Sharing financial data with employees has more pros than cons.
a decade ago, I attended a seminar by businessman and author Jack Stack that
remains vivid in memory as filled with uncommon common sense. Stack is known as
the father of “open-book management,” a methodology centered on sharing
financial and decision-making duties among all employees.
Open-book management is not mysterious. Most small contracting companies
practice a version of it without being aware of the label. They simply rely on
a handful of full-time staffers who know almost everything there is to know
about the company and its operations. Yet, even in tiny companies, the field
workers may not know all the details of financial performance, and probably
don’t care as long as their checks don’t bounce. Heck, in too many cases, even
the owners don’t know that much about the company’s financial performance. They
just cross their fingers and hope enough cash is flowing to pay all the bills
and provide them a decent draw.
As a company grows, jobs become more specialized and only a handful of people
become privy to the financial details. Usually that’s just the owner(s) and
whoever occupies the position of chief financial officer, whether it comes with
that title or not. More often than not, the people who do track company
finances tend to keep them a secret from other employees. There’s a certain
business logic to guarding this information. The more people who know about a
company’s finances, the more likely it is for that information to get out to
competitors, vendors and customers, which could have negative
However, the negatives mainly apply when information leaks out about a poorly
performing company. When done right, open-book management should do two things:
1. Boost operating performance;
2. Give employees a stake in the company, which makes them unlikely to blab about
sensitive matters to outsiders, except to tell everyone what a great place it
is to work.
In any case, the main reason most owners are reluctant to share financial info
has less to do with outsiders than keeping employees in the dark about one
overriding secret – how much the owners and top managers get paid. Ingrained in
our culture is the notion that it’s nobody else’s business how much you make.
Plus, the fear is that lower paid employees will resent seeing how much
managers and owners are making.
There are various ways to deal with this problem. Most common is simply to lump
all managerial salaries under a heading of “administrative salaries/income.”
The larger the company, the more difficult it is to guess who’s making what. If
there are only two or three administrative staffers, it’s harder to disguise
the salary levels, but if they are not excessive, this should not be an
insurmountable obstacle in a well-run open-book program. Keep in mind that
public companies have to disclose how much their top executives
These obstacles are mostly psychological and somewhat trivial when weighed
against the positive outcomes of open-book management. A large body of
anecdotal evidence suggests that companies have more to gain than lose when
they make employees truly feel like part of a family ownership. A successful
open-book system is not simply a matter of tossing the company’s profit-loss
statements to the wind. Here are some key elements:
Give employees training to understand the financial statements – and the need
to keep them confidential. Without training, a P&L statement or balance
sheet will appear as hieroglyphics to many employees. Pertinent information may
include revenue, direct and indirect costs, profit, cost of goods and cash
flow. Some companies may wish to include information about upcoming bids,
backlogged work and so on, but too much information can be confusing, so
Avoid paralysis by analysis. Don’t provide so much financial data or make it so
arcane only a CPA can make sense of it. Successful open-book companies tend to
zero in on one or two key financial parameters as a mark of success and
encourage employees to do what they can to boost them. The open-book technique
pioneered by Jack Stack relied on a “critical number” concept that defined the
break-even point of profitability.
Give employees responsibility for numbers and ratios that are under their
control, such as budgets and expenses. Tie their performance reviews in some
measure to how well they control the financial aspects of their
Give everyone a stake in the company’s financial performance. Aside from the
individual performance goals referred to above, create a profit-sharing or
bonus plan tied to overall company performance.
Engage employees to come up with cost-saving and revenue-generating ideas. The
old suggestion box is a cliché, but something comparable to it can be a good
way to involve everyone in driving the business toward best
Open-book management is no guarantee of success. In today’s economic meltdown,
it may well be that open-book companies are facing hard times, just as much as
traditional closed-book firms. However, employees who have access to the
numbers are much better positioned to understand and accept the need for
vigorous cost-cutting. Nobody is going to applaud layoffs, salary cuts and
other drastic measures, but there’s a better chance of morale holding up at an
open-book company where everyone can see the reason for these
One of the messages I remember from that long-ago session with Jack Stack is
his emphasis that open-book management takes time to develop and implement.
It’s not just a matter of handing out company financial statements. A lot of
thought needs to go into determining the kind of information that is most
relevant and structuring a program aimed at involving employees and getting
them to care about the company’s performance. In addition to orientation
sessions, most open-book companies schedule regular meetings with employees on
a monthly or at least quarterly basis to discuss performance parameters and
share ideas for improvement.
An issue that needs to be decided is whether to hold these sessions on company
time or after hours without extra pay. Do them on company time, and it’s a
drain on productivity. Ask employees to give up some of their free time to
discuss company business, then it’s likely you won’t get full attendance. One
solution is to split the difference, such as scheduling these meetings to start
a half-hour before normal quitting time, with pay, but realizing the session is
bound to last longer, and attendance is voluntary and without pay beyond
If you’re interested in exploring this further, go to amazon.com and do a
search on “open-book management.” You’ll find various titles listed, including
two of the seminal books on the subject: Jack Stack’s The Great Game of
Business, and Open Book Management: Coming Business Revolution by John Case.
These and other books on the subject are available in paperback for the price
of a lunch, and you may find them even more nourishing.
Smart Business: Managing by the Open Book
August 1, 2009