“Take care of the business you know and the stock price will take care of itself.”

Every time I hear this line, I cringe. This perspective is so damaging to a company with a shareholder base of any size, it truly is the kiss of death. What most senior managers don’t understand is that the moment they accept equity funding, they now run two businesses: one designed to create value for customers and another whose sole aim is to build value for shareholders. (You can read more about best practices for increasing shareholder value in my article: What About Those Pesky Shareholders?) 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.

I have seen many many companies led by individuals who professed the attitude that somehow “the stock price will take care of itself.” Of the many examples 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 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 was 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 end of that story has been all over the news during recent months. Let’s hope Bob develops a shareholder value perspective under the thumb of Fiat and the U.S. governemnt.

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.

Senior management teams are obligated to understand that 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 demand of your stock, and ultimately the value of your company. Do they buy? Do they sell? What are their intentions? When you truly look at managing shareholder value as the second side of your business, you are not satisfied with paltry Investor Relations efforts. When I ask companies about their relationships with shareholders, I sometimes hear back, “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 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?

If you would like to read more about my best practice methodologies for understanding and communicating with shareholders as well as developing your stock price, I recommend you read What About Those Pesky Shareholders, which is my free gift to you. If you like what you see, please feel free to contact me and let’s see if our Pillars of Inflection consulting model, which advises growth companies on the implementation of best practice methodologies for increasing shareholder value, is right for you.