TABLE OF CONTENTS

Essential Knowledge
1. What is the Purpose of Your Business? 1
2. Avoiding the “Kiss of Death” 2
3. Managing the Stock Price Side of the Business 3
4. Overhang and the Risk of Stock Price Catastrophes 5
5. What if You Ignore the Second Side of Your Business? 6

Best Practices and Trade Secrets

6. How to Analyze and Understand the Shareholder Base 10
7. Moving Stock From Weak Hands to Strong Hands 11
8. Why Investors, Not Traders, Are Desirable Shareholders 11
9. How to Identify Shareholders 11
10. Methods for Communicating to Shareholders 13
11. Methods for Marketing to Desirable Shareholders 15

Organizational Structure that Supports Both Sides

12. Bet on the Jockey 16
13. Musical CEOs 16
14. The Compensation Debate 17
15. How Many Millions Are Enough? 17
16. If Senior Management Compensation is Wrong 18
17. How to Get Yours 19
18. How to Recruit the Right Board 19
19. Conclusion 20

COPYRIGHT © 2009 KIRBY COCHRAN. ALL RIGHTS RESERVED

1. What is Your Purpose in the
Business?
I am not looking for your
marketing spin here. I don’t want
your grand vision of how you are
transforming your product or service
and I could care less about your
elevator speech. I am looking for
that lackluster but essential answer
that lurks in the first chapter of every
financial accounting textbook. What is
the purpose of a business? Why does
it exist?
The maxim states that the primary
goal of a business is, to add value for
the shareholders.1 If adding value for
the shareholders is the purpose of the
company, then, ipso facto, it is also
the goal of Senior Management.
So, what is this “shareholder
value?” I am asking a little tongue-
in-cheek, but consider that private
companies with a limited number
of shareholders have the luxury of
being able to decide what maximum
shareholder value means. They might
be non-profit companies formed to
serve a cause which might be social,
personal, political or even altruistic.
Public companies on the other hand
(or private companies with a trading
shareholder market) only deliver
maximum shareholder value in one
way—by increasing their stock price.
COPYRIGHT © 2009 KIRBY COCHRAN. ALL RIGHTS RESERVED
It is a simple, universal, value per
share formula.
The transition a company goes
through from before it has significant
number of shareholders (or more
specifically a trading shareholder
market) to the time when it has a
base of shareholders is fraught with
the desperation and heads-down
operational execution that are the
hallmarks of a company in the midst
of rapid growth. The obligation of a
new shareholder focus tends to sneak
up on these teams and is easy to miss.
It may not be part of the company’s
DNA or even a blip on the radar of
Senior Management.
What’s more, Senior Management
tend to be unaware that there is
another side to their business, are
resistant to admitting its importance
and are reluctant to embrace the added
responsibility. In fact, if you have read
this far, you are already ahead of most
of your peers.
The first key to success in leading
a growth company with a shareholder
market is to recognize that you are
running two sides of the business. It
is like you are running two companies
with linked but separate goals—and
neither one can really succeed without
the other.
First, you manage the business
you are used to—the revenues

and earnings side that comes from
solid execution and smart decision-
making. Leadership teams may be
already adept at this. After all, this is
part of the reason they attracted the
shareholders in the first place.
Second, you manage the
shareholders and the stock price. Why
is the second side so critical? Success
in managing the stock price means
you have fulfilled the purpose of your
company (add value for shareholders)
and increased the value of your
company. Senior Management likely
do not even understand that this side
of the business exists, let alone how to
execute their obligations to it.
Familiar or not, Senior
Management must embrace the fact
that they have this dual responsibility
or else reap the weighty and
unpleasant consequences of ignoring
it. Reluctance is understandable. “kiss of death.” Of the many examples
If you are one of the reluctant ones,
read on. I have included all the critical
information necessary to get you
started on the right track.
2. Avoiding the “Kiss of Death”
Now, let me indulge in one
example for the sake of the
understandably skeptical.
To those of you who say, “Wait
a minute. Shareholders, certainly
the early ones, bought stock in our
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Page 2
company because they believed in our
business. We won their confidence by
executing on our business plan, by
meeting the needs of our customers
and by driving earnings and revenues.
Our job isn’t to influence the stock
price. If we look after earnings and
revenues, the stock price will take
care of itself.” The market is full of
people preaching that stock price is
not part of the responsibility of Senior
Management teams.2 In ignorance,
CEOs steer clear of anything
resembling an attempt to impact stock
price fearing regulatory misconduct.
But, this is not an area where
business leaders can afford to remain
ignorant.
I have seen many many companies
led by individuals who professed the
attitude that somehow “the stock price
will take care of itself.” I call this the
we could cite, perhaps none is more
illustrative than that of Robert L.
Nardelli.
Bob Nardelli, was a talented
executive who joined GE in 1971
and climbed the ranks to become
the President and CEO of GE Power
Systems. He was mentored by famed
GE CEO, Jack Welch, and was even
referred to as “Little Jack.” When
Jack Welch retired as CEO, Bob

