September 14, 2004
Editor's Note: This column was prepared by the staff of Winning Workplaces, a not-for-profit organization that helps small and midsized businesses create better work environments.
Some companies' financial information is not exclusively in the realm of accountants and top management. Everyone from administrative assistants to production workers know exactly where their organization stands in relation to its goals and what they need to do to meet these goals.
These companies practice open-book management. Companies that practice open-book management teach employees how to read a balance sheet and share critical financial information. In short, they get their front-line people to think like owners.
In a 2002 Chicago Tribune article, John Case, author of two books on open-book management, estimated that about 1,000 companies currently practice this business model. While this number represents a sizable demographic, it's surprising that more companies have not adopted the practice, especially considering the success enjoyed by open-book companies.
A 1998 study by the National Center for Employee Ownership (NCEO) and Inc. magazine found that open-book companies grew 1.66 percent faster than their competitors, and 2.2 percent faster if combined with an employee stock ownership plan. What's more, according to Inc., the majority of open-book CEOs report this management style also has a bigger impact on profits than on sales. So their companies are not only bringing in more revenue, they're doing it more efficiently, at less cost.
This isn't surprising considering the results of an Ernst & Young survey that found 59 percent of workers said they would be more motivated if they knew how their jobs impacted the bottom line. Seventy-seven percent of all managers agreed their people would perform better if they were made privy to their organizations' critical numbers.
So why hasn't open-book management taken hold at more companies? The most often cited objections are related to staff and money. Many worry that making the books accessible will result in employees seeking a bigger piece of the pie. Others are afraid their employees won't understand the information or that sensitive information will fall into the wrong hands. However, a comprehensive study of seven open-book companies by the Financial Executives Research Foundation should put these fears to rest. The study found that:
•Little information leaks to competitors.
•By detailing the numbers most valid to incentive compensation, open-book companies are able to keep remuneration expectations synchronized with productivity.
•Both formal and informal training is an effective method of developing the financial acumen necessary to make open-book management work.
Perhaps the biggest barrier is cultural. Open-book management requires a shift from the traditional top-down business model firmly ingrained in most organizations. It means blurring the lines between executives and employees, creating an environment of openness and accountability. If there is one important lesson that can be learned from successful open-book companies, it's that corporate culture is an integral part of an organization's success.
Consider one of the most famous and successful examples of open-book management: Jack Stack's turnaround of Springfield ReManufacturing Corp. (SRC), a manufacturer of components for automobiles, agricultural equipment, and construction vehicles.
SRC was an ailing division of International Harvester when Stack assumed control as part of an employee-led buyout. The biggest change under his direction was cultural. The company created and embraced an environment of open communication, learning and development, and trust. SRC taught its employees how to read a balance sheet and began sharing key financial information. Employees learned how key performance measurements such as defect rates and order backlogs impacted the bottom line. The result? Since 1983 the company's sales have grown from $16 million to more than $160 million!
Contrast SRC with another employee stock ownership plan, United Airlines', and the power of culture becomes even more evident. United, unlike SRC, never succeeded in getting its employees to think like owners. This is because United's employee stock ownership plan was an effort primarily to coax wage concessions from employees instead of a strategic effort to reinvent the company's culture. United's corporate culture, one marked by an antagonistic relationship between management and labor, finally proved to be its undoing.
With distrust of business so prevalent among shareholders and employees, open-book management is a timely business tool. Trust is one of the cornerstones of a winning workplace. Companies cannot expect employees to expend discretionary effort in their duties if they do not believe their employers will do right by them.
Trust, however, is a two-way street. It is not enough to gain the trust of your work force. You also must trust them to do their work and make sound decisions, especially in a down economy when their expertise can mean the difference between success and failure.