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Patagonia Case Study Open Book Management Theory

This is the unconventional idea that firms are most effective if their accounts are left open for all their employees to see as and when they wish, at the same time as the employees are taught to understand better the full financial picture. Traditionally, only a handful of senior executives are made to feel responsible for whether a business makes money or not. Open-book management attempts to extend this feeling of responsibility to everybody in the organisation.

It is described by John Case, the man who claims to have invented the expression, as the idea “that companies do better when employees care not just about quality, efficiency or any other single performance variable, but about the same thing that senior managers are supposed to care about: the success of the business”. It spread the burden of P&L responsibility—the responsibility for the profit and loss account of a business unit that is generally given as a reward to rising managers—to everyone in the organisation. With open-book management, the idea is that everyone has a certain amount of P&L responsibility.

Open-book management is based on the same sort of logic that persuades parents to leave household bills lying around in sight of their teenage children, in the (frequently vain) hope that the children will make different economic choices if they can see that their telephone bills are much the same as the price of a Caribbean vacation. A corporation's gain from open-book management comes from the extra motivation that employees may get from knowing its true situation, and from feeling that they are trusted not to abuse that information. The danger is that proprietary information will be spread to rivals, and that if business is bad, employees will be damagingly demotivated. Moreover, not every employee wants details of their salary to be widely bandied about.

Although John Case, once a journalist with Inc. magazine, claims credit for the invention of the expression, the idea of open-book management was pioneered by a company called Springfield ReManufacturing Corporation. It opened its books to its employees in , and a book called “The Great Game of Business”, written by Jack Stack, the company's president, documented its experience. Every other Wednesday, 35–40 Springfield employees would sit around a U-shaped table and receive a financial presentation from the company's finance director. Departments would also report their results to the meeting. The exercise is said to have made the company's employees act more like business people and less like hired hands.

Several companies have used open-book management as part of an attempt to generate intrapreneurship (see article). They have also used it in line with compensation schemes related to the business's performance. In one company, the boss quizzed employees on the company's profit and loss account and rewarded correct answers with $50 bonuses handed out on the spot.

When R.R. Donnelley, the world's largest printing firm, adopted open-book management it found that it failed to live up to expectations. However, Case claimed to have found over US-based companies that had raised profits by opening up their books in one form or another. But even he admitted that it takes up to four years to make the culture change that is necessary for open-book management to work.

Further reading

Case, J., “Open-book Management: The Coming Business Revolution”, HarperBusiness,

Case, J., “Opening the Books (open-book management)”, Harvard Business Review, March–April

Davis, T.R.V., “Open-book management: its promise and pitfalls”, Organisational Dynamics, Winter

Stack, J., “The Great Game of Business”, Doubleday,

More management ideas

This article is adapted from “The Economist Guide to Management Ideas and Gurus”, by Tim Hindle (Profile Books; pages; £20). The guide has the low-down on over of the most influential business-management ideas and more than 50 of the world's most influential management thinkers. To buy this book, please visit our online shop.

Editor's Note: This column was prepared by the staff of Winning Workplaces, a not-for-profit organization that helps small and midsized businesses create better work environments.

Some companies' financial information is not exclusively in the realm of accountants and top management. Everyone from administrative assistants to production workers know exactly where their organization stands in relation to its goals and what they need to do to meet these goals.

These companies practice open-book management. Companies that practice open-book management teach employees how to read a balance sheet and share critical financial information. In short, they get their front-line people to think like owners.

Numbers Don't Lie

In a Chicago Tribune article, John Case, author of two books on open-book management, estimated that about 1, companies currently practice this business model. While this number represents a sizable demographic, it's surprising that more companies have not adopted the practice, especially considering the success enjoyed by open-book companies.

A study by the National Center for Employee Ownership (NCEO) and Inc. magazine found that open-book companies grew percent faster than their competitors, and percent faster if combined with an employee stock ownership plan. What's more, according to Inc., the majority of open-book CEOs report this management style also has a bigger impact on profits than on sales. So their companies are not only bringing in more revenue, they're doing it more efficiently, at less cost.

This isn't surprising considering the results of an Ernst & Young survey that found 59 percent of workers said they would be more motivated if they knew how their jobs impacted the bottom line. Seventy-seven percent