Disclosure

You’re the owner or senior manager of a small- to medium-sized privately-held business. One day, an employee asks you:

  • What are our annual revenues?
  • What are our gross profits?
  • What are our operating profits?
  • How much does the owner take out?

Oops. Are you ready for this? Do you have a company policy regarding financial disclosure?

This month, I’ll explain the pros and cons, and then leave the decision up to you. Among our TEC members, the pendulum swings from one end to the other on this issue. Here are some examples:

  1. “We have been a ‘closed” company for 100 years. The family has never shared anything outside the family.”
  2. “We have a gain-sharing program in place. Our employees know our operating expenses and profits, and we share with them at that level.”
  3. “I share everything. Why shouldn’t I? Our employees know I took a great risk buying the assets of this company when it went belly-up with the prior owner.”
  4. “We share selectively on a ‘who should know’ basis. Everyone gets some information. No one gets all the information.”

Advantages of sharing information

First and foremost, it’s an issue of trust. The more you disclose in terms of financial performance, then the less likely that employees will complain that they always end up on the short end of the stick when it comes to raises or benefits, or especially employee concessions.

Second, it’s an issue of simply being informed. Every employee survey I’ve ever seen done by TEC members over the last 38 years always gets the same answer to the question, “How well do you think your company keeps you informed about its performance?”

Employees thirst for knowledge about your company. I hate to be the purveyor of bad news. But your e-mails, tweets and newsletters, in whatever form, do not get the job done. Disclosure, in face-to-face meetings with employees, is the answer, if you truly want your employees to feel that they’re informed.

Third, there are counterproductive rumors whether you have 15 employees or 500. The less employees know about financial performance the last quarter, the more they will fill in the blanks. Rumor always emphasizes the negative, not the positive.

Don’t kid yourself. Rumors affect morale and productivity. It’s like a bad infection. And it isn’t good for business. Disclosure squelches rumors and replaces them with facts, whether the news is good or bad.

The disadvantages

First, opening Pandora’s Box may confuse employees. Disclosure companies invest valuable time helping employees understand what the numbers mean – not just lines on computer graphs. There’s no point about talking gross profit results for the past 30 days if an employee has no clue about what gross profit means.

If you don’t handle the education process correctly, it leads to comments like, “They’re just trying to pull the wool over our eyes.”

Second, the issue is complicated if your company has a union. Your contract might address issues such as disclosure. The union might even have the right to approve or disapprove of financial disclosures not covered in the contract.

Third, in some companies, the performance results are totally due to the result of outside influences, none of which can be affected by employee performance. This is especially true in pure commodity firms, because performance results are determined solely by market influence.

Finally, there’s the subtle issue of owner compensation, in whatever form it might take. My personal preference is to keep this out of the financial disclosure discussion, because each business owner has a different set of ownership circumstances.

In TEC, I know I’m speaking for many of our CEOs who would say that they would never extract more financial reward from their companies than justified.

I believe strongly that while the pendulum still swings from one end of the other regarding financial disclosure, very few of our TEC members favor complete non-disclosure.

Until next month, I hope you’re doing the right thing for yourself, your people and your business.

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