Time to open up the information spigot

What your managers don't know can come back to haunt you. It is also frustrating and stressful for them.

By Léon Danco

"Thou shalt maintain an orthodox accounting system and make available the data therefrom to thine officers and managers."

You wonÕt find that commandment anywhere in either the Old Testament or the New. But it has always been high on my list of absolute requirements for success in a family business.

The costs of hiring a reputable accounting firm or installing management information systems may seem like a luxury to family owned firms. But nowadays you canÕt run a competitive, efficient business without information-sharing. As markets change, as old products die and new ones are born, as hungry new competitors emerge, information of all sorts must flow up and down the ladder faster, and the people responsible for making day-to-day decisions need to be trusted with sensitive data.

Yet there are still family companies that are reluctant to share vital information on the operation of the business with non-family senior managers. I have met purchasing agents who didnÕt know the total value of their inventory. I have known managers of manufacturing who were not told what their indirect labor costs were or had not been shown the depreciation schedule for plant machinery. You wonder how they can run a business that way.

Such secrecy is, of course, needed if you have to cover up various tax ploys. Instead of making a profit, the goal of some companies seems to be to Òbreak even higher and higher.Ó As annual revenues and earnings increase, deductible expenses somehow seem to grow in order to keep pace with them. This is much like the way the Mafia would run a car wash: Wash cars that donÕt exist in order to account for the income from their illegal activities; then, create and pay themselves expenses that also donÕt exist in order to channel this income and shelter it from taxes. A more ingenious money laundering scheme would be hard to imagine.

In family businesses, the magic of bookkeeping covers up a lot of the Ògravy,Ó the bonuses and the perks that can supplement the ownersÕ salaries but could appear questionable to the IRS. Mom writes the ÒconfidentialÓ checks which go to family officers but are not so identified in the general accounting system. When the bookkeeping is done by the little old lady in the office upstairs, the family can often get away with it. But a reputable accounting firm and a professional CFO are usually too smart to go along with such games.

Though taxes are truly a burden, I believe the IRS code nonetheless can provide a useful moral standard. The code can also foster ethical practices and open systems of accounting that are essential to the survival of a family business. In the long run, it is cheaper and more efficient to share accurate information on a regular basis than to suffer the long delays of having it travel up and down the management hierarchy or to sow confusion by trying to run a business with an accounting system that is designed to confound the IRS and not provide reliable, objective perspective.

There are some kinds of information, of course, that might not be shared with middle management. If the board is considering closing a plant or a division, for example, it will only alarm employees unnecessarily to inform them in the early stages of the discussions before any decision is made. Likewise, you canÕt always share the companyÕs long-term strategic plan or the design of a new product with everyone. In a competitive world, some documents are truly Òconfidential.Ó

What many businesses that are not sophisticated at managing the flow of information do is to simply shut off the spigot entirely. The policy cascades back on the owner in the form of constant questions and requests for information. Every time managers need to know something, they must come to the boss. Which may be the way some owners want itÑthey like to believe in their own indispensability and to foster exactly this kind of dependence. But the frequent requests and questions also consume much time that an owner should be spending on more important things.

I have never known a company that was hurt by too much opennessÑand that includes sharing of ÒsensitiveÓ financial data. I have one client who informs his entire senior management group of where every dime in revenues goes. The company is an S corp and made $6 million in profits this year. Every cent of it goes into the ownerÕs pocket, along with an extra hundred thousand or two from bonuses and perks. The senior managers are fully aware that theyÕre making him rich, but are they upset or resentful? Not in the least. Several of them earned as much as $250,000 last year. TheyÕll work their hides off this year, too, in hopes that the owner will make $7 million.

Most nonfamily managers tend to accept that they do not have a right to receive, and are never going to get, equity in a family company. They usually understand, too, that a son or daughter or other family member will get shots at the top positions in management before them. So long as those family members are qualified and capable and treat the managers with the respect they deserve, they accept the realities of working in a family firm. They accept, or they leave.

They do demand to be treated with decency and respect, however, and they do have a right to equal pay for equal work. The best companies will have open, fair salary schedules, based on industry standards, that ensure family and nonfamily employees are paid alike for the same work. Executive talent today is highly mobile. You canÕt get away with paying your son or daughter $100,000 a year and nonfamily managers $50,000 a year for doing the same supervisory job, not without losing some of your most capable people.

Just as important, senior managers have a right to know as well as a need to know. Surveys show that the psychological satisfactions from a job are just as important to managers as the money, sometimes maybe even more so. But not having enough information to do their job right is a source of frustration and stress.

Labor today still wants Òmore,Ó as Samuel Gompers said, but they want more information as well as higher wages. If you canÕt trust senior managers with more knowledge, you should not give them less. You should get rid of them.

Whether they know it or not, good businesses today are virtual universities. They must offer employees constant training and educational programs. The whole concept of empowerment, the new buzzword in management circles, is based on the conviction that an investment in a knowledgeable worker is an investment in productivity.

ItÕs part of the cost of doing business, like paying rent.

Léon Danco is the founder of the Center for Family Business in Cleveland and the author of four books on family business.