Bad News

The advantages of sharing bad news with employees during tough times.

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When your business experiences tough times, how much should youtell your employees, and when should you tell it?

In 1985 Jim Ebright's company fell off a cliff when his biggest customer turned into his biggest competitor and several million dollars of venture money he'd been counting on for a crucial project didn't come through. Ebright was coming off a high, as Software Results Corp., based in Columbus, Ohio, had been on the Inc. 500 in 1983 and 1984. Sales peaked at $4.2 million. Over the next four years revenues would shrink to $500,000 and the payroll would dwindle from 65 to 10. At one low moment Ebright found himself so desperate he resorted to reading U.S. military manuals on combat survival.

Software Results went through three waves of layoffs. "The first set, you know pretty much who's going to go. That was easy," says Ebright.

The second and third set were excruciating. They also took an odd turn. After Ebright called the affected workers in and gave them the bad news, he says, "I'd find some of them consoling me. They would say, 'I understand.' It was a strange feeling to have them cheering me up."

Ebright figures he got that kind of response because his employees knew what the score was. He had decided early on to let his workers in on what was happening at the company. He aimed to avert any nasty surprises and in the meantime husband what credibility he had left. He figures that when hard times hit, his workers had all the information he had. Like it or not, they at least knew where he was coming from.

Recessions are to be dreaded most for their cumulative effect. They trigger chain reactions of ugly economic reversals, ultimately causing emotional bombs to go off inside companies that often are ill prepared to deal with the shock that follows. Orders slow down; a customer goes bankrupt; a payment is missed. All those events build and resound in the form of bad news. Bad news inside a small company can swiftly assume a potency and proportion beyond its reality.

To the chief executive who has built a company and seen it fly high when times were good, the primary instinct is to disbelieve what is happening. The next impulse is to protect the company at any price. That's what Briggs Doherty did last September, when his Providence, R.I., clothing store was forced to reorganize under Chapter 11. "We saw it coming, but I didn't really think it would come," says Doherty. "Until you get into the middle of certain things, it's not helpful to publicize them. This was between me and the chief financial officer."

Jim Ebright acknowledges the impulse to keep employees in the dark. "There's an obvious downside. Even if you think this is a temporary problem, your best people may leave," he says. But Ebright also believes keeping employees in the dark is shortsighted. Companies, after all, are meant to endure in bad times and good. Otherwise, why bother starting one? Thus, sharing the bad news yields dividends more prospective than immediate, in the form of employee trust and sacrifice and a heightened awareness of future trouble.

Obviously, no two situations are alike. Variables such as the size and makeup of a company's work force, the size of the community it's in, and the extent of the bad news affect what a manager will ultimately disclose. But Ebright, like many small-company chief executives interviewed for this article, believes the risks inherent in full disclosure are worthwhile. "In the long run it's absolutely vital there be a degree of credibility," he says. "Once you start telling white lies no one will believe you anymore."

To invoke a cliché that is as true as it is tired: Information is power. These days buyers religiously consult Consumer Reports before they venture out to purchase something as pedestrian as a toaster. Increasingly specialized magazines and newsletters continue to proliferate, speaking to the idea that readers are continually in search of deeper knowledge on narrower subjects.

The notion of the worker as a consumer and repository of information carries over to the modern workplace. It is seen as key to better job performance, not to mention the enhanced prosperity of the company itself. "The only difference between the guy on the shop floor and the guy in the front office is the amount of information they are privy to," says Pat Thompson, president of Trans-Matic Manufacturing Co., in Holland, Mich. "If he has the same amount of information I do, he will make a decision the same way I will."

Thompson is a great believer in all workers having what he calls "fiscal literacy," the comprehension of the financial dynamics of the company they work for. "Fiscal literacy is not innate. It's an acquired skill," he says. "What better place than the workplace to acquire it?" Thompson says that while it is the employees' duty to make themselves fiscally literate, it falls to management "to constantly define the financial reality so people can know what they have to do to respond to that reality." He adds: "We try to educate the employees so they know what's coming. The average person will help you if you share the information. Otherwise, that person will be very upset the day you go out there with the pink slip."

Trans-Matic, which had sales of about $15 million last year, employs 150 people. It makes stamped metal parts, 50% of which go to the automotive industries. So it's no surprise that the financial reality at Trans-Matic has been grim of late, but that hasn't kept management from disclosing it. Every month management distributes a sheet of paper to the work force. One side contains detailed financial data comparing actual performance with target numbers. Year-to-date information is also supplied. The other side, titled Performance Analysis, comments on the numbers.

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