Opening the books, growing the business

Companies that share information with employees find that transparency makes everyone more visionary.

On the surface, Tasty Catering is similar to many of its competitors in the Chicago area: It offers a wide variety of salads, sandwiches, and snacks for weddings and corporate events.

But what you can’t tell while munching on its Waldorf salad or herb-crusted pork loin is something that makes the company radically different: It’s an open book, financially speaking.

In 2011, the company opened its books to employees, choosing to share detailed financial information previously reserved for owners. The thinking: Treat employees like owners, and those employees will act like owners. They will think about ways to save money and how to spend it as if it were their own.

It’s one of the principles of open-book management, a concept that has been slowly embraced by organisations around the world. And in the years since introducing it to its employees, Tasty has saved tens of thousands of dollars.

“They’re thinking of better ways to serve our customers, and they’re constantly thinking about things from an owner perspective,” co-owner Kevin Walter said.

Take the example of one Tasty Catering delivery driver. The driver was assigned to monitor one line of the company’s profit-and-loss statement: fuel costs. He began charting the price of petrol over the course of several months in early 2012 and found that Tuesdays and Wednesdays were the days it was cheapest. The company began fuelling its fleet of 18 delivery vehicles midweek, saving more than $20,000 per year.

The roots of open-book management

Open-book management is a concept credited in part to Jack Stack, a business owner in the mid-western US state of Missouri. Stack was a plant manager at Springfield Remanufacturing Co. (SRC) beginning in 1979. He was sent there by parent company International Harvester because the unit was losing money. Stack led a turnaround by sharing the financial information with employees and getting them to play a game with those numbers, a process detailed in his book The Great Game of Business.

He and 12 other employees bought SRC from International Harvester in 1983. Today, Stack is the CEO of SRC Holdings Corp., which is owned by its 1,400 workers. The company operates 31 businesses using the principles of open-book management.

The game is based on three principles: business transparency and education, high-involvement planning, and “the critical number”, a financial or operational metric that becomes the focus of the organisation’s game. If employees play the game well, they have a better chance of being rewarded financially and recognised for their success. Interest in sharing information, and ownership, with employees is growing.

Revenue for The Great Game of Business, a division of SRC Holdings that offers corporate training and education on open-book practices, has more than doubled in the past three years. The number of US workers participating in employee stock ownership plans (ESOPs) grew from 6.3 million in 1996 to 13.5 million in 2014, according to the National Center for Employee Ownership (NCEO).

The number of workers at majority-employee-owned companies in Europe has grown from 373,000 in 2006 to 445,500 in 2015, according to the European Federation of Employee Share Ownership.

And a report by Robert Half Management Resources in 2012, the most recent data available, showed that 7% of US private companies shared financial information with all employees. Tim Hird, executive director of Robert Half Management Resources, said open-book practices, even among companies that aren’t employee-owned, have continued to grow, but the evidence is anecdotal.

Naturally, many companies that open the books to employees are employee-owned. But companies that aren’t employee-owned can learn from those that are. Employee-owned companies tend to perform better than those that aren’t employee-owned, in part because of the transparency.

ESOP companies have 25% higher job growth than comparable, non-ESOP companies over a ten-year period, according to the NCEO, and ESOP companies also experienced increases in sales, productivity, and return on assets. Research detailed in Harvard Business Review in 1987 showed that 73% of companies that instituted ESOPs significantly improved their performance.

Hird said workers are seeking more openness from companies, and those companies that oblige can have a more engaged workforce and better employee retention. But it’s more than financial information that employees are seeking. They want insight into the strategic direction of the organisation. “Companies that have the best retention and morale, they’re talking about more than the numbers,” Hird said.

Data support what Hird is saying. A Harvard Business Review Analytics study showed that executives view effective communication as one of the most critical factors to success. And US and UK workers seem put off by managers who don’t share information, according to a survey by Geckoboard, a UK provider of data communication tools such as dashboards. In a 2015 survey, 76% of workers said they did not trust bosses who failed to share company data. Eighty-one per cent of workers want more information related to the business, and that includes bad news: 94% said they would rather hear negative results than hear nothing.

