Open-Book Management

Posted by Aaron Juckett, CPA, CPC, QPA, QKA on Tue, Mar 25, 2008
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The latest Employee Ownership Blog post, Open Book Management – Does Your Company Practice?, discusses open-book management (OBM):

The theory behind OBM is that all employees are provided information on the financials so they can and, hopefully, will make better and more informed decisions as workers and in the case of an ESOP company, as owners. The employees are also provided with training so they can properly read and understand the financial information and then provided with a forum to discuss the information.

Each ESOP company is different in terms of what information is shared and how much. There are no hard and fast rules as to the right amount but most people in the employee ownership community can agree that the sharing of some information is important for an ESOP company to fully develop an ownership culture and mindset.

The Wikipedia open-book management page discusses the Jack Stack/SRC Holdings management technique:

The technique is to give employees all relevant financial information about the company so they can make better decisions as workers. This information includes, but is not limited to, revenue, profit, cost of goods, cash flow and expenses.

The basic rules for Open-Book Management are as follows:

  • Give employees training to understand the financial information
  • Give employees all relevant financial information
  • Give employees responsibility for the numbers under their control.
  • Give employees a financial stake in how the company performs.

In a company fully employing Open-Book Management employees at all levels are very knowledgeable about how their job fits into the financial plan for the company. However taking a company from "normal" to open is not as easy as just starting training classes on income statements and balance sheets. Employees rarely find it compelling to understand these numbers. In order to overcome this problem Open-Book Management focuses on a "Critical Number". The number is different for every company but it is a number that represents a prime indicator of profitability or break-even point. Discovering this Critical Number is a key component of creating an open-book company. Once discovered then a "Scoreboard" is developed that brings together all the numbers needed to calculate the critical number. The Scoreboard is open for all to see and meetings take place to discuss how individuals can influence the direction of the "Score" and therefore, ultimately, the direction of the Critical Number. Finally a Stake in the Outcome is provided which can be a bonus plan that is tied to Critical Number performance or it can include Equity sharing or both.

Open Book Management How-to-Guide

This Open-Book Management How-to-Guide discusses the origins of open-book management:

"The beauty of open-book management is that it really works. It helps companies compete in today's mercurial marketplace by getting everybody on the payroll thinking and acting like a businessperson, an owner, rather than like a traditional hired hand." So wrote John Case, who was a senior writer at Inc. magazine in 1995 when he coined the phrase "open-book management."

Now, years later, companies are still debating the merits of opening their books to employees and vendors alike. Many tout the benefits, such as improved bottom-line results and employee retention. Still others warn of open-book pitfalls, such as employees using their newfound knowledge against the owners.

To help you learn more about the pros and cons, we've created this guide to the best resources available on that relate to open-book management. Learn from the experiences of other entrepreneurs before you decide what's best for you and your company.

The How-to-Guide also contains various open-book management links, grouped in the following categories:

  • The Origins of Open-Book Management
  • Helping Employees Understand the Financials
  • The Risks in Sharing Financials
  • From Hired Hand to Businessperson: Changing Employee Perception
  • Further Reading

Updates/Related Blog Posts:

Topics: Information Page, ESOP, Communications and Culture, employee stock ownership plan

Aaron Juckett, CPA, CPC, QPA, QKA
Written by Aaron Juckett, CPA, CPC, QPA, QKA

Aaron is President and Founder of ESOP Partners and provides implementation, administration, and consulting services to hundreds of companies. He is a member of The ESOP Association (TEA) and the National Center for Employee Ownership (NCEO).

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