How reluctant are companies to let their employees see corporate financial information? Consider this:
We were once teaching a financial-fundamentals class to managers of a division of a Fortune 100 company. Since we like to use real data, we asked the company to share with us the division’s current revenue, costs and other figures for classroom use.
The company politely declined, saying it didn’t want the managers to see the divisional statements—even though those very same numbers would soon appear publicly in the company’s annual 10-K report.
Talk about shooting yourself in the foot. And yet this company is hardly alone in its myopia. Our experience is that many, if not most, companies refuse to share much financial data with any employee other than top executives. The unfortunate message this sends to anyone outside the loop: We’ll tell you what you need to know. Period.
Operating in the Dark
Yet when managers and employees don’t see financial data, they don’t know critical facts. Is the company’s profit healthy or declining? How is our unit doing? Is cash abundant or tight? Are our gross margins bigger or smaller than those of our competitors?
Without such information, people can’t make good decisions in their daily work. Sales reps may be tempted to offer hefty discounts just when the company needs to boost gross margin. Engineers may keep proposing additional bells and whistles for the company’s latest products even though cash is tight. Plant managers, kept in the dark about warranty expense, may cut corners on quality in hopes of meeting production cost targets.
What’s more, sharing the numbers tells employees you think they’re an important part of the business. Studies indicate that commitment grows and turnover declines.
The whole idea of sharing financial data gives a lot of old-school managers the willies. And understand, we aren’t advocating sharing such sensitive information as salaries. But there are two sets of data that companies can easily share.
The first relates to the big picture. Every public company files consolidated financial statements with the Securities and Exchange Commission once a quarter. Every three months, in other words, the company has a great opportunity to help every manager understand the financial threats and opportunities the business is facing right now.
A well-known videogame company, for example, holds a conference call for all employees after every quarterly earnings call. During the conference call, executives tell associates about the company’s results for the quarter; how profit compares with that of last quarter and last year; and what the company’s investment figures indicate about management’s commitment to the future.
Know Your Ratios
A second set of easily shareable numbers relates to business units and jobs. This kind of information isn’t usually made public. But a unit’s sales force needs to know not only its sales target but also its profit target. And each department needs to monitor its operating-expense ratios to be able to deliver good value.
Professionals in practice groups, too, can benefit. A nonprofit medical practice with nearly 30 facilities in eastern Massachusetts, for example, is sharing profit-and-loss data with staff at each location. The doctors especially are expected to follow the financial information and to help manage each branch’s results.
Many top executives worry that managers who see sensitive financial data will somehow abuse it. A few are concerned, for example, that if people see in detail what a company’s costs are, they will see that the company makes “big profits” and hence expect raises. Or worse, they might try to sell the data to a competitor.
But in our experience, these fears are misplaced. People who are trusted with sensitive data nearly always respect the trust that is put in them. And even if there are a few bad apples, they are likely to find that the information they see will generate little interest outside the company.
Once a company has decided to share information, the natural follow-up question is a basic one: Who gets to see it? Many companies share their financials only with the managerial or professional ranks. But if managers work better and smarter when they see the numbers, the same probably holds true for other employees, too.
Small companies and units have an advantage here, because the more direct the line of sight from an employee’s job to financial results, the more likely it is that people will get interested and begin changing how they do their work. An engineering and manufacturing company in Utah, for example, holds weekly meetings for all staff in which managers discuss the financial performance of every continuing project and the company as a whole.
Similarly, we know of a fast-food outlet whose managers taught their young employees to understand a simplified income statement, and then posted each week’s revenue, costs and gross profit in the break room. It wasn’t long before the workers were doing all they could to boost the gross profit line—particularly since the managers paid modest bonuses based on profitability.
Of course, there are obstacles to financial transparency. Publicly traded corporations can’t disseminate consolidated financial data before it is released to the public. Owners of closely held companies may be leery of allowing employees to see profit ratios and other usually confidential numbers.
But many companies find ways around these concerns. A public company can usually share key financial indicators for individual plants, products, or branches. Some closely held companies provide employees with indexed ratios of the company’s performance without revealing the actual figures.
Nearly every company these days seems to want its employees to be engaged in the business. They want everyone to think like a CEO, and to make smart decisions.
But many businesses don’t take the essential first step: making sure that their people have the information they need to be valuable contributors.
Ms. Berman and Mr. Knight are co-owners of the Business Literacy Institute, a Los Angeles-based company that provides financial training, and co-authors of “Financial Intelligence: A Manager’s Guide to Knowing What the Numbers Really Mean.” They can be reached at firstname.lastname@example.org.