Nardelli was one of a threesome on
the shortlist to be Jack’s successor.
In the end, Bob came in as a
runner up. Being passed over for the
top spot at GE, however, was anything
but a career killer for Nardelli. Bob
was a man in demand, and was almost
immediately extended an offer to take
the helm of The Home Depot (for a
paltry $38 Million, plus bonuses).
The Home Depot was struggling,
but Bob was off and running. He
was righting the Home Depot ship
operationally and turning it into a real
money maker. Under his leadership,
The Home Depot doubled its sales
and profits between 2000 and 2005
(revenue jumped from $45.7 Billion
to $81.5 Billion, while profits leapt
from $2.6 Billion to $5.8 Billion).
Operationally, Nardelli was a rock
star.
But, what about Bob’s other
business?
During the same period, share
price fell 6%. By contrast, shares at
Lowe’s had grown by 200%.
Pressure from shareholders forced
the board of directors to push for
Nardelli to alter his compensation
package in order to tie his salary more
closely to stock price performance.
Nardelli countered complaining that
“share price was outside his control.”
He was not without support in this
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Page 3
position with many crying that his
charge was to run the company, not
the stock price.
The shareholders disagreed. Their
scrutiny may have been attracted
by Bob’s generous compensation
package—CEO compensation
is a favorite bone to pick with
shareholder activists. Truthfully,
his pay wasn’t the key issue, theirs
was. The shareholder’s value wasn’t
growing despite increasing profits and
revenues, and Nardelli was forced to
resign.
Now there will probably be few
tears shed for Nardelli’s fall from
grace. After all, an estimated $210
Million in severance has made him
the poster child for golden parachutes.
It appears Nardelli will continue to
swim in deep water. In 2007, after his
departure, Bob was offered the job of
CEO at Chrysler (where, incidentally
his pay is tied to a successful
turnaround after the Daimler Benz
divestiture), and he spent much of
the end of 2008 before Congress
alongside GM and Ford requesting a
Federal bailout of the auto industry.
The moral of the story is that
once Bob declined his responsibility
to increase shareholder value, it was
the kiss of death and no matter how
stellar earnings were, it could not save

him from the repercussions of not
shepherding the share price.
It is easy to see why CEOs of
growth companies might resist the
idea of tackling an entirely new
dimension of their business. It is the
basic psychology of human nature. We
resist change and fear the unknown.
For these executives, the revenue
and earnings side has been their whole
focus. To get to this point, they must
have already mastered many of the
critical skills necessary to drive this
side of the business. To suggest that
they take on an another side of the
business—about which they know
nothing—is uncomfortable. It is like
telling a child who has learned to ride
a bike that that is all well and good,
but what really counts is how good
they are at rowing a boat.
If you feel this, acknowledge it
and discipline yourself to learning the
other side of your business. Like it
or not, Senior Management actually
run two companies and they bear the
twofold responsibility to manage both
sides of the business: revenue and
earnings and stock price.
3. Managing the Stock Price Side of
the Business
Another thing most Senior
Management teams do not understand,
is the relationship between the
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Page 4
shareholders and the value of the
company. In fact, they may know very
little about their shareholders.
Shareholders drive the value of the
company!
The behavior of the shareholders
directly affects the value of the
company whether you have ten
shareholders or ten thousand.
Managing your shareholders directly
affects the stock price and your ability
to raise money and grow the business.
What is the mechanism for
this relationship? The value of
a company is a function of the
price and volume of its stock. The
behavior of your shareholders—past,
present and future—affects the supply
and demand3 of your stock, and
ultimately the value of your company.
Do they buy? Do they sell? What are
their intentions?
Notice how price is affected as the
volume of supply or demand goes up.
The goal of the Senior
Management team should be to
increase both the volume and price
of the company’s stock. Rapid
fluctuations in volume, however, yield
disastrous results on price. Managers
need to grow the stock with as little
volatility as possible. So, the aim
should be a steady increase of both
price and volume, keeping in mind
 Page 5

Demand Supply Demand Supply Demand Supply

P-2
P-1
Price

Price

Price
P-1
D-2 P-2

S-1
D-1 S-2

Volume / Quantity Volume / Quantity Volume / Quantity

Figure 1

the balance, the equilibrium between beholden to a shareholder it does not

supply and demand that dictate price.
There are a lot of choices when
it comes to buying stock. Why does
someone buy a particular stock?
Well, if a stock is on the S&P 500 or
the DOW 30, people will buy it just
because it is on the index. What about
companies who aren’t on an index?
What if your company isn’t on an
index? Increasing the value of the
company depends on someone buying
your stock.
Well, let’s just get everyone we
can, any way we can, and crank up the
shareholder base, right?
Not so fast—not all shareholders
are created equal. Companies do
things in order to make their stock
desirable to potential shareholders.
If a company is careless or does not
understand what type of shareholder it
wants to attract, it could easily end up
want.
Your shareholder base4
should not spring up by accident.
Companies need to understand
who their ideal shareholder is and
tell a story that attracts that type of
shareholder. Whether intentional
or not, Companies are recruiting
new shareholders and the Senior
Management needs to understand how
to attract and market to the right ones.
This is impossible if you do not know
who they are!
In the end, Senior Management
needs to understand who its
shareholder is if it is to have any
chance of influencing its stock price
and ultimately the value of the
company.

COPYRIGHT © 2009 KIRBY COCHRAN. ALL RIGHTS RESERVED


4. Overhang and the Risk of Stock
Price Catastrophes
Not only do most Senior
Management teams not understand the
relationship between shareholders and
value—they often don’t understand
their shareholders at all.
In my years consulting with
dozens of growth companies, I found
that Senior Management could usually
tell me a lot about the company’s
customers. I mean they practically
knew what each customer had for
breakfast: they know the detailed
profile of their target customer and
what the key demographics are. They
can tell me about the psychographic
profile of their customers, about their
lifestyles and about their interests,
attitudes, and opinions. They have
crunched the numbers and know what
it costs to attract that customer and
how much they expect to earn from
each transaction.
Then I ask them to tell me about
their shareholders.
I hear crickets.
These competent and skilled
executives look at me with blank
stares. A few start grasping at straws,
but most don’t even know how
many shareholders there are, or
what the average number of shares
per shareholder is. Somehow, they
are entirely ignorant of how the
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Page 6
shareholder relationship will impact
the success of their business.
So what? What are the risks of
this kind of ignorance? For starters,
there are what I call stock price
catastrophes.
Remember supply and demand? A
stock price catastrophe is typically the
result of a flood of supply—someone
is unexpectedly selling large amounts
of stock and the price plummets in
a very short time frame. If Senior
Management does not understand
what is happening within the
shareholder base, they are unprepared
to mitigate stock price catastrophes
that otherwise could have been
averted.
On the other hand, management
teams who understand their
shareholders will notice precipitating
events, or catch the warning signs that
are the fruits of some basic and simple
analysis. Underlying any analysis
of the shareholders is the concept of
“overhang.”
What is overhang?
To understand overhang, you
need to understand some things about
the psychology of how individuals
think about their stock. One of the
irrationalities of people buying and
selling stock is that they often weigh a
stock’s current price against the price

originally paid, not whether or not the
stock is worth its current price.5
As the difference between the
current price and the price paid grows,
so does the psychological pressure to
sell.
For example, let’s say that an
individual bought $1,000 of stock in
a growth company at $1 per share.
Then the price starts going up. It goes
to $1.50, then $2.00 per share. The
investor is thinking he is pretty savvy
to have made such a great return, but
in the back of his mind he knows
that the general market average only
delivers returns of just less than 8%.
He has beaten the average by ten
times already. Then the stock goes
to $3.00, then to $5.00 per share. He
starts to get nervous. This might be
too good to be true. What if the price
goes back down? Where is this stock
going to peak? If I have already made
500%, can’t I be happy with that?
And so it goes. As the difference
between the price paid and the current
price grows, especially as that growth
outpaces the market, so to does the
itch to sell. If the pressure to sell
motivates a sale of any inordinate
volume, you have the perfect
conditions for a sale that is likely to
cause a drop in stock price.
With that in mind, overhang can
be defined simply as cheap stock.
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Page 7
Shareholders who bought stock
at a cheap price should be a red
flag for Management because these
shareholders represent a threat
that stock could suddenly and
unexpectedly come onto the market.
And of course, a sudden influx of
shares will most often cause a drop
in price. What’s more, since many
investors get their investment advice
from other investors around them,
a move to sell by one could bring
a flock of imitators6 and cause a
full-blown stock price catastrophe
(remember our supply and demand
curves).
5. What If You Ignore the Second
Side of Your Business?
Here are two typical examples–
stories I see all the time; one
represents individual shareholders
and the other represents institutional
shareholders. Both illustrate the
reason why it is a fatal mistake not to
manage your shareholders:
Example 1.
An aggressive young and growing
company makes its Initial Public
Offering. To raise the cash necessary
to bring the company to this point,
the company used its equity and sold
stock to an individual investor looking
for big returns on ownership of a pre-

IPO company, but who cares little for
the company.
The CEO and founder of this
company is focused on execution. He
is in his stride driving revenues for
the company and making his dream
for the company come true. Raising
money and even the IPO are only
stepping stones in his company’s
growth.
The individual shareholders
forgotten, he gets up every morning
and checks the stock price. He has
been working tirelessly and has led
the company to stellar earnings and
takes great satisfaction in watching his
stock price climb accordingly. It’s up
to $14 per share!
Figure 2
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Page 8
Then one morning he stares at
his screen in disbelief. The stock has
fallen to $8 per share overnight.
What happened?
The individual investor dumped
his shares onto the market as soon as
his six month holding period expired.
He is allowed to do this, right? YES,
and the entrepreneur just saw his stock
price (ie. his company’s value) drop
by 43% overnight because this flood
of shares is equal to ten times the
daily trading volume of his company’s
stock.
This is almost exactly what
happened to Lululemon. Lululemon
Athletica made its IPO in July of 2007
at $18 per share. Existing shareholders

were under a 180 day lockup
agreement which would have expired
around mid November. Over the
next four months, successive volume
spikes cause the price to tumble from
a high of around $60 to a low of
around $20 per share.
Example 2.
Here is a company that has been
courting individual shareholders, but
along the way has attracted one or
two institutional buyers. They might
form a “fat tail” (which we will
discuss a little later). They don’t really
fall within the normal shareholder
distribution, and since they are an
outlier, Senior Management ignores
them.
Like our previous example, Senior
Management has managed—through
extraordinary effort and drive—to
generate earnings that represent a 20%
return! The company is riding high
and individual investors love it.
Then the day after earnings are
reported, the institution sells in bulk.
Stock price drops and instantly erodes
the hard won gains.
Why did they sell? The company
was generating stellar returns!
Understanding this example
requires a closer look at the
differences between individuals and
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Page 9
institutions as shareholders.7 These
two behave very differently.
Purchases by institutional
shareholders are often made by
investment managers. Institutional
managers are not as interested in
growing their personal wealth, or
even the wealth of the institution, they
tend to act more interested in keeping
their jobs and avoiding blame. The
ideal investment for them would
consistently return a few points over
the market in general—no more, no
less. They are like Goldilocks. They
want their stocks not too hot and not
too cold—they want them just right.
These managers may purchase
on the recommendation of internal or
external analysts, who are focused on
calculations like Earnings per Share
(EPS) or PE Ratio or even world
events. Analysts issue reports that may
recommend investors buy, hold or sell
certain stocks.
The manager needs the opinions
of the analysts, in case an investment
goes bad or does not yield as
expected, so he can claim that he has
made his decisions using the best
advice in the industry. They manage
to mediocrity and follow the safety
of the herd. As a result, they set up
criteria that govern their purchases.
Institutional managers have an
incentive to play it safe.

