Photo: Jo Naylor via Flickr
Most small-business owners have an open-door policy. When you’ve only got a few employees, holing up alone in an executive suite isn’t an option. But being truly open about the state of the business is another matter, and when it comes to sensitive financial information — such as how much your company made (or lost) last year — owners prefer to keep mum.Why? A management approach known as “open book” has been gaining popularity by advocating the opposite approach. In its most simplistic form, it means literally opening the books: letting all employees see the company’s financial statements, so they know exactly where you stand.
But shedding the secrecy surrounding profits is just the first step. Having the knowledge is one thing; it’s what your employees do with that knowledge that really matters.
Any employee can be taught how to read a balance sheet or profit and loss statement, says Wayne Baker, a professor of management and organisations at the Ross School of Business at the University of Michigan. “If that’s all you do, you haven’t given people the tools to take action,” he says. “Financials don’t provide information in a form that’s actionable.”
Another problem with focusing solely on finances is that you’re looking at the past rather than the future. “Financial statements tell you the history of a company, but not where you’re going,” Baker says. “It’s like driving down the street only looking in the rearview mirror.”
The father of the open-book movement, Jack Stack, first put the theory into practice as CEO of Springfield Remanufacturing in the early 1980s. (Stack’s principles have since been spun off into a coaching and training company, The Great Game of Business). Studies have shown that companies using the approach achieve better performance and productivity compared with those that don’t.
As a comprehensive approach, open book management depends on three key principles, all of which have parallels to the sports world (hence, the “game” of business):
1. Leaders must know and teach the rules of their business. That means showing employees what makes the company profitable and explaining how and why resources are allocated. On a winning football team, everyone knows the plays, but in the business world, employees often get much less information than managers.
2. Leaders and workers must keep score. Assessing how you’re doing is not just about hitting a certain sales target. Workers need to see exactly how their day-to-day decisions affect the bottom line. There needs to be a system in place that constantly gives workers feedback, rather than a single annual review.
3. Everyone needs to share in the rewards. All the players on a winning football team get a Superbowl ring — not just the quarterback who threw a great pass. For an open-book approach to work, everyone must have a stake in the outcome.
It’s a big cultural shift for many companies, and one that can take years to integrate completely. To test the approach on a smaller scale, consider a “mini game”: a short-term incentive plan to solve a particular problem.
First, put together a team to work on the issue, then apply the three principles: What are the “rules” of this issue? What can be done or can’t be done to solve it? Next, agree on a method for measuring improvement. Finally, decide what the goal is and the timeframe, and set a reward for the group on completion.
As an example, Baker cites one of his recent business classes. The students decided they would get more out of the class if more people took part in discussions. As a group, they worked on ways to encourage participation and determined a scoring system. “They took ownership of their learning experience,” he says. When the students achieved their goal, they claimed their reward: a party at Baker’s house.
Running an open-book company is about financial transparency, but operational transparency is just as important. All employees know exactly how their everyday tasks affect the overall business. When it works, it can boosts employees’ loyalty and productivity.
But there’s also another often overlooked benefit for owners: it creates a community of problem solvers, all motivated to make your company better.
“You don’t have to carry the whole weight of the business on your shoulders,” Baker says. “The rewards are shared, but so is the stress.”
NOW WATCH: Ideas videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.