The power of employee input

When New Belgium Brewing Co.’s CEO and majority owner announced she had sold the company, employees summoned to a meeting at headquarters in Fort Collins, Colorado, were told to open envelopes placed under their chairs. The envelopes were to reveal the identity of the new owner. Inside the envelopes, they found mirrors.

New Belgium’s employees — referred to as co-workers — were thinking like owners before co-founder Kim Jordan made that announcement in January 2013. Two such employees, Marc Finer and Don Rich, proposed in 2008 that New Belgium eliminate cardboard dividers in its 12-packs of bottled beer. The dividers were to keep bottles upright — and keep them from breaking as trucks shipped beer to most US states.

The employees saw other beer companies eliminate the dividers and thought New Belgium should try it. The company had a committee for considering such ideas, and the committee approved a trial of the suggestion. By shrinking the outer cardboard package, the bottles fit tighter and didn’t need dividers. The move saved New Belgium $280,000 and eliminated the use of 150 tons of cardboard. It also increased the co-workers’ share of profits that year.

“Everybody was high-fiving them in the halls,” said Katie Wallace, New Belgium’s assistant director of sustainability.

New Belgium has since eliminated the dividers on packs of 24 beers as well as packs of 22-ounce bottles. Wallace said the annual savings are 360 tons of cardboard and about $1 million. That number doesn’t include savings from shipping more beer per truck because the cardboard cartons are smaller. And the company eliminated the No. 1 reason for downtime on the bottling line: The cardboard flaps sometimes got stuck.

“We were able to use our equipment to a greater efficiency level,” Wallace said.

New Belgium CFO Danielle McLarnon, CPA, CGMASharing ideas is part of the culture at New Belgium, a company that also shares financial information with the employee owners at monthly staff meetings. The sharing starts with basic education on financial terms and is part of the orientation process for new hires, according to CFO Danielle McLarnon, CPA, CGMA (at left). “We don’t want them to have to create a P&L, but we do want them to understand what a P&L is,” she said.

That desire to share and educate ties into New Belgium’s core values, one of which reads: “Trusting each other and committing to authentic relationships and communications.”

“If we want our co-workers to understand how they personally can impact the purpose of the company and the financial results of the company, they need to understand this process,” McLarnon said. “We need to be authentic. We need to be real. And we need to be timely with our information.”

A successful partnership

Employees have a similar mindset at the John Lewis Partnership, UK owner of John Lewis department stores and Waitrose supermarkets. In 1929, John Spedan Lewis, the son of the company’s founder, signed a trust settlement, which led to the co-ownership of the company by its employees, reasoning that employee ownership was a better way to do business. Today JLP employs more than 90,000 “partners”, its word for the workers who receive a percentage of company profits in the form of an annual bonus.

“When you own something, you take more responsibility, you take more care, you are more loyal and committed to helping deliver success,” said Louisa Hosegood, FCMA, CGMA, the head of assurance, operations at John Lewis.

Staff at John Lewis are afforded a direct line to management through the company’s constitution, written by John Spedan Lewis. In addition to traditional management, the company has a parallel democratic structure, which includes a Partnership Council comprising, amongst other members, 65 partners who are elected to represent colleagues, reflect their opinions, and influence the policies of the business and how profit is spent. “It’s basically to hold our management to account,” Hosegood said.

The company’s profit-sharing encourages employees to feel responsible for how company money is spent and come up with ideas to maximise the bonus, which is paid as a percentage of each partner’s salary. The 2016 bonus was 10%, the equivalent of five weeks’ pay.

Hosegood said that notes are affixed above some light switches. The hand-written message: “You’re burning our bonus. Switch off the light.”

