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.

In September, with Trans-Matic's numbers noticeably tailing off, Thompson wrote, "Sales bookings and backlog continue to decline, which will make the next six months a tough period to get through."

In October the message was reinforced: "The outlook for November and December profitability is still not good."

November's missive -- backed by the numbers -- was darker still: "The December sales forecast looks very dismal."

Thompson's warnings proved prescient. In December the company suffered its worst month in its 23-year history. However, its management was hard at work on a detailed memo titled Recessionary Strategies, outlining how the company would cut costs and tool up more quickly for new jobs to dig itself out once the economy turned up again. By doing so, Trans-Matic has thus far been able to avert layoffs.

Thompson sums up the recent difficult months this way: "I'll say this is a collegial atmosphere. There's empathy for management in a company that's willing to share that information in advance. By identifying the problem you have not done something to those employees. Instead, you've endured something with them."

Sharing the bad news inevitably points to a core concern of worker and manager alike: credibility. Fragile even when the going is good, in bad times credibility often becomes the first workplace casualty. A factory floor can become a hothouse of rumors. Consider, then, what could happen in a small town dominated by a handful of enterprises.

Eufaula, Ala., with all of 14,000 souls, is home to Techsonic Industries Inc., a maker of sonar devices used by sport fishermen to locate fish. Not long ago, when business was booming, Techsonic was the town's second-leading employer. In 1988 sales peaked at $70 million -- a threefold increase in five years. Then came the crash.

In the past two years the company has reduced its work force three times, shrinking from 440 people to 235. "We're in a tailspin," says CEO Jim Balkcom, who admits in a somewhat shell-shocked tone, "I've never been through this before."

So how does he feel about laying that kind of self-doubt on his employees? "My perspective is, Share it all. " He reasoned that if he started sugarcoating the reality, fear and loathing would reverberate well beyond the factory parking lot. "We are in a small community, and I think the people in the community have understood."

Balkcom believes he had to be open, not only to shore up morale but to send a message to the town. He wanted people to know Techsonic was dealing in good faith and also wasn't going to disappear. "I wanted people to understand that there is a future here. The boat business is cyclical. It will come back someday."

As a result of bad times, Balkcom has emphasized "frequent and candid communication." In addition to weekly executive meetings and monthly company meetings, he has held a meeting every six months to elaborate on business conditions. "We had a special meeting after each of the reductions in the work force to tell people what was going on." At each meeting there came the inevitable question: So, is this it? "I told them, 'I don't know.' "

Rick Wiand's experience was different -- and so, to a certain extent, was his response. His company, The Reiss Corp., a maker of several lines of women's clothing, operates in a community that has long been in economic flux -- Madison Heights, Mich., near Detroit. People there have been traumatized by years of uncertainty about the future.

The bad news broke last April, when Wiand's 50% partner in Reiss simply quit, unhappy with the business's performance. Wiand told his managers, and the word spread quickly to his work force.

Wiand knew that more setbacks would follow. He knew he had to downsize the company. Because the departing partner had been the company's primary designer, Wiand had to find a replacement, a difficult process that took about six months. During that half year the company suffered substantial losses, but, believing he could reverse that, Wiand saw no reason to alarm people. He chose to withhold details about how poorly the company was doing.

"I regret not telling them how bad things were, but there's no nice way to tell people that things are going to change." Change meant consolidating operations and farming out some of the work. As a result many employees would have to choose between being laid off or dealing with a longer commute. So when the changes happened, Wiand concedes, "they felt betrayed."

Wiand now admits he should have been more forthcoming "about the amount of losses," but he was afraid he would just end up spooking his employees -- at the company's expense. "My overriding concern was the survival of the company," he says. "I have no regrets about that."

It was the lack of full disclosure that helped shape Glenn Smoak's thinking when he left Sky Courier Network, an air-courier company, to found a rival, Sterling Courier Systems Inc., in Herndon, Va., in 1985.

Smoak started his company determined not to repeat the fatal errors he saw management make at Sky Courier. There, in the early 1980s, Smoak had 110 people working for him. "The company was really feeling the recession, and at the same time inflation was still a big problem," he recalls. "People needed raises." And those raises weren't in the cards because the company was doing poorly.

That didn't keep Sky Courier's management from painting a rosy picture, claims Smoak. "They had no good news to share, but they would go out and pump people up," he says. "You can be positive while you're being negative, but you've got to be able to back it up with some connection to reality."

About a year after Smoak had left the company, one of Sky Courier's owners rented a theater and screened Hoosiers, an inspirational film about a small-town high school basketball team in Indiana making it to the state finals. Before the film he came out dribbling a basketball and proceeded to give a motivational speech. People who were there described to Smoak a scene of employees standing in the aisles, some with tears in their eyes, ready to go into battle for Sky Courier. "Ten days later this same guy was walking through the halls wearing a button that read, 'I don't work here anymore.' He had sold out."

