The Case For Accountability

Who benefits most when you make regular reports to outside advisers and creditors? You do
Advertisement

One of the joys of owning your own company is that, in a formal sense at least, you're not answerable to anybody. You can make decisions without waiting months for feedback from those higher up on the corporate ladder. You can take actions that feel right to you when they feel right to you. No one is badgering you if your numbers come in under your projections. It's a wonderful feeling -- especially for someone like me who had previously spent years as a general manager in Fortune 500 companies. There, the atmosphere of being held accountable is not only overpowering, it's often punitive as well.

Still, when I purchased Batter & Tire Warehouse Inc., now a $12-million company, five years ago, I had a nagging concern that maybe too little accountability could be a problem. I'd be able to rationalize poor results and discount their implications. I could easily fall into a pattern of denying things, with no fear of repercussions. I had certainly seen that happen in other privately held companies, and there was no reason to think I'd be immune to the practice myself.

So I decided to set up a few systems that would make me feel -- and act -- accountable to people outside the company even though they have no formal power over my decisions. Besides creating an outside board of directors, I prepare and send quarterly financial reports and an annual business plan to each member of the board, our banker, major suppliers with whom we have substantial credit lines, and selected outsiders. The payoffs have been tremendous. Not only have these systems kept me on my toes when I'd prefer to have my head in the sand, but the feedback they provide has been invaluable.

I suspect that part of my motivation for going on the record with this information was the need to "play to an audience," to make up for some of the loneliness that comes from being the head of your own company. And frankly, it's not just company problems that I broadcast. If I have accomplished something that I'm proud of, the systems provide me with the means to crow about it and enjoy some pats on the back.

My board members (see box, "A Tough Board," page 130) are people I know I cannot con or manipulate. It's true that they don't own stock and they can't dismiss me for poor performance, but they are people I respect. And they serve my purpose perfectly, which is to have a group of people with whom I can discuss a problem -- and then be too embarrassed to show up at the next meeting without having tackled it.

At a meeting last July, for example, I acknowledged that a key manager wasn't up to the performance level we were going to need as the company grew. Since he was able to handle the job at the moment, though -- and had helped us throughout the early, messy transition period -- I was agonizing over taking any action. The thought of facing the board at our next meeting without a resolution to the problem, however, was sufficient to force the issue, and made me face what I considered to be a very distasteful task.

I use the quarterly report in much the same way. The format is a summary of our financial results for the quarter, compared with both the prior year and with our business plan. In the report I discuss any deviation from our earlier expectations and review any major events, such as the demise of a major competitor.

Of course, once I had started sending out the report, I was on the spot to continue preparing it each quarter, including times when I would rather have hidden quietly and licked my wounds. But instead, I was forced to explain the results and tell how I intended to solve the problem.

During this past quarter, for example, I admitted that while our sales were well above last year and on target, our profits were running under plan. That forced me to think through the reasons why -- and what we were going to do to about our tight gross margins and high operating costs. Comfortable? Hell, no! But I feel it is a lot better to answer these questions at this point than to face our irate creditors a year from now because we hadn't coped with the issues in time.

The reports buy the company a great deal of credibility and also solicit some good feedback. The chief executive officer of one of our major suppliers, for example, always writes a comprehensive critique, which gives me a perspective on the business that is quite different from my own. One time, for instance, he spotted a comment I made about the difficulty we were having in creating a base of affiliated tire dealers. He gave me ideas and suggestions from his experience in other locations, and that information opened up entirely new ways for me to think about the problem.

We also develop and distribute an annual business plan as one more way to go on accountability. The plan includes a summary of the prior year's results, a business plan for the coming year, and a general discussion of the company. After a report is published, it's hard to ignore events that contradict situations described in it. The net effect is that I feel obligated to address these issues.

A classic example occurred last year, when I laid out a strategy for developing an in-house truck-tire service capability so we could attack a market previously unavailable to us. As the year progressed, we decided instead to accomplish the same purpose by affiliating with independent service companies -- a major departure from the plan. Knowing that I would have to report on this shift in strategy made me think hard and long about it before I changed direction.

It might strike you that the disclosure of all this information is risky -- I am discovering that my fellow business owners are very reluctant to share company data. But personally, I don't see where the risk lies. If a competitor obtains some of this information, so what? As far as I'm concerned, the only really confidential data we have is our customer list.

Some people think that disclosure of bad news to the bank or major creditors is a mistake, too, but that hasn't been my experience. The fact is, it builds tremendous credibility and a willingness to work together.

After my first full year of ownership, for example, we came up with a significant shortfall in the book-to-physical inventory. I wasn't at all comfortable reporting this information, particularly when the shortfall continued for the next few years as well. The news did not trigger panic among our lenders, however. Instead, they seemed satisfied that we were working to solve the problem, and, even more important, that the problem was not deeper and more insidious than reported. Let's face it, really bad news eventually will come out, and from a banker or other creditor's point of view, to have it come as a surprise is much worse than hearing it directly from you.

When all is said and done, I have found that deliberately relinquishing some of the comfort, privacy, and convenience that comes with being the sole owner of a private company is well worth it. It hasn't always been easy, but it has made me tackle issues I'd like to bury, and it has certainly paid off for the company.

Last updated: Jun 1, 1988




Register on Inc.com today to get full access to:
All articles  |  Magazine archives | Livestream events | Comments
EMAIL
PASSWORD
EMAIL
FIRST NAME
LAST NAME
EMAIL
PASSWORD

Or sign up using: