By Patrick S. McGurn

The Internet—companies can't live without it, but they must learn to live with it as well. That's clearly something that Boykin Lodging Co. was forced to confront last Fall.

On October 26, the hotel real estate investment trust announced plans to webcast its third-quarter analyst conference call on November 2 on its web site (www.boykin lodging.com). A not-so-funny thing happened on the way to this e-forum. The Hotel Employees and Restaurant Employees International Union (known as HERE) issued a November 1 press release urging Boykin shareholders and other interested parties to visit its alternative web site (www.BoykinInvestor.org). HERE's blunt message: the Boykin's board should "consider a sale or liquidation of the company, and, in the meantime, (to) reform the company's corporate governance policies." (HERE represents employees at three Boykin owned hotel properties.)

Welcome to shareholder activism in the Internet Age. While dissident challenges are nothing new for the REIT sector, the Internet is changing the rules of engagement. The web allows activists such as HERE (a very small shareholder in Boykin's stock) to reach out to investors 24 hours a day, seven days a week to push their agendas. It also allows them to communicate in real time for a very small price.

BOY, Oh Boy!

Although HERE eventually dismantled the site after settling their dispute with the hotel operating company (Boykin was only peripherally involved), this type of activist attack is becoming a commonplace tactic.

HERE did not pull any punches in their attempt to use the site to pressure Boykin. At the site's Shareholder Center, for example, the investor could download a PDF copy of the fight letter sent by the union to Boykin board. It also linked to: (1) a list of the biggest holders of company stock (from Lions Share.com) (2) profiles of board members (from the company's site) and (3) stock trading by company insiders (from InsiderTrader.com). That's not all. The Center also offered a shareholder poll focusing on governance concerns—sample question: Should Boykin remove its poison pill? [ ] Yes [ ] No.

The coup de grace of the site: two downloadable versions (Word or WordPerfect) of a form letter that it could be printed out and sent (office/home addresses were provided) to the members of the Boykin board.

Other clicks on the Boykin Investor.com home page jumped visitors to the latest SEC filings (from FreeEdgar), recent Wall Street analyst reports (from Multex, Zack's and Friedman, Billings & Ramsey), streaming stock quotes and breaking company news (from Yahoo! Finance), active message boards (Yahoo! and Raging Bull) and related industry pages, including the NAREIT site.

HERE also looked to use "pushback" technology. It invited visitors to register with the promise of delivery of "e-mail alerts notifying you about breaking Boykin news, and the latest updates to the web site." HERE requested the normal stuff (name, address, phone, fax and e-mail) plus information on stock ownership.

"The union was in the midst of contract negotiations with one of our tenants to implement a union contract at one of our hotels. They chose this vehicle to attempt to place pressure on us relative to those negotiations," points out Boykin's CFO and treasurer, Paul O'Neil. "We couldn't and wouldn't be drawn into a dispute between a union and one of our tenants."

O'Neil also notes that the site was clearly slanted in its coverage of Boykin. "For example, the site commented upon an analyst downgrade of a recommendation for investing in Boykin shares, but then it failed to mention that at that same time two other analysts upgraded their recommendation for Boykin stock."

A Pervasive Problem

In recent years, dissident investor groups have used the web to make contact with like-minded shareholders. Some funds have followed the lead of the giant California Public Employees Retirement System (www.calpers-governance.org) and the Domini Social Equity Fund (www.domini.com) by broadcasting their actual votes over the web prior to corporate annual meetings.

Active investors—hedge funds and other value-oriented shareholders also use the Web. Some of these "noisemakers" such as Greenway Partners (www.greenway.com) maintain permanent addresses. Other dissidents have created fight-specific sites. In some instances, these dissidents skated on fairly thin ice as their jawboning crossed over to pseudo-proxy solicitations. Recently however, some dissidents have begun to make significant (and perhaps more importantly legal) use of the Internet to organize investor rebellions.

Making Noise at REITs

The web threatens to virtually eliminate many of the advantages held by incumbent boards in proxy contests. Despite the advantages of incumbency, sitting directors have managed to retain their seats in less than one-half of recent contests that reached the balloting stage.

REIT boards can be vulnerable to attacks. Witness the boardroom housecleaning last May at retail REIT Malan Realty Investors, Inc. by dissident Kensington Investment Group, Inc.

Even where dissidents have lost the proxy battles they ultimately won the wars. Facing likely defeat in a year-long fight, another retail REIT, Burnham Pacific Properties, Inc. threw in the towel in September by naming the leader of the dissident group, Jay L. Schottenstein, as co-chair of its board and adopting his plan (liquidation). A third retail REIT, Captec Net Lease Realty, Inc., turned back a spirited challenge from dissident Phillip Goldstein of Opportunity Partners, L.P. Within weeks of its "victory," however, the Captec board determined to proceed with pursuing a possible sale of the company based on a recommendation from its financial advisor, Prudential Securities. Goldstein, who had urged a sale, has been known to cruise chat rooms and e-bulletin boards in search of dirt (think disgruntled employees) and to find allies for his dissident campaigns.

Despite this rising web- activist tide, most corporations, both inside and outside the real estate world, are currently virtually unprepared to fight the online battles of the 21st century. While most firms maintain active sites and a growing number webcast their quarterly analyst (and sometimes annual shareholder) meetings, they typically ignore web-related corporate governance matters. Although many corporate sites offer "Investor Relations" pages, chock full of financial information, they're mute on governance issues. Failure to remedy this shortcoming may leave boards vulnerable to attack.