Open Book Management
for Family Businesses

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Would you like your employees to think like owners? Give them the information they need to perform to their fullest potential. That can include sharing how the company makes and loses money. In order for employees to fully identify with your business, they must understand the financial realities – and how their individual performance directly impacts profit and loss.

The concept of open book management – a practice of sharing key company financial information with employees – has steadily gained acceptance in privately-held companies over the last 10 years. Yet many family-owned businesses cringe when they think about opening the books to non-family employees. For all its merits, open-book management is not for everyone. If you're considering the concept of open book management, here are some issues to think about as you make your decision.

Do your employees understand the business you're in? If the answer is "no," think about how that impacts their ability to make good decisions. If employees don't understand the impact of their decisions, you can't expect them to make good ones. However, before you begin sharing financial information, help employees understand how the business works. What are the inherent business risks? What does it take to get your products or services to market? How do you determine pricing and margins? What is the cost structure of your company? Give them the business context so that financial information makes sense.

How do you reward employees? One of open book management's main benefits is that it enables employees to see how their individual roles influence sales and profits. To emphasize the importance of financial performance, companies that practice open book management typically award bonuses based on organizational, rather than individual, performance. Are your employee's eligible for a bonus based on overall business performance?

How much influence do employees have over their work? The more influence employees have, the more important it is for them to clearly understand the financial and business goals of the company. Even hourly workers can have a fair degree of control – especially over quality. At a furniture manufacturing plant, employees on the packaging line frequently boxed furniture before the lacquer was completely dry. The result, of course, was returns and ruined furniture that had to be refinished or scrapped. If they had understood the financial consequences to the company (and if those consequences had trickled down to employees), they may have made better decisions about asking the line to be slowed down to give the furniture time to dry.

What is the trust level in your company? Do your employees see you as trustworthy and interested in the well-being of everyone in the company, or do they think you want it all for yourself? When trust is high, it's easier to open the books. If the trust level is low, work on improving that first, before you begin sharing financial information.

Are family members in agreement about opening the books? If not, proceed with caution. What may start out as a great business idea could backfire if it creates conflict in the family. Family owner groups should work out their differences in family council or board meetings, before presenting open book management to their employees.

How much information should you share? Many family companies share only operating information (sales, hourly budgets, etc.) and keep salaries and the bottom line confidential. A good rule of thumb is to share enough to help employees understand the process, measure results against goals and improve their day-to-day decision making.

In addition to the benefits of improved decision-making, open book management can also be an employee retention tool. Employees who feel that they have some control over their destiny tend to stay longer, particularly if they see that they are being treated fairly.

Some family businesses fear that employees will be envious of the amount of money being made by the shareholders. In reality, employees may think shareholders make more than they actually do because they don't understand the costs and risks associated with owning a business. That's part of the education process.

Making the decision to open your books is complicated, but can be rewarding for family owned businesses. Take the time to find out more about Open Book Management – many companies report a perceptible increase in profits as a result of this cultural shift. There are a number of books written about the subject that may give you additional insight. Check them out – the issue deserves serious consideration.

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Tandem Partners' family business advisors work with CEOs and other business leaders to help them achieve a balanced approach to family and business. For more information on establishing an Open Book Management System in your organization, contact Margaret Wilson at 443-589-1152 or via email: margaret@tandem-partners.com .

Copyright 2008 Tandem Partners

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