Individual buyers, on the other
hand, don’t read analyst reports as
often and don’t usually use the same
type of rigid criteria that institutional
buyers use. They may care more about
the background of the management
team or the company’s position in its
industry or any of a number of other
investment data points when they
make their purchases.
So, why did the institution sell?
The institutional manager looked at
earnings growing more than double
the general market. While superb
for individuals, this falls outside his
established criteria and he regards the
growth as unsustainable. It has fallen
outside his safe zone and even though
it seems like good news, he sells. (It’s
not like it’s his money anyway.)
Other reasons the fat tail
institution/investor could
unexpectedly sell is that someone
in the company did something
that disappointed or angered an
analyst. The analyst retaliated with
a bad report. Or maybe he had bad
information and published a negative
analysis. Remember, institutions live
and die by the analysts because their
managers live and die by blame. Net
result—your company loses value
which it could take years to recover.
Both of these stories are
oversimplified to make the point that
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Page 10
Senior Management must understand
its shareholders. Institutions may
hold the company to a higher or
stricter level of performance than an
individual investor or use different
criteria altogether in deciding to
buy or sell. The principle is not
one of endorsement for or against
institutional or individual investors,
but an endorsement for understanding
your shareholders, and understanding
them in-depth. The industry saying
goes, “You live by the institutions;
you die by the institutions.” This
means that if you have, or more
importantly try to attract, this type of
investor you need to understand the
way they play the game.
And it’s no different with individuals.
If you want to be able to meet your
obligations to increase shareholder
value and to head off the catastrophes
that may be lurking within your
shareholder base, you absolutely must
understand them.
There is no shortcut.
For example, within each of these
groups there are subgroups. There
may be investors in your space who
only buy companies that are pre-
earnings. Others only buy companies
after they produce earnings. Either of
these types of shareholders may be
ideal or flat wrong for the company,
 Page 11

but Senior Management needs to

know which.
By understanding the
shareholders—more specifically,
by understanding the shareholders
who are overhang and represent a
significant number of shares either in
or entering the float8 (trading shares
of your stock), you can take steps
to head off stock price catastrophes
and fulfil your obligation to increase
shareholder value.

COPYRIGHT © 2009 KIRBY COCHRAN. ALL RIGHTS RESERVED


6. How to Analyze and Understand
the Shareholder Base
Understanding the shareholders
starts with some basic analysis. Senior
Management should look at the
shareholder base just as they would
their customer base. Basic analysis
starts by collecting statistics and
demographic information and, at a
minimum, answering the following
questions:
How many shareholders are
there? Is the number increasing or
decreasing? How long do shareholders
typically hold the stock? What are the
demographics of the shareholder base
(institutional vs. individual, investors
vs. traders, old vs. young, etc.)? How
many shares does each shareholder
own?
With this information,
shareholders can be segmented and
some simple statistics can be applied.
Figure 3
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Page 12
What does the distribution look
like? Is it normal? Is there more than
one peak? Are there any fat tails?
Are there restricted shares out there?
How many? When do they become
tradable? Who owns them? At what
price do they own them? What are
their intentions of holding or selling?
How many shareholders are in each
standard deviation from the mean? If
we consider three standard deviations
(σ) to be the base, how many outliers
are there? Who are they and how
many shares do they own? Are there
warning signs or positive indicators
showing up in the data?
Outlier clusters and fat tails are
indicative of potential overhang.
In this image, we are showing
shareholders on the Y-axis and
number of shares on the X-axis. The
graph on the left shows a normal
distribution—high at or near the
mean, with a bell-curve sloping off to

the two tails on either side. Everyone
is accounted for.
However, the graph on the right
has most of the shareholders within a
normal distribution, but a shareholder
cluster or “fat tail” exists which needs
to be analyzed. This likely represents
a risk of overhang. If it does, a plan
needs to be put in place to buffer the
impact of an unexpected sale.
7. Moving Stock From Weak Hands
to Strong Hands
While it is illegal to manipulate
your stock price, it is not to
orchestrate it. In fact, Senior
Management has an obligation to be
strategic about orchestrating its stock
in order to create the most value for
the shareholders.
When overhang is owned by an
investor who may sell unpredictably,
these shares are in “weak hands.”
As long as this investor holds the
shares they are outside the free float
where market forces keep the price in
equilibrium with supply and demand.
As long as there is overhang, the firm
is at risk of a stock price catastrophe.
One way to mitigate the risk of the
overhang is to work on “patriating”9
the overhang into the float. By
getting these shares into the freely
trading circulation at an acceptable
volume, the risk of an artificial price
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Page 13
fluctuation shrinks. This also means
that shares tied up in any fat tails are
absorbed into the normal distribution.
Note that the “weakness” of a
shareholder holding overhang, is a
way of describing the unpredictability
of their behavior. By understanding
the shareholder base and what
shareholders intentions are, Senior
Management works to minimize risk.
A shareholder could own a great
deal of cheap stock, but if the Senior
Management knows he is holding the
stock out of a belief in the long-term
success of the company and that he
has a longer investment horizon—if
this was an investor whose behavior
was predictable and acceptable—his
stock would be considered to be in
“strong” hands and not a risk.
Senior Management should be
vigilantly looking for weak hands and
making efforts to move those shares to
strong hands.
8. Why Investors, Not Traders, Are
Desirable Shareholders
What is the difference between
an investor, or newer investment
criteria, and a trader? These two buyer
types are operating from different
paradigms.
Traders are not primarily
interested in your company. They are
interested in the ebb and flow of your

