** Insiders Can Alter Market Value as Their Needs Dictate

The value of the stockholdings of insiders is measured by what they can do with the business if and when they want to do it.

• If they need a higher dividend to establish this value, they can raise the dividend.
• If the value is to be established by selling the business to some other company, or by recapitalizing it, or by withdrawing unneeded cash assets, or by dissolving it as a going concern, they can do any of these things at a time appropriate to themselves.
  

Rarely if ever do (controlling) insiders suffer loss from an unduly low market price which it is in their power to correct.

• If by any chance they should want to sell, they can and will correct the situation first.
• In the meantime they may benefit from the opportunity to acquire more shares at a bargain level, or to pay gift (and prospective estate) taxes on a small valuation, or to save heavy surtaxes on larger dividend payments, which for them would mean only transferring money from one place where they control it into another.
  

To the extent that operating management and inside stockholders form a cohesive group - and this is more typical than not in corporate affairs - the insiders must be considered as opposed in a practical sense to the improvement of bad management.

• They are often opposed to the payment of an adequate dividend, because they save taxes by a low dividend and they have effective control over the undistributed earnings.
• A holding-company setup may be of great strategic advantage to them, and they can terminate its disadvantages whenever they wish.
• The same is true of the retention of excessive capital in the business.
  

Thus on many counts the insiders are likely to look upon corporate policies in ways diametrically opposed to the interests and desires of the typical outside stockholder.

• We believe that the public stockholder is entitled to have his legitimate interests preferred over the special interests of the insiders.
• Once the public has been asked to invest its money in the common stock of any company, the management and the controlling stockholders should recognize a continuing obligation to conduct the business in all respects as trustees for the public stockholders and to follow such policies as are conducive to satisfactory investment results by the ordinary, outside owner of their shares.
• This principle is in accord with the spirit of our laws. It has not been applied as yet to any extent in legal cases, because, we believe, the issues are somewhat subtle and they have not been presented to the courts with sufficient clarity and vigor.
  
  

Ref: Security Analysis by Graham and Dodd