What Is Open-Book Management?
Open-book management has been called the most important management trend in the country. Definitions of open-book management vary, but it is generally accepted to include the following components:
- Sharing the income statement and balance sheet with most employees;
- Sharing other data with employees (such as productivity and plant utilization/quality
- Encouraging employees to use the information in their daily work;
- Training employees to understand financial numbers; and
- Sharing the financial results through a gainsharing program.
Research on Open-Book Companies
In a study conducted by the National Center for Employee Ownership (NCEO), companies that shared such information with their employees experienced a one to two percent annual increase in sales growth over what would normally have been expected.
Earlier studies, conducted by the NCEO and others, have consistently shown a positive connection between employee ownership, participation, and corporate performance. A 1986 study by the NCEO showed that highly participative companies grew 8% to 11% faster than they would have been expected to grow. But to date, no research had been conducted on open-book management which typically combines both increased worker participation and financial incentives for increased productivity.
To conduct this research into open-book management, the NCEO matched 50 to 54 companies that had been practicing it for at least three years with three to five competitor companies, based on SIC codes, number of employees, and sales volume.
We then collected sales and employment data for each target company and for their competitors for a three-year period before and after the year in which the target company implemented open-book management. For each company, we calculated the average rates of sales and employment growth for each period, compared those rates with competitors, and subtracted the difference. For example, if Acme Bicycle grew 2% faster than other bicycle shops in town before implementing open-book management, and 4% faster than other shops after implementing the new management approach, then it can be said that the 2% differential was attributable to open-book management, assuming that something else did not happen at the same time the open-book system was started.
The results of our study indicate that open-book management really does work. Non-employee ownership companies saw an increase in sales of 1.66% per year and employment of 1.27% per year relative to what would have been expected without open-book management. Employee ownership companies did even better, with an annual sales growth increment of 2.21% and an annual employment increment of 1.14%.
These numbers are impressive. Employee ownership companies, for instance, would be nearly twice the size normally expected after 30 years. In the world of economic data, not many things have as much of an independent impact.
Case Study: Pool Covers, Inc.
The following case study is from the NCEO's November/December 1998 newsletter.
Pool Covers, Inc. is the largest independent company in the country in its industry, a feat it accomplishes with 26 employees. The Richmond, CA-based company installs swimming pool covers for home swimming pools. Started in their garage in 1984 by Bill and Bonnie Pickens, the company is one of a growing number of companies to have both an ESOP and a formal open-book management plan. The company started a participative management program in 1993, implemented open-book management in 1996, and started an ESOP in 1997. Like many ESOPs, the plan was not set up to buy out the interests of the owners, although it could be used for that purpose in the future. Instead, it simply fit well with the culture the Pickens were trying to create at their company.
Establishing the ESOP
Pool Covers set up its ESOP in 1997 simply by contributing treasury shares to the plan. The initial contribution was for $100,000 worth of shares, meaning the average employee was allocated around $4,000 in stock. That amounted to a 10% stake in the company for the plan. Additional contributions will be made in the future. Bill Pickens says that some people are skeptical about the value of just giving away ownership, but he points out that the contribution of shares kept the cash in the business and provided a valuable employee benefit at the same time. More important, Pickens thinks it will help the company grow. "Would you rather own 100% of a company with $300,000 or $400,000 in sales or 51% of a company with $10 million in sales," he asks. In fact, profits on sales grew from 0.4% before the ESOP to 3% after.
Pool Covers started practicing open-book management in 1996 after Bill and Bonnie Pickens attended a Great Game of Business conference. At first, little information was made available to employees, partly because of concern that the numbers did not look very good. It wasn't long, however, before employees were receiving financial statements they could take home. Financials were shared semi-annually in 1996, but now are given out every month. To help employees understand the numbers, Bonnie Pickens leads a weekly staff meeting at which one or two items from the financial statement are discussed in-depth. While just about every financial number is discussed, individual salaries are not. Bill Pickens will tell people his own salary if they ask, but if people want to know how much someone else makes, he tells them to ask that person directly. Pickens says that sharing salary information can too easily lead to resentment. The financials are augmented by critical number analyses. Critical numbers are factors that drive the company's success, but do not necessarily show up directly on the income statement. For instance, a few years ago, "go-backs," the number of return trips an installer has to make to complete an installation, were costing the company over $100,000 per year. Employees were told if they could reduce the go-backs, they would get 50% of the savings in bonuses, up to a maximum of $54,000. In the first year, $20,000 in bonuses were paid out. The "go-back" bonus has now been transformed into a "bucket plan." Every part of the company is involved. Specific company functions are tied into various targets, such as completions of installations or service orders, sales volume growth, shop time per person, and other factors. Each time a target is met, a certain amount goes into the bucket until the total reaches $1,285. When the bucket is filled, the amount is paid out, and the bucket starts filling again. The key concept here is that people are focusing on numbers they can control, rather than more abstract entries on the financial statements. If these controllable numbers are managed well, employees can see how they build into good financial statement results.
Pool Covers started employee involvement in 1993. At that time, the program was designed by two managers, but since then, employees have assumed a more influential role. Major issues are decided with everyone's input at a weekly staff meeting. A steering committee was recently created to oversee employee involvement. Four employees volunteered for the committee, and one additional employee was appointed. The eventual goal is to create a salary committee to review raises and justify the numbers.
Day-to-day decisions are made as much as possible by the people involved. For instance, employees recently redesigned the warehouse layout, while another group led the decision on what kind of new trucks to buy. Employee accomplishments are regularly recognized by the Pickens personally as well as by regular applause and cheering at staff meetings. A "book of kudos" is on display for everyone to look at, providing a permanent record of jobs well done.
Since implementing OBM and the ESOP, the numbers Bill Pickens feared sharing because they did not look so good have become numbers he can be proud to share. "I work a lot less, I make more money, and the value of the company is a lot higher," he says. "It's marvelous that I don't have to make every decision and be the one turning the lights off at night."