stock price. They are trading to make
money on the fluctuations. They watch
for the momentum in your growth to
fall off, and then they sell. Because
of this, they can create instability and
become overhang. They don’t invest
because they believe, they are just
playing the numbers.
Investors, on the other hand, are
betting on your company for the long
haul. Because they believe in your
company they are more predictable
and less panicky.
The moral of this story is that you
want to develop shareholders who are
investors instead of traders.
9. How to Identify Shareholders
The first step in understanding
your shareholders is to know who they
are. Understanding the shareholder
base is essential to influencing stock
price and protecting the firm from
unexpected fluctuations like those
mentioned above. By profiling your
shareholder base, you will start to
have the information you need to
anticipate what your shareholders are
thinking and what their actions will
be.
Typically, it is not very
challenging to make a list of the
shareholders classed as “insiders.”10
These are members of the Board
of Directors, officers & Senior
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Page 14
Management, directors, key
employees (control persons), or
shareholders with over 10% of the
issued shares.
Before a company goes public,
it is also fairly straightforward to
get a list of shareholders. A great
practice for pre-IPO companies is
to review their financial statements
for the “Records of Certificate” that
show stock has been sold. Private
companies keep their own records
(they can, but usually do not, use
a Transfer Agent, defined below).
They keep a shareholder list or can
extrapolate one from their cap sheet.
The original filing will indicate the
original shareholders and subsequent
filings should provide a paper trail
for what stock has been issued and to
whom since that time.
What if you are public? Things
can get a little more complex.
Public companies are required to
have a third party who handles the
transferring of shares of stock. The
third part is called a Transfer Agent
and the Transfer Agent is responsible
for keeping the transactions out of
the company’s hands. Each company
can only have one Transfer Agent at
a time, and part of what the Transfer
Agent gets paid to do is keep a record
of all the Shareholders.

Resources are also available
through The Depository Trust &
Clearing Corporation (DTCC).11
The DTCC was formed in 1999 as
a holding company to combine the
Depository Trust Company (DTC),
and the National Securities Clearing
Corporation (NSCC) which had been
formed initially to handle the needs
of the New York Stock Exchange
(NYSE), the American Stock
Exchange, and later the NASDAQ.
DTCC now serves the needs of all US
and many foreign stock exchanges.
The DTCC is owned by those who use
it and is regulated by the Securities
and Exchange Commission (SEC).12
The DTCC is basically the
framework upon which all trading
happens; it is a warehouse for
public companies which facilitates
transferring between brokers and
dealers electronically.
They record and secure all the
transactions. All trades in the US go
through the DTCC. A guide published
by the DTCC, Following a Trade,
which outlines the mechanics of
what happens as shares are traded, is
available from the DTCC web site.
The DTC is the actual legal
owner of the shares, but has no
“beneficial interest” in them.13 The
shares, while “legally” owned by
the DTC are “beneficially” owned
COPYRIGHT © 2009 KIRBY COCHRAN. ALL RIGHTS RESERVED
Page 15
by the participants14 or clients of the
participants. Beneficial ownership
gives one voting rights and the right
to dispose of the shares. The names
of beneficial owners are pseudonyms
or “street” names in order to keep the
owners anonymous.
In order to penetrate the street
names and determine who really owns
the shares in your company, you need
to request a list of the “Names of
Beneficial Ownership,” or a NOBO
list. The DTC is the only entity who
can penetrate the street names via the
NOBO list. NOBO lists are typically
used for preparing an Annual Report.
After collecting the names of all
your shareholders, what next?
10. Methods for Communicating to
Shareholders
How do you communicate
with your shareholders (other
than a dutiful entry in the Annual
Report)? Some companies truly
understand this and have become
experts at communicating with their
shareholders. One example is BASF.15
With a tagline like “we don’t make a
lot of the products you buy. We make
a lot of the products you buy, better,”
their ads are clearly not targeting
consumers.
Try buying anything from BASF
at any retailer; you can’t. They are

Figure 4
not speaking to consumers of their
products; they are speaking to people
considering what their 401ks and their
mutual funds are invested in. This is
an unusual example of a firm who
knows that it needs to speak to its
current and potential shareholders.
So, where do you start
developing your communication?
The key to communicating with your
shareholders is to recognize that you
want to build a relationship with them.
COPYRIGHT © 2009 KIRBY COCHRAN. ALL RIGHTS RESERVED
Page 16
Shareholders need a little TLC.
Investors are news junkies. They
want any crumb of news about the
companies they own. So ask yourself,
are you giving them the news that
they need? How often are your press
releases going out? People within the
company possess nauseating levels of
information about what’s happening,
but investors are often starved of
even the most trivial morsels of
information.

Do you have a mailing list? An
e-mail list? Are you sending anything
out? Do you have an Investor
Relations department?
In my consulting, I often ask a
firm to tell me about their investor
relations department. They say, Oh,
we hire that out. What!?
If you understand that investor
relations is more than just a
department (and is in fact more
than merely “investor relations”),
that it truly is the second half of
your business, if you understand
that it is like the Yin to the Yang of
serving your customers in order to
create revenues and earnings, then
you have to ask yourself, does it
really make sense to subcontract out
such a vital part of your company’s
success? Would you try to hire out
your company’s ability to generate
earnings? Of course not.
The shareholder side of the
business is at the heart of the strategic
vision Senior Management has for the
company. It must be done right in its
totality. Which means that it simply
requires too much care and attention
to allow someone else to do it for you.
Another question I often ask is,
how much do you spend on marketing
and selling your product or service?
Answers vary, of course. Then I
ask, Now tell me what your budget
COPYRIGHT © 2009 KIRBY COCHRAN. ALL RIGHTS RESERVED
Page 17
is for improving your stock price—
how much are you willing to spend
to market your stock? Consider a
company with 10 million shares. If
they could get the stock price to go up
even $1 per share, it would be worth
ten million dollars in valuation. But,
how many companies dedicate even
$50,000 or $100,000 to this side of
the business? Very few (almost none
in the micro cap sector) even have
budgets allocated for marketing their
stock.
Executives have to remember that
if they don’t find a “home” for every
share of stock, every single day, then
the value of the company is going
to go down. Demand has to exceed
supply to keep the price moving in the
right direction. How can management
know what demand to generate if they
don’t even know how fast their float is
turning over?
The CEO has to understand and
be able to champion the Investor
Relations effort. I often ask, where do
investor relations and public relations
fit on your org chart? This tells me
something about where IR fits in the
list of priorities.
Think about it. If you do not give
your shareholders information about
you, where are they going to get it?
 Page 18

