Having an Open-Book Policy

Enough with the secrets--give your key employees the financial information they need to help you run a successful business.

Ready to open the books--to everyone? The concept that key employees should be able to see and understand a company's financials, that they should have a part in moving the numbers in the right direction, and that they should have a direct stake in the company's success makes many family business owners cringe--even though it can pay off down the road.

"In the early stages of [growth], family business owners don't have much money and don't want anyone to know," says Ernesto Poza, a family business advisor in Chagrin Falls, Ohio. In the later stages, their reasons change. "Then they don't want the IRS knowing they've struck it rich, and they find legal ways to make it seem like they're just breaking even. They're also afraid that Uncle Joe or the employees will get wind of the success, and everyone will be tapping them for money."

But secrecy can be counter-productive, especially when employees assume the family is reaping wealth from the firm and they're getting unexciting salaries. They may be unaware that most of the profits are being put back into the business instead of into the family's pockets. That's why Poza supports opening the company's financial information to key nonfamily employees. "The more they understand about the business and the consequences of their actions, the more likely they are to make decisions that parallel the owners' interests."

Financial secrecy also undermines a family business's ability to hire, motivate and retain nonfamily executives who are already leery of joining a firm because they believe they have little or no chance of moving into the top positions often earmarked for family members, according to Poza.

In many family businesses, where the founder is still running the company, the finances are secret even to the members of the next generation. Such concealment can be detrimental to the continuity of the business because the secrecy "erodes the commitment of your very own children," Poza observes.

In James Brogden's case, it wasn't the commitment to the business that was hurt by his parents keeping the financial information of Masters Industries Inc., an injection-molding firm in Piqua, Ohio under wraps; it was James' ability to take over when his father, Claude, the founder of the company, died suddenly in 1984 and he went to work the next day as president of the company.

Patricia Schiff Estess writes family business histories and is the author of two books: Managing Alternative Work Arrangements (Crisp Publishing) and Money Advice for Your Successful Remarriage (Betterway Press).

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This article was originally published in the March 2000 print edition of Entrepreneur with the headline: Open-Book Policy.

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