Why Open the Books?
Should owners share company financial information with employees? Two entrepreneurs--Leslie Fishbein, a furniture retailer, and Milton Lee, a partner in an optical-engineering company--debate the issue
LESLIE FISHBEIN: OPEN FOR BUSINESS. At first I was reluctant to share financial information. I worried that people might use the information against us or not be able to make sense of the numbers. But ultimately, we turned to open-book management because we believed that if we gave employees more information and got them more involved, we'd be better off.
We had to produce simplified versions of our financials, hold meetings twice a month, and offer accounting classes. People won't participate unless they have something to gain, so we tied learning about the financials to their bonuses. It seems to me that Milton was in an enviable position. He had a highly educated staff that wanted more and more information. I think Milton's mistake was assuming his employees would understand cash flow just because they were educated.
The program has been successful for us: information helps people make decisions that are good for the company. Recently, someone at one of our retail stores recommended that we change the store's hours to bring in more customers. You can imagine the reaction if I had suggested that. Instead, the idea was adopted, and there's been a 15% increase in sales.
Opening the books didn't solve all our problems. In fact, this year we didn't hand out bonuses, because the company didn't meet profit projections. Everybody knew why, and nobody came to me and said, "Where's my bonus?"
I tell my people, "You know the score. You know what to expect, which means that you can actually have some control."
Leslie Fishbein, 44, is the president of Kacey Fine Furniture, in Denver. It has five retail stores, more than $30 million in revenues, and 170 employees.
MILTON LEE: CLOSED CALL. Since we're completely self-financed, I opened the books, so employees would understand how the company functions. Because most of the staff had advanced degrees--some even had M.B.A.'s--I assumed they understood cash-flow management. But they didn't get it at all.
The controller and I presented financial information at monthly meetings. We'd explain how we arrived at the numbers and which accounting methods we'd used. My people are sophisticated, but without a finance or accounting degree, it's very hard to discern the actual flow of a dollar through the books. I constantly had to reexplain it.
Employees used the information against me. When we made a profit, they demanded bigger bonuses and new computers. When I used profits to finance a new product line, everybody said, "That's nice, but what's in it for me?" That's a legitimate question, but it wasn't as if I were taking the money home.
It's possible that open-book management is more effective at companies like Leslie's, where the average employee doesn't have a master's degree and feels privileged to get that kind of information. I show a bunch of Ph.D.'s this information, and they say, "Yeah, where's the rest of it?"
If your employees misinterpret financial information, it's more damaging than their not having access at all. I gave them general and administrative rates. Next thing I knew they were backing out everyone's salaries, and I'd hear, "You're paying that guy $86,000? I contribute more." So now I show only monthly abbreviated income statements and balance sheets. Having some things cloaked in mystery is not so bad.
Milton Lee, 36, is the co-owner of Optics 1 Inc., an optical-engineering company in Westlake Village, Calif., with less than $10 million in sales. He has 23 employees.