11. Methods for Marketing to firm. They may strategically acquire

Shareholders private companies at private valuation
If you don’t reach out to the right and converting them at their public
shareholders, how will they find you? valuation.
The relationships you build with Wrapped inside of that story
your current shareholders are a great is a reason to believe—a rationale
vehicle for reaching out to others. that answers the question: how can
What really drives anyone to buy I make money. The message should
stock in a company anyway? be communicating authentic value.
People buy stock because Ultimately, management needs
they perceive an opportunity. The to pull this together in a way that
psychology is simple. Almost communicates potential.
universally, they believe that, at some
point, the value of the stock they
purchase will go up.
In order for a company to attract
the right shareholders, they need to
tell a story that resonates with their
target shareholder. It has to be very
compelling. The target audience
should feel like they will struggle with
a lifetime of regret if they don’t make
the purchase.
So, what makes a story this
compelling? Senior Management
needs to communicate to their
shareholders that they have vision.
They need to be enthusiastic, but
grounded in the facts. They need
to represent that they are executing
on growth strategies, which could
include: uses for the cash they are
raising by selling stock, expansion
into new products or new markets,
merging with or acquiring another

COPYRIGHT © 2009 KIRBY COCHRAN. ALL RIGHTS RESERVED

12. Bet on the Jockey able to recognize before it comes back
Over the past twenty years, I to bite you.
have seen company after company Just like shareholder base, you
come through my door looking for can identify and take the first steps
funding or help in executing their to mitigating the risks of the wrong
growth strategy. I am a believer in the executive compensation structure by
sentiment, “Bet on the Jockey, not the understanding it and its implications.
Horse.” Experience has taught me 13. Musical CEOs
this lesson over and over again. The
Senior Management and the Board
Leadership within the company is
of Directors are not always on the
more critical than the elements of the
same page. Often the first CEO of a
company itself and a great company
growth company is the founder. He
with weak leaders at the helm is a
or she is entrenched in the history and
recipe for failure, no matter how good
roots of the company. Entrepreneurs
the company looks on its own.
are, by nature, control freaks. They
Senior Management teams who
have brought the company to its
understand both sides of the business
current state by sheer force of will.
are critical, but we know that most do
Sometimes that same strength of
not. How can companies encourage
personality that created the company
the types of leadership and execution
starts holding the company back—
that support both sides of the business
oftentimes there comes a point when a
when all or part of the Senior
company is ready to grow beyond its
Management is ignorant or reluctant
roots, but the CEO is not.
to embrace both sides?
It’s a tough road. Entrepreneurs
Management compensation is a
are required to navigate many
critical component to successfully
transitions. One of these is the
managing both sides of the business.
transition from owning all the stock
Your key executives are smart
at a low value to owning a portion of
individuals who understand exactly
the company and working to increase
which side their bread is buttered on.
value. This can get a little ugly. So,
The right compensation structure is
the simple truth is that a lot of CEOs
essential for them to be successful.
get fired or otherwise transition out
Likewise, the wrong comp structure
of the CEO job (maybe to take seats
creates a huge risk that you need to be
on the board or provide a consultative

COPYRIGHT © 2009 KIRBY COCHRAN. ALL RIGHTS RESERVED


role) shortly after a company raises
its first equity financing and hits the
throttle on growth.
Finding a great CEO is not easy
and often companies go through two
or three generations of management
trying to find the right fit. In the end,
it is not uncommon for the board of
directors, tired and desperate to get the
company on solid footing, to become
focused on one side of the business:
the earnings and revenue side. They
typically end up with management
who are operations experts, but
who know nothing about stock or
financing, or the relationships on the
investment side of the business.
In other words, they just hired
themselves the “Kiss of Death.”
14. The Compensation Debate
I am going to outline the secret
to compensating your executives
in a way that incentivizes them to
create the most value, but I would be
remiss not to acknowledge that there
is a furor raging in public discourse
over this issue. On the one hand,
market forces dictate the going rate
for CEOs in any industry. On the
other, shareholders are asking tough
questions about the justification for
big salaries and they are wielding
increasing power. Needless to say,
COPYRIGHT © 2009 KIRBY COCHRAN. ALL RIGHTS RESERVED
Page 20
executive compensation is a hot and
divisive topic.
Earlier I cited Bob Nardelli as an
example of a high profile CEO whose
compensation package was a sore
point for shareholders, but Bob is not
alone. Disney, and the NYSE have
all had high-profile CEO fires where
compensation was an issue. Currently
CEO compensation (and particularly
severance packages) are one of the
issues at the heart of the mortgage
crisis.16
Shareholders are raising eyebrows
at CEOs exiting businesses with
very large severance deals at a time
when these firms are in real jeopardy
ostensibly because of the leadership
decisions of the departing executives.
Shareholder activist groups, like
AFL-CIO, are increasingly organized
and able to garner enough votes to
force decisions from the board of
directors. Often executive pay is the
issue that causes them to pick up the
torches and pitchforks. Shareholder
activism has gained popularity as
management compensation at publicly
traded companies and the rising cash
balances on corporate balance sheets
have risen.17 Some of the recent
activist investment funds include:
Icahn Management LP, Santa Monica
Partners Opportunity Fund LP and
Relational Investors, LLC.18

