That's like empowering someone to drive a truck -- without giving that person a map or a destination. Open-book management provides both.
Of course, you can't just announce that people are now empowered, any more than the Founding Fathers could just announce that the United States would have a democratic government. You need structures and procedures.
One approach, pioneered by SRC and widely adopted by others, is the so-called huddle system.
Representatives from SRC's departments and divisions meet once every two weeks to report their numbers and their opinions about the upcoming weeks and months. As at Foldcraft (no coincidence -- Foldcraft modeled itself after SRC), they generate an income statement, a cash-flow statement, and a forecast, which people take back to their own units.
In the units is where the work gets done. Managers help employees address problems. Every unit is accountable for its own numbers -- and every man and woman in that unit shares in the accountability. The units report new numbers to the corporate offices each week. If they're on target, fine. If they're off, those same men and women had better have an idea of why, and of how to fix it.
A second path to empowerment: turning the company into a collection of smaller but identical companies.
Published Image, a financial-newsletter publisher in Boston, has established teams that founder Eric Gershman calls "little Published Images." Each has its own editor, art director, and salesperson, and a couple of junior staffers. Unlike traditional teams, Published Image's act like self-contained businesses. They line up clients and negotiate prices. They take responsibility for producing their clients' newsletters, start to finish. They collect their own accounts receivable and are learning to keep their own books.
Gershman and other veteran managers oversee the teams, coach and train their members, and set companywide policies on matters such as compensation. But the teams' autonomy encourages members to think like businesspeople rather than like hired hands.
A third option: turning departments into business centers, so that every department becomes a company within a company. The units still have specialized tasks, unlike the teams at Published Image. But they're responsible for satisfying their customers, whether internal or external, and for their finances.
The exemplar of this approach is Chesapeake Packaging Co.'s Baltimore box plant, which has eight so-called internal companies. The flexographic-printing department is run by a "company" called Bob's Big Boys. Customer service is the province of a "company" called Boxbusters.
Like any business, the internal companies manage their own affairs. They track and measure output and figure out how to improve it. They watch costs. If they need new equipment, they order it -- or prepare their own capital-authorization requests for the corporate office. They get involved in the annual plantwide planning-and-budgeting process. The members of a company review one another's performance and take part in hiring and disciplinary decisions. Like businesspeople.
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Step Four
Make Sure Everyone -- Everyone! -- Shares Directly in the Company's Success, and in the Risk of Failure
If you want people to think like owners, they must be rewarded like owners.
That isn't a controversial proposition: thousands of companies already have some kind of profit-sharing bonus system or employee stock ownership plan. But most of those plans don't have the motivational effects the management wants, for the simple reason that employees either don't understand or don't trust them.
Maybe the profit sharing is determined each year after the fact, at the management's discretion. Since employees don't know how the company is doing, any bonus that materializes might as well be pennies from heaven. Or maybe the stock-ownership plan puts a few shares every year into employee accounts. But workers don't know how many they'll get from year to year, they don't know what the shares may be worth in the future, and they don't have a clue how their own work affects that share value. That isn't what you'd call a world-class incentive.
An open-book company is different. Employees know what they're working for when they start the year. Like businesspeople, they track their progress by watching the numbers. At the end of four quarters, they know if they have been successful -- and they know why or why not.
Manco, for example, sets annual targets for net earnings and return on operating assets. If employees hit both targets, the company "makes bonus," meaning that employees collect payouts ranging from 10% to 50% of their total compensation. Want to know the prospects? Check out that lunchroom wall.
A bonus is a reward; it's also a powerful educational tool. So a lot of open-book companies use the bonus to reinforce key business lessons. Engines Plus, a Springfield, Mo., company that buys diesel engines and converts them to stationary power plants, pays bonuses that are pegged both to profit before taxes and to inventory accuracy. The latter is a critical operational number for the company, and CEO Eric Paulsen wants employees to focus on keeping it high. Kacey Fine Furniture paid a bonus in 1993 based on net profits and return on assets. Last year the company included a factor designed to minimize customer returns.
What about stock ownership? Open-book management can work without an equity stake -- I've seen it -- but it works better when employees own stock in the company.
The reason: business is always a game of trade-offs between the short term and the long. Do we raise everybody's wages and salaries, or do we invest more in expansion? Do we pay a big profit-sharing bonus, or do we hold on to the cash and thus raise our share value? Long-term payoffs, of course, redound primarily to a company's owners.
"Equity is t
