with *** are significant at the 1% level, ** at the 5% level and * at the 10% level.
Treatment Group: Board representation by Hedge Fund Activists (582 Target Firms): only includes hedge funds that sought and won board representation to
actively monitor management of a Target Firm; and
Control Group I: Target Firms that “won" the proxy fight against Hedge Fund Activists (115 Target Firms): this group is the primary Control Group since it's
comprised of Target Firms that faced the “threat" of hedge fund board representation but the majority of the shareholders supported the incumbent management
team and board. Therefore, this group did not receive active monitoring by a hedge fund activist nor it's collateral effects as a disciplinary mechanism.

23
Total Shareholder Return (TSR)
Following Heckman et al (1998), Matched Firms are determined by Log Market Capitalization, Log Assets, Market Value / Book
Value (Tobin’s Q), Institutional Ownership and fixed effects for both four-digit SIC industry and year. Matching is assigned
using nearest neighbor propensity scoring methodology, following Dehejia and Wahba (2002), Smith and Todd (2005) and
Abadie and Imbens (2006).

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