Where many of the large cap
companies may have gone too far
with their activism, small and micro
caps need to be increasingly aware
of the issues surrounding this debate.
The issue has grown in interest to
the point that during his time in the
Senate, President Barak Obama, even
sponsored a bill that would require
a non-binding vote on CEO pay
by shareholders: the Say on Pay19
bill (S. 1181/H.R. 1257).20 He has
since pressed the issue of executive
compensation as part of his economic
policy.
15. How Many Millions Are Enough?
Senior Management is the group
responsible for running the company.
The Board of Directors and the
Shareholders are responsible for
managing the Senior Management.
The Board of Directors has a
responsibility to establish a
compensation plan for management
that ties the self-interest of executives
to increasing shareholder value and
harnesses their drive in a way that
motivates them to achieve that goal.
Here is a textbook reference that
starts to outline the issues at work in
establishing appropriate and effective
management compensation.
“Managerial goals may be different
from those of shareholders. What goals
COPYRIGHT © 2009 KIRBY COCHRAN. ALL RIGHTS RESERVED
Page 21
will managers maximize if they are
left to pursue their own, rather than the
shareholders’ goals?
“ . . . managers obtain value from
certain kinds of expenses. In particular
company cars, office furniture, office
location, and funds for discretionary
investment have value beyond that which
comes from their productivity.
“. . . Corporate wealth is that wealth
over which management has effective
control . . . . Corporate wealth is not
necessarily shareholder wealth.”21
My point is that this is not an issue
that naturally resolves in a way that
supports both sides of the business.
So, what is the right strategy for
establishing executive compensation?
How do you align management goals
with investor goals?
To start with, the Board needs
to establish a Compensation
Committee.22 Compensation
Committees are often organized
with a charter and they develop
certain principles as guidelines
for their objectives in making
recommendations about executive
compensation.
The core principle is that bonuses
and stock are the two elements over
and above a straight salary that tie
in to the two sides of the business.
This much is pretty straightforward.
Bonuses tie to earnings and revenue
goals, while ownership of the business
through stock or options create an

incentive for executives to increase
shareholder value because they are
numbered among the shareholders.
In practice this can be more
complex. For instance, a CEO who
was the original founder has to make
the transition from owning all the
shares to owning only a portion
of them (and seeing that a smaller
percentage of a bigger pie is the
more valuable of the two). It may be
foreign for this individual to think of
his or her compensation plan from
the perspective that the ownership
element is worth more than the salary
and bonus element. It may never
have been considered that salary and
bonus were the minority players in the
compensation plan.
Here are some elements to
consider...
16. If Senior Management
Compensation is Wrong
Senior Management, and
particularly CEO, compensation
that is aligned incorrectly begins to
show signs of the mismatch. As the
saying goes, the fish starts to stink
at the head, so CEOs with the wrong
compensation package start showing
symptoms that they are set up with the
wrong compensation package
For example, if management
does not have a significant ownership
COPYRIGHT © 2009 KIRBY COCHRAN. ALL RIGHTS RESERVED
Page 22
stake in the company, they tend to
look for other means of compensating
themselves besides increasing the
stock price (ie. shareholder value).
These could be wages, perks, travel,
entertainment, cars, side deals, etc.
Even if they have high salaries,
small or no ownership equates to no
incentive to grow the stock price.
17. How to Get Yours
It is an unfortunate fact that very
few entrepreneurs can execute their
business plans completely. Research
shows that most entrepreneurs want
two things: to make a lot of money,
and to call the shots in their business.
The same research shows that less
than 25% of entrepreneurs are still
CEO by the time their company
makes its IPO.23 It takes a different
set of skills to get your company off
the ground than it does to manage it
through the phases of growth.
With that in mind, demonstrating
that you can develop and execute
on a growth strategy is one of the
best ways to ensure your stake stays
strong. Showing that you are a
management team that can execute is
the same as demonstrating that you
are worth the ownership stake.

18. How to Recruit the Right
Board provide for Directors and Officers
Why do you have a Board? Who
do you want on your Board? What do
you want out of them?
Board members provide several
things to a growing company. Having
members who are experienced and can
provide mentoring and leadership to
the Senior Management team is a real
strength. Board members also help the
company raise money and make key
introductions and forge relationships
that help expand the business. In
effect, Board members bring their
network of contacts, their experience
and their clout to bear in evening out
the roadblocks that companies face in
their path to growth.
Board members should not
just be a rubber stamp for the aims
of management. They need to
understand that they have a fiduciary
responsibility to all the shareholders.
Members need to be recruited who
will ensure the best interest of the
shareholders.
Prior to Sarbanes Oxley, it was
common for Board selection to be
a process of dipping into the “Good
Old Boys,” throw in some nepotism
and take a devil-may-care attitude to
independence. SOX changed all that.
In order to be SOX compliant, you
need to have an independent Board.
COPYRIGHT © 2009 KIRBY COCHRAN. ALL RIGHTS RESERVED
Page 23
The company also needs to
Insurance. Board members take on
significant risk. Growing companies
are by their natures involved in the
risky business of being in business.
When something goes wrong and
a growing company has to declare
bankruptcy or gets involved in a
lawsuit, the members of the Board are
exposed to significant liability.
Often Board members come to
the board as successful officers from
other companies—which means when
things go south, they represent the
deep pockets for litigators. Remember,
the average business person is sued
every three years—this is a real
concern that can be mitigated by
proper D&O Insurance.
19. Conclusion
Entrepreneurs and Senior
Management teams are usually ill-
equipped to realize the impact of the
stock price side of the business. As
I consult with growth companies in
many industries, I find that rare is the
company who really understands the
impact of the investment side of the
business.
What that means is that there
is a great opportunity for growing
companies to create an advantage
for themselves through competing
 Page 24

along both fronts. How much would

it mean to you to receive funding
when your competitors do not? How
much would it mean if you drove the
value of your business by dedicating
resources to increasing stock price and
to marketing to your current and ideal
shareholders?
By embracing the responsibility of
increasing shareholder value and by
equipping yourself with the essential
skills and strategy necessary, not only
to do it, but to be wildly successful
at it, you will rise above your peers.
Even better, they won’t know why you
are growing when they are shrinking
(because they don’t know about the
second side of their business either).
Finally, by focusing on both
sides of your business, you will be
creating real value in the company
as the stock price increases as well
as understanding and capturing the
best terms for yourself. You will
understand the mechanics of how
companies increase in value and gain
the skills necessary to turn that into
a winning growth strategy for your
company. 

COPYRIGHT © 2009 KIRBY COCHRAN. ALL RIGHTS RESERVED

 Page 25

Kirby Cochran is an educator, speaker and thought leader in the field of management and
finance and is a leading expert on capital structure and shareholder value. He has been teaching
new venture financing and entrepreneurship to graduate students for over a decade. Kirby
currently serves as an adjunct professor in the Finance department of the David Eccles School
of Business at the University of Utah. A veteran of the venture capital industry and a pioneer
of emerging approaches to raising capital, Mr. Cochran has been at the forefront of the growth
company financing and management trends for over twenty-five years.

In his new series of articles entitled Leadership Insight, Mr. Cochran reveals secrets used by
entrepreneurs and CEOs to drive growth in their companies. This information has always been
difficult and painful for Senior Managers to acquire, found only in the ruthless university of
experience and obtained through costly tuition at the school of hard knocks.

North Point Advisors, the firm founded by Mr. Cochran, advises growth companies on the
implementation of the best practices discussed in Leadership Insight for increasing shareholder
value.

ACKNOWLEDGEMENTS
Chad Jardine, my close associate and friend, was responsible for much of the leg work and
physical writing of this article. His contribution allowed the principles and practices of my
consulting process to come to life in written form and bring my insights, personal experiences and
unique “voice” to a new audience via the printed page.

COPYRIGHT © 2009 KIRBY COCHRAN. ALL RIGHTS RESERVED

1. Ross, Stephen A., Randolph W. Westerfield, and Jeffrey Jaffe. 2005. Corporate Finance, Seventh
Edition. 15. New York: McGraw Hill/Irwin.
2. D&O Diary blog, The. http://dandodiary.blogspot.com/2007/01/executive-pay-shareholder-activism-and.
html.
3. Note: Price is directly affected by the equilibrium of supply and demand.
4. Note: Shareholder base is all the shareholders cumulatively.
5. Armstrong, Robert, and Jacob Ward. 2008. Money Minded: How to Psychoanalyze the Stock Market.
Popular Science, February.
6. Ibid.
7.  Note: Institutional investors are typically hedge fund, mutual funds, insurance companies, etc., and
they typically make large buys or sales (compared with individual investors) and are managed by a
professional manager.
8. Wikipedia. Float (finance). 2008. http://en.wikipedia.org/wiki/Float_%28finance%29 (accessed July 15,
2008). Note: The “float,” “free float,” or “public float” is usually defined as being all shares held by
investors other than insiders and shares that are not “restricted.”
9. Note: Patriating refers to the process of moving shares from risky overhang into the free float where
their price is determined by the market for the stock.
10. Wikipedia. Insider Trading. 2008. http://en.wikipedia.org/wiki/Insider_trading#General_Information
(accessed July 15, 2008). Note: Corporate Insiders are members of the Board of Directors, officers &
Senior Management, directors, key employees (control persons), or shareholders with over 10% of
the issued shares.
11. DTCC: The Depository Trust and Clearing Corporation. 2008. http://www.dtcc.com/
12. 2007. The US Model for Clearing and Settlement: An Overview of DTCC. 1. DTCC.
13. Goodman, Amy L., John F. Olson, and Theodore B. Olson, editors. 2001. A Practical Guide to SEC
Proxy and Compensation Rules, Third Edition. 12-6. New York: Aspen Publishers.
14. Ibid. Note: Participants are the member organizations of the various national stock exchanges, such as
Merrill Lynch, Goldman Sachs, etc.
15. BASF. Print Advertising. 2007. http://www.basf.com/corporate/printadvertising.htm
16. AFL-CIO. 2008 Executive Paywatch. 2008. http://www.aflcio.org/corporatewatch/paywatch/
17. Wikipedia. Activist Shareholder. 2008. http://en.wikipedia.org/wiki/Activist_shareholder
18. Ibid.
19. CRO: Corporate Responsibility Officer. “Say on Pay” Gets Its Day. 2006-2008. http://www.thecro.com/
node/462
20. AFL-CIO. 2008 What You Can Do. 2008. http://www.aflcio.org/corporatewatch/paywatch/what2do/
index.cfm
21. Ross, Stephen A., Randolph W. Westerfield, and Jeffrey Jaffe. 2005. Corporate Finance, Seventh
Edition. 14. New York: McGraw Hill/Irwin
22. Note: Compensation Committee information is readily available. Here are links to the
Compensation Committees for Microsoft (http://www.microsoft.com/about/companyinformation/
corporategovernance/committees/compensation.mspx), Dell (http://www.dell.com/content/topics/
global.aspx/corp/governance/en/compensation?c=us&l=en&s=corp) and Dow (http://www.dow.com/
corpgov/board/comp.htm).
23. Wasserman, Noam. 2008. The Founder’s Dilemma. Harvard Business Review February, 2008.

COPYRIGHT © 2009 KIRBY COCHRAN. ALL RIGHTS RESERVED