The lesson, Smoak hopes, was not lost on him. "I try to run a business where the workers count, because they actually run the business. They do the work." Smoak feels that credo is reflected in two ways: First, he shares the information. Second, he shares the wealth. "Forget the stockholders. The employees are the real stockholders," he says.

Accordingly, Smoak takes whatever he can from the gross margins of Sterling Courier -- which ended its fiscal year in March with sales of about $6 million -- and gives bonuses to his 29 employees, instead of turning it into equity. In good times the bonuses expand; in hard times they contract. But beneath them lie base salaries that are generous for the industry. Those salaries are meant to be bedrock. They symbolize that the employee, barring a depression, can always count on a decent paycheck and the likelihood that Sterling will not have to lay anyone off.

CEOs who can establish sufficient credibility in good times can, in fact, turn hard times to their advantage. They can reposition their companies. They can take preventive steps to head off a downturn. Leslie B. Otten, president of the Sunday River Ski Resort, in Maine, says, "I began to anticipate that things weren't going well last summer." He announced a 6% cap on raises. "We told the whole company this was coming, and if we're wrong, we will not suffer. We tightened our belts. We went into this with our eyes wide open."

Otten then communicated the idea that the sky does not necessarily fall during a recession. Economic expansion may cease, but economic activity does not. He thus told his company that growth would have to come by taking market share from the competition. That led to a number of companywide and departmental meetings designed to ferret out logical growth areas within the operation. It was agreed, based on market research, that Sunday River should revamp its ski school and step up its skier-development programs. The company also built a restaurant at the top of the mountain, which has a more varied menu than that offered at the bottom. "Overnight it became the most popular food outlet on the mountain." It was also decided that Sunday River would make a lot of snow as soon as the first cold hit, in November, so the trails would have a large enough base to withstand subsequent thaws. That move paid off during a mild week in December and again during a warm period in February, when many resorts were awash in snowmelt. Sunday River had nearly 100% of its trails open for skiing.

"We've had an 8.6% growth in units [skier visits], and revenues are up 13.3% over last year," says Otten. The ski industry on average in the Northeast is down 20%. Otten believes Sunday River's gains couldn't have happened without an awareness, on the part of the workers, of what the company was doing and why. "Employees are generally smarter than you think," he says. "And if they're good employees, they're smarter than you are."

Harry Seifert, owner of Winter Gardens Salad Co., in New Oxford, Pa., takes a similar tack of doing what he can to prepare for hard times early on. "I've been in business for 25 years," he says. "We've gone through many recessions, and I've survived them all. My advice is, Do not participate in a recession. It will kill you."

Seifert knows when to start talking to his 150 employees: before hard times really hit. "When things are good, a lot of things are wrong and you don't know it. That's when we tell ourselves, We're going to change our strategy. We're going to concentrate on efficiency and profit. You have to get the attention of everybody. Most of the time companies take the poor hourly guy who has no input and cut him off." That belated and blunt approach, Seifert claims, places blame precisely where it doesn't belong.

In January a stringent review began at Winter Gardens, which makes salads for the food-service industry. Sales last year were $14 million. Seifert told his employees that if things continued as they were, either staff or pay would have to be cut by 20%. "Workers always think the owner or the CEO is going to fix things. They have to understand that they have to fix it. That gets their attention."

In the next step, Seifert recalls, "we looked at every product we make. We asked: 'Is every product profitable? Is every account profitable? Is every system efficient?' "

In each department profit-and-loss statements were redesigned from the bottom line up, producing certain sales and operating assumptions derived from a desired profit level. The statements were updated every week instead of every quarter. Financial information was shared in each department to show whether it was, in fact, profitable or not.

Pruning then ensued. Marginally profitable products were cut. Inefficient procedures were revamped. Instead of emphasizing increasing current sales, the company made maintaining market share a priority. Salespeople were assigned to marketing tasks, prospecting for future niches they could sell to once the economy improved.

Jim Ebright of Software Results believes that few businesses survive what his did -- a nearly 90% drop in sales over a four-year span. The company, he thinks, scraped bottom in 1990 and now will start to turn up again. He notes, "We will introduce more new products this year than in the last four combined."

No different, perhaps, from fire or flood, hard times prepare the ground for economic renewal. In that sense, Ebright has discovered a curious thing. Some of his early hires, people who helped him build the company and then left because it started to feel too big, have returned to work for him. These are people who can handle bad news -- people who, in fact, may be energized by it. Says Ebright with more than a touch of awe in his voice, "We've ended up with the same kind of people we started the business with: people who want to have some kind of effect."

He figures that is his payback for telling it straight all along.