Having an Open-Book Policy
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).
Show Them The Money
"I've always wanted to create a higher degree of commitment among employees, and I thought that was possible only if people had a greater understanding of how the company ran and how their area of responsibility fit into the whole," says Brogden. So over a period of time, sharing financial information became the policy at Masters. "The data goes out to key executives a week or so before our monthly meeting so they have time to study it," he explains, "and then we sequester ourselves for half a day or a whole day to discuss it."
Says Ra Broaddus, an Atlanta business advisor and a proponent of open-book management for all employees, "Each family business owner has to determine how far down on the profit-and-loss statement he or she is prepared to share. Often family businesses stop at the gross-profit level, and most keep salary information confidential."
If yours is a business with high levels of trust among the relatives and non-family employees involved, you've paved the road for sharing financial information. If that mutual trust isn't there, the concept is more difficult, but not impossible, to roll out, Poza says. "You've got to take steps to build trust. That might mean going out on a limb, like instituting a profit-sharing or bonus program," he says. "People begin to trust the family when they feel they're gaining something." But sharing financial information needs a well-thought-out plan. Here are some steps:
1. Educate the people who will be receiving the information."I don't believe in plopping data onto someone's desk and not explaining what's in it," says Brogden. Explain how financial statements are created, what goes into each line item, and how the operating results flow on the income statement and the balance sheet. Talk about appropriate actions that could be taken if there's a variation from the expected results.
"For employees, this type of education is like getting a custom-tailored MBA program," says Poza. And it helps people see the relationships between their work, the work of other departments and the company's bottom line.
2. Set goals at every level, for every business process.Determine the company's critical numbers--those that have the greatest impact on profits. Besides sales figures and gross margins, these numbers can be anything from past receivables to turnover rates.
3. Keep nonfamily executives up-to-date with the numbers.Everyone has to know whether the company is making money. Share the financial information with employees, "and if something important comes up before the weekly, biweekly or monthly meeting, let them know," says Broaddus.
"We track lots of indicators; each department has a series of these. At our monthly meetings, we use the data to discuss our theories as to why things are happening as they are and how we can improve the indicators," says Brogden.
4. Compensate people for their successes.Obviously, a nonfamily employee has to feel that the compensation is competitive with the broader market. But it goes beyond that. If you're going to ask people to think about profits the way you and your family do, "there should be a group bonus based on achieving profit goals," says Broaddus. Individual achievements can also be recognized with bonuses. If the business doesn't reach its profit goals, employees don't get a cut of the action.
Examining The Downsides
Family businesses evince concern over sharing the numbers for several reasons: They don't think every employee will want profit-and-loss responsibility, they're afraid that the competition will get wind of the numbers, and they don't want to share profits with nonfamily members.
Most key executives want to align themselves with family owners to profit as the business profits, so it would be rare for them to consider knowing the financial picture a problem. "But the concept doesn't fly with every employee," says Broaddus. "Many people just want to show up at eight, leave at five, and collect a paycheck. So if an owner institutes an open-management approach for all employees, you might get some flack. I would say, `Fine, you don't have to buy into this. You'll still get your bonus check. But if you talk down the concept, you're terminated.' "
If a key employee leaves for the competitor's firm, Poza suggests information will fall into the competitor's lap--with or without secrecy. What family business owners need to examine is what the competition can actually do with the numbers. "Probably very little," says Broaddus.
Notes Brogden, "It's something I have thought about. I've tried to look at a worst-case scenario--a disgruntled ex-employee goes to the competition and he lies, saying we're in a weak financial position. I don't think our competitors would stoop to share that information with a customer, however, because most people realize these tactics don't work to their advantage." So far, Brogden's right. "We've never had a problem."
Ra Broaddus, (770) 643-0990, email@example.com
Master Industries Inc., (937) 778-1300, firstname.lastname@example.org
Ernesto Poza, PO Box 248155, Cleveland OH 44124