The Management Philosophy That Lets Every Employee Look at the Books

Why bosses do the things they do.
May 19 2014 12:28 PM

We Spent What on Paper Clips?

Open-book management lets every employee look at the company’s accounts.

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Some owners or managers might be reluctant to share numbers with employees. One concern is that workers might leak information to competitors. But if employees have been sufficiently motivated by equity stakes or bonuses that are entwined with company performance, the last thing they'll want to do is harm the company by aiding a rival. An employee of Square, the privately held San Francisco–based payments company, tells me that over the multiple years that Square has been sharing financial numbers with its employees, there’s never been a single leak—despite operating within the incestuous, cutthroat realm that is the Bay Area technology sector.

Another worry is that sharing numbers might fuel employee resentment over how budgets are distributed. But according to Case, most low-level workers vastly overestimate how much of their company's revenue is profit. When they learn how thin the margins truly are, they develop far more respect for attempts to limit needless expenditures. In situations where layoffs become necessary, opening the books can help workers understand why the company was forced to cut jobs. Case credits open-book management for frequently defusing adversarial relationships between labor unions and management. (Sharing information about individual salaries is still very rare, for obvious reasons. But consider: In the wake of the firing of Jill Abramson, executive editor of the New York Times, there were reports that Abramson had battled ownership over getting fair pay in comparison to her predecessor in the job. Salary transparency could put an end to these kinds of conflicts. Still, most open-book firms choose to reveal payroll outlays in the aggregate.)

Perhaps the biggest stumbling block isn't merely presenting the numbers, but presenting them in a way that's understandable to all employees. “I still learn new concepts every time I look at our bookkeeping,” says my friend with the industrial plumbing parts company, “and as the president and owner, I expect to have a pretty good handle on it. For an hourly machinist, it might be a challenge. And they might be tempted to say, ‘Why can't I just do my job?’ ”

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But just “doing your job” as a mercenary hired hand, with no comprehension or motivation when it comes to how you contribute to the company's bottom line, is exactly what open-book management seeks to eliminate. It thus becomes vital to teach employees some basic accounting and corporate finance concepts, with regular tutorials, so the numbers getting shared will have real weight and meaning. Open-book companies often end up developing their own educational modules as they figure out ways to make financial statements clear to all sorts of different workers.

Along with transparency and explication, the third leg of the open-book stool is making sure everyone has skin in the game. Knowing the numbers and what they represent only gets you so far. Workers must also be incentivized to move those numbers.

Case tells a story about a hotel manager who was mentored by Jack Stack. The hotel was averaging a feeble 67 percent occupancy rate, which meant it was losing money. Stack first advised the manager to share the occupancy number with all employees—maids, bellhops, everyone—every day. Then he had him offer a bonus to every worker if the rate stayed above his goal of 72 percent. The transformation was evident: People weren't just clocking their hours, they were now working together to improve occupancy so that they'd all make more money. And the daily number felt like a scoreboard. “At the end of eighteen months,” Stack told Case, “they were up to 85 percent. The funny thing was, they now had people running out, carrying bags, greeting customers, being personable. For all that time before, what kept the manager from thinking that all the employees could understand that critical number—and could respond to it?”

Open-book has always been a quirky management choice, rarely adopted by big, mainstream companies. As recently as October, a post in the New York Times’ You’re the Boss blog wondered why more corporations don’t open their books. But the strategy continues to find its adherents. An estimated 4,000 U.S. firms are believers. And the 2014 Fortune list of the 100 best companies to work for found open-book practitioner Hilcorp, an oil and gas exploration company, sitting at No. 15—on the list for the second year in a row.

“People say, ‘It wouldn't work for my business,’ ” says my friend. “But I've talked to people using it successfully at accounting firms, law firms, marketing agencies, and local governments, along with a lot of industrial companies like mine. To me, it's the most logical management system there is.”

Seth Stevenson is a frequent contributor to Slate. He is the author of Grounded: A Down to Earth Journey Around the World.

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