John Lewis shares sales information by shop and type of product, in addition to other metrics, with partners each week. It communicates business strategy and plans with partners, and annual results are brought to life through dynamic infographics. John Lewis also has an internal, weekly magazine that includes a Letters section where employees often comment on challenging topics such as executive pay or strategic decisions. “Relevant managers have to respond to each one, so it makes everyone accountable for their decisions and actions,” Hosegood said.

‘Peer-to-peer pressure’

At Tasty Catering, delivery drivers and cooks are seen as shareholders and entrepreneurs. Good ideas can come from anyone, which is one reason the company shuts its doors and turns off its phones each day at 12:30 p.m. for an all-staff lunch. On Wednesdays, profit-and-loss information is shared on a large whiteboard. Green markers are used for positive numbers, red for negative. The numbers affect each employee’s bonus amount.

“It’s peer-to-peer pressure to do the right thing,” Walter, the co-owner, said.

Hugo Rios, an employee in charge of van maintenance, found annual vehicle repair costs to be $56,000. He estimated that by scheduling regular checkups for the vehicles, the cost could be cut to $37,000, leaving some room for the costs to address unforeseen breakdowns. Even though that goal wasn’t reached, the company cut repair costs to $42,000.

“We saved $14,000 on one line of our P&L just because we were more proactive with maintenance,” Walter said.

How to be more open

Transparency and open-book management can yield big savings for companies. Here are a few ways organisations can be more open.

Lisa Cvecko, CPA, CGMAStart with education. Outside the accounting department, there is often little understanding of finance basics. So, employees will be more conversant about finance if they have more knowledge. Lisa Cvecko, CPA, CGMA (at left), the vice president of finance at Evergent Group, a Northern California staffing firm, required that her company’s leadership team take an in-house course on financial literacy before members of that team participated in meetings about finances. “Financials are only as good as your understanding of them,” Cvecko said. “Gross margin, operating expenses, cost of sales — people don’t understand those terms, so I wanted to give them some background.”

Danielle McLarnon, CPA, CGMA, the CFO at New Belgium Brewing Co., said her company offers two accounting sessions at its annual retreat: basic and beyond basic. They are part of the company’s overall business acumen sessions that can help the staff understand the business better — and understand their role in making it more profitable.

Don’t be too technical. Cvecko and McLarnon recommended offering information in an easy-to-understand format. Charts and graphs are better teaching tools than spreadsheets and income statements, at least for those new to finance and business concepts.

Don’t be afraid to share bad news. Cvecko said that tough times are the best time to share information. “That’s the time that you can really engage your team to help make a difference, to help you find the solutions and the answers that the business needs, as opposed to upper management, which doesn’t touch the day-to-day stuff, trying to make the difference themselves.”

Louisa Hosegood, FCMA, CGMALouisa Hosegood, FCMA, CGMA (at left), the head of assurance, operations at John Lewis Partnership, said not to hide bad news; employees will learn about it soon enough anyway. At John Lewis, when profit seems on pace to fall below projections, the company begins the conversation with employees well before year end, so that they are not surprised on the day annual results are announced.

Tell the story behind the numbers. Hosegood recommended providing context with all data shown to employees. For instance, if a sales team has sold more goods than the previous year, the sales team might assume a higher commission or bonus is coming its way. But if the cost of those goods has risen, and margins are lower, the bonus might be lower.

“You can give people information, but if they don’t know what to do with it or why it’s there, they’ll struggle with it, or they’ll ignore it, or they’ll take it the wrong way,” Hosegood said.

When Cvecko’s company shared its information, employees came up with an idea to reduce costs. Changing standard contract terms from 30 days to ten days, Cvecko estimates, has saved the company $60,000 annually in interest since 2014.

Set ground rules. Not every decision or policy in a company should be up for debate, even among companies that consider themselves transparent. Hosegood recommended that management be clear with employees about what can be debated and what can’t. There is a difference between being given information and being able to make a decision about the information.