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Financial Disclosure

“Financial Disclosure”

How far should you go in sharing numbers with employees?

Open-book management (OBM), the practice of opening company books to employees, became popular in the ’80s after Jack Stack’s dramatic turnaround of Springfield Remanufacturing Corp.

In addition to sharing financial information, other key components of OBM include business-literacy training and establishing key measures to track performance. The idea is that financially literate employees can reduce costs and boost the bottom line.

Although OBM has been growing in popularity, few companies practice it as Stack does. We asked entrepreneurs from different industries to share their thoughts and approaches to OBM.

An appetite for ownership

Kasey Anton practices an informal brand of OBM. Co-founder of Bomboa, a Boston restaurant with 27 employees and $1.8 million in revenues, Anton doesn’t hold formal financial meetings; however, she does share financial information periodically, such as gross sales and expenses.

Prior to launching Bomboa in 1999, Anton worked for a large restaurant chain where employees were told as little as possible. "That was something I never understood," says Anton. "When you make employees understand the reason behind something, it creates a feeling of ownership among them. They see the restaurant as their own and will take better care of it."

For example, Anton had a bartender with a habit of overpouring. Anton sat down with her one day and explained how much profit she needed to make on liquor sales. Then by taking an empty vodka bottle, filling it with water and pouring several drinks, Anton demonstrated how easily a few ounces here and there can put a restaurant in the red. "That really opened her eyes," says Anton. "Now I hear her explaining to other employees how important it is to be accurate."

Being open about financials also promotes teamwork, Anton says: "Employees have more of a common bond; they act in concert because they understand what’s going on. They’re all on the same page." What’s more, Anton attributes her low turnover (almost zero in the past two years, which is phenomenal for a restaurant) to keeping employees informed.

Granted, there are a couple of drawbacks: "When you share financial info, people tend to ask more questions about other things, which take time to answer," says Anton. "And the mere fact that everyone knows what’s going on does create a little more stress for me."

But when employees feel like owners, they go above and beyond job descriptions, she adds: "I’ve seen waiters buy bottles of champagne for customers out of their own pocket. It’s an amazing feeling."

A trusting culture

"When I was kid, I despised having someone say ‘just because’ when I asked a question," says Frank Riordan, founder of DMC Inc., a $1.5 million Chicago-based engineering and software-development consultancy with 18 employees. "So my philosophy since starting the company has been to share just about everything with employees. I’m hiring people who are as smart or smarter than I am, and I don’t want to keep them in the dark. If you try to hide things, it creates an environment where employees think the worst. They make assumptions, which can often be the wrong ones."

At DMC, employees have access to all accounting information in the company’s shared database, except for individual payroll data (aggregate salary data is available). Riordan reviews the company’s P&L statement and balance sheet with them each quarter. In addition, employees review the profitability of each project when completed.

"When people understand how their work impacts the bottom line, they’re better able to focus their efforts," says Riordan. "For example, if they don’t understand budgetary constraints, they could design and develop projects to death." OBM also perpetuates a more trusting environment, which is an important cornerstone of DMC’s culture, adds Riordan.

There’s no silver bullet to running a company, Riordan admits, but believes his approach to OBM works well: DMC’s growth rate has consistently been in the 25%-30% range, and turnover has been negligible — in five years, only four employees have left. The only change Riordan is considering is to summarize information more. "We’ve had a few complaints about the minutia in the quarterly meetings," he explains.

Context is crucial

When Robert C. Rhodes launched Systems Evolution Inc. in 1993, he was extremely open with financial data. But over the years, he has become more careful about disclosure. "We’ve moved from sharing everything to sharing pertinent information," says Rhodes, CEO of the Stafford, Texas-based technology consultancy.

Today Rhodes boils down the 40 items on his P&L statement to a few key indicators — revenue, expenses (equipment, miscellaneous, office, payroll, travel, taxes) and net profit/loss — that are shared with employees through an internal newsletter. "If you give out too much information, it can be misunderstood, resulting in no benefits and even some fallout," says Rhodes.

Too much of a good thing

This shift in thinking resulted from a series of events, explains Rhodes, but he recalls a distinctive turning point: One day an employee was invited to join a management meeting about hiring a sales staff.

"We only needed the employee’s input on one thing — what our clients’ viewpoint might be — but we let him listen to the entire discussion, including whether we could afford a sales force and how we would compensate them," says Rhodes. "What the employee took away was, ‘Wow, they’re going to hire someone and pay them $300,000.’ Although that wasn’t the salary we intended to pay, we were trying not to limit ourselves." The incident sparked jealousy on the employee’s part, and he approached Rhodes every quarter, asking for a raise.

Rhodes’ revamped version of OBM is working better now. "Don’t be afraid to share information, but make a mental list of the things you’ll talk about — and things you’d rather not discuss," he explains. "That doesn’t mean you’ll refuse to share items on your second list, but be sure to measure the consequences before you do. Depending on where employees are and the company is, the amount of pertinent information you want to share will change."

A double-edged sword

Barrett Carlson also has tempered his approach to OBM.

Currently the founder of Nine Iron, a private-equity firm in Chicago, Carlson’s first entrepreneurial experience was Waterstone Consulting, a technology-services firm that he and three partners launched in 1994, then sold five years later after growing the company from four to 85 employees.

"At Waterstone, we took a very open-book policy from the beginning," says Carlson. "It was one way we competed in the hot employee marketplace — saying that you can do more things with your career here, that we’re going to educate you about business. And when you start out with only four employees, everything is pretty open anyway."

Growing pains

But down the road, Carlson discovered some drawbacks to OBM. "Depending on the level of education employees have, financial literacy carries a time cost," he explains. "Most of our people were in their early or mid-20s, so we were trying to educate them on concepts that they didn’t have a frame of reference for. It’s not just about explaining what a line item is on your P&L — you have to put things into context, whi
ch leads to other complex topics, such as how you set strategy and budgets."

An open-book policy also can create an entitlement mentality, causing employees to believe they have authority over financial decisions when they don’t, adds Carlson. For example, when Waterstone spun off a new company with different ownership, employees wanted to know what piece of the new organization belonged to them and how it affected their bonuses — questions that prevented the venture from taking off more quickly.

Although Carlson is still bullish on OBM, he now takes a more modified approach, something he will deploy in Nine Iron’s portfolio of companies. Two suggestions:

  • Use a filter. Before you disclose financial information to employees, think about the impact it will have on them personally.
  • Be matter of fact. Don’t ask employees, "Hey guys, what do you think of spending $50,000 on a retreat?" Tell them, "This year we’re going to spend $50,000 on a retreat." An owner can see the value of investing in brainstorming and camaraderie, but for a 25-year-old employee, $50,000 is a lot of money that could have gone toward a bonus pool.

Writer: TJ Becker.