The WSJ on Open-Book Management
The Benefits of Opening the Books is a video that shares how one company has implemented open-book management:
At Dorian Drake International, executives don't believe in keeping financial details behind closed doors. CEO Ed Dorian talks with Kelsey Hubbard about how his open-book management style gives employees a stake in the company's performance.
In addition to the Wall Street Journal video, An Open Book - When companies share their financial data with employees, the results can be dramatic is an article that discusses some of the results of companies that utilize Open-Book Management. It cites how a group of employees volunteered to take a layoff to help the company after they learned the current financial situation:
After the meeting, Mr. Darling made a decision. If there was to be a layoff, he would volunteer. Unlike some co-workers, he didn't have a mortgage or a family to support. At the meeting in October, he and about six other installers said they would take a layoff rather than see the company struggle to meet payroll and find work for idle crews.
The company has shared financial information and taught the key drivers to business success since 1994:
Pool Covers' meetings weren't some emergency measure that management engineered to soften the blow of layoffs. They are business as usual for the company's open-book management, a practice that involves sharing financial information with employees -- as well as teaching them about the measures of business success while offering incentives to improve performance. Pool Covers has been using the practice since 1994.
Because of open-book management, employees "understand business. They understand what it takes," says Bill Pickens, the company's chief executive. "They've got all the information. It's not their fault and it's not our fault. They know they're not getting laid off because they made somebody mad. They got laid off so the company can survive." He expects to rehire all the employees who were laid off in the fall. And the current downturn aside, Mr. Pickens credits the approach with helping the assessed value of Pool Covers, an employee-owned company, grow an average of 23.8% a year from 1997 through 2007.
Proponents of open-book management say, if done well, the practice can indeed make companies more profitable and easier to manage. And it typically is easier to implement at smaller companies, where cultural change and releasing nonpublic information is often less problematic.
The article discusses how companies determine what and how much information to share:
It's often best to focus on just a few key measures, such as sales and shipments, or, taking it further, assign each employee a target metric and tie it to overall company goals. Many open-book companies don't disclose individuals' salaries. Instead, they group compensation together.
One company has daily 15-minute team meetings, a weekly one-hour companywide meeting, and a quarterly half-day meeting, and offers a semi-annual financial information refresher course:
Every day, each of the firm's 50 employees attends a 15-minute team meeting, where they discuss plans for the day and the previous day's problems and successes. They also talk about issues that they're stuck on and how other departments can help…Each week, employees also attend a one-hour companywide meeting to discuss the week's financial results, coming goals and ways to cut costs and increase revenue. They also get an update on where Kindermusik is in terms of its goals for the month and budget for the year. Each quarter, all employees attend a half-day meeting to discuss the company's progress and review highlights from various departments' work. About twice a year, the company offers a short refresher on how to read a balance sheet and income statement, among other things… Kindermusik has tried to set its performance into the broader business context by comparing itself with the results of related companies or the overall U.S. economy. "Over time, we've ended up teaching microeconomics, a little bit of accounting and a little bit of macroeconomics," Mr. Dougherty says..
Another company was quickly able to save significant dollars right away based on learning about discounts that some divisions were getting that others were not:
When Dorian Drake International Inc. started letting employees in on the company's financials in 2002, some workers realized a few departments were getting discounts from vendors that they weren't -- including 1% to 2% off when bills were paid early or on time. So they decided to do something about it.
By working to get the discounts for all departments, among other things, employees helped the company go from a $500,000 loss on sales of $32 million to $200,000 in profit in its first year of open-book management -- with no increase in sales.
Open-book management made layoffs easier to communicate to employees of one company, as they understood they were laid off for business reasons:
When Kindermusik downsized amid a rough patch two years ago, the people affected "knew it was nothing personal," says Kimberly Diachenko, the company's human-resources administrator. "We struggled for the longest time, and they realized that it was the only way for the company to survive."
The article also discusses some challenges of implementing open-book management, including getting ownership over the hurdle of sharing financial information, the time and complexity of consistently communicating the financial information in a format that can be understood by everyone, and how financial information in downtimes can create anxiety among workers. Open Book Management in the Wall Street Journal addresses some of these concerns and shares some additional open-book management considerations.
The first is about ways people perceive risk. One common argument against open book management is that bad news saps morale and if you start sharing information when times are good, pulling back in bad times compounds the problem. This argument is wrong because it does not understand the distinction between "good uncertainty" and "bad uncertainty." – While "good uncertainty" is scary, it identifies the problem and provides the employees an opportunity to solve it.
The second point that is under-emphasized in the article is the natural connection between employee ownership and open book management. Two of the companies, Pool Covers and Kindermusik, are ESOP companies, and that makes sense. Open book management works best when employees share the benefits of success both in the short term (a monthly or annual bonus) and in the long term (by seeing an increase in the stock value).
We have also updated our Open-Book Management information page.