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Article appearing on Sage on-Line Investors and Multex and
eRaider site.

New Math for Shareholders
Vincent Van Gogh's Starry Night, a painting of the swirling
night sky over
Saint Remy, is among the most dramatic impressionist works
of art. A few
years ago, astronomers from UCLA's Griffith Observatory
determined that the
painting represented the pre-dawn sky of June 19, 1889. 112
years later,
June 19, 2001, will be a dramatic day for wired shareholder
There are three kinds of shareholders: Insiders,
Institutions and
Individuals. Insiders are corporate managers, board members
and large
shareholders who work closely with management. Institutions
fall into two
subtypes. Mutual funds, investment banks and most
professional money
managers want to keep corporate management happy because
they want corporate
business. Also they tend to have high portfolio turnover so
it's not worth
their while to work to improve companies, they'll probably
sell the stock
before their actions yield results. Pension funds, on the
other hand, have
no reason to kowtow to corporations and tend to have longer
holding periods.
Individuals also fall into two categories. Passive
individuals often do not
even know what stocks they own, and never know much about
the companies.
Generally someone else picks their stocks. They seldom vote
at all in
corporate election, and almost never vote against
management. Active
individuals know quite a lot about their companies and
usually select their
own stocks without broker or advisor.
Traditionally the only way to force corporate change was to
find a company
with large percentage ownership by active institutions or
to buy a large
block of stock yourself. Improved corporate defenses
against the latter
strategy (particularly poison pills) meant that
institutions were the
catalysts for improved corporate governance during the
1990s. This trend was
accelerated as individual investors switched from owning
stock directly to
buying mutual funds.
However, since 1995 the tide has been running in the
opposite direction. It
appears that individual stock ownership is increasing,
although the rate is
too slow to be sure. What is definitely true is that the
demographics of
individual ownership are shifting from passive to active.
Many individuals
who owned stocks in 1980 owned only one stock, or inherited
their stock or
were over 80. Virtually all bought through brokers or
advisors. In 2001,
individual stockholders are younger, better-educated,
wealthier, hold more
diversified portfolios and are more likely to research and
buy their own
stocks. Such shareholders are much more likely to vote for
a dissident slate
of directors or support shareholder resolutions opposed by
The Internet has increased the power of individual
shareholders in another
way. Most of these younger, better-educated, wealthier
stock researchers use
the Internet to find and oversee their stocks, thus they
can be reached
cheaply. Five years ago it cost about $5 to $25 to get one
shareholder vote, today a persuasive Internet appeal can
sway hundreds or
thousands of shareholders for nothing. At the same time,
changes in
securities law and technology have made it much easier for
individuals to
For all of these improvements, no Internet group of
individual shareholders
has ever elected a director of a public corporation. Some
alliances have
come close. United Companies Financial shareholders were
recognized as an
official equity committee and given the exclusive right to
propose a
reorganization plan. Luby's Cafeteria shareholders filed a
solicitation with the SEC and management made many of their
proposed changes
in a successful effort to defeat the dissident nominees.
organization has become important for rallying support for
resolutions, or when institutional adversaries reach out
for individual
shareholder allies. But until someone proves that a pure
Internet alliance
of individual shareholders, without any institutional
backing or support,
can actually elect a slate of directors, individual
shareholders will not be
viewed as primary actors in corporate governance.
My company Inc. was formed to rally individual
shareholders on
the Internet to improve shareholder value. Like any
sensible people, we
prefer the cheapest, easiest and least divisive ways to
achieve our goals.
Thus in our first four eRaids we used negotiation, email
campaigns and
shareholder proposals without having to resort to a proxy
fight. But our
fifth target company, Goldfield Corp. (AMEX: GV) proved
resistant to milder
tactics. So we filed a proxy statement with the SEC (a
necessary step before
soliciting votes from the public) and are running a
dissident slate of
directors at the annual meeting on June 19.
Here is the basic math. It contains a lot of uncertainty
and guesswork. I'm
not trying to handicap the Goldfield election, just to show
the key.
Goldfield has 27.7 million shares of stock. I know of no
holders (public institutions have to file their holdings,
as does any
organization that owns more than 5 percent, but smaller
investments by
private hedge fund for example do not show up on available
lists). I
estimate management has about five million sewed up. I
further think there
are seven million additional shares held by active
individuals on the
Internet. I think we have contacted most of those people
without spending
any significant amount of money.
The remaining 15.7 million shares I consider to be held by
individuals. I expect only three to six million of them
will vote. They are
expensive to reach, and however much money we spent I would
be surprised if
even 10 percent of them (1.6 million shares) could be
persuaded to vote
against management. Therefore I plan to solicit some of the
shareholders in this group, but for the most part I'm
ceding it to the
In order to name at least one director, I think I need
about 2.5 million of
the seven million shares I estimate are held by active
individuals on the
Internet. Whether I can get it is the key question, not
just for Goldfield
but for Internet shareholder activism. Can activists
identify large blocs of
shares on the Internet? Or will I find my seven million
shares to be the
product of active imaginations and practical jokers? Will
Internet allies
actually download, sign and mail proxies? Or will they
flirt with dissidents
but vote with management in the end?
If I win one or more board seats it will be a dramatic
development that will
change a lot of thinking. Companies will have to ask how
many shareholders
are active and amenable to Internet solicitation. In many
cases the answer
will be large enough to affect corporate elections.
Companies will have to
court these shareholders, lawyers will have to design
defenses against them.
On the other hand, if I cannot get even one board seat, a
lot of corporate
incumbents will relax, secure in the belief that the
Internet has once again
been more hype than substance.
As a finance professor, my main concern is that business
considerations play
a larger role in corporate elections. The trouble today is
institutions with
business and financial expertise are mostly passive,
because they do a lot
of corporate business, and active institutions like public
pension funds do
not have the staff or budget to do extensive in-house
business analysis on
their companies. This impairs the ability of corporate
elections to enforce
high standards of performance. The obvious solution is to
grant more power
to sophisticated and informed individual investors. The
experience and wisdom of a company's shareholders is an
important and
little-used asset.
So watch the election on June 19 at Goldfield Corp. for a
pointer to the
future of corporate governance.

eRaider is soliciting proxies for Goldfield's annual meeting on June 19,
2001. eRaider strongly advises all shareholders to read the proxy
statement at
47 or by emailing, or a free copy is available from:
Privateer Asset Management
POB 20170
Park West Station
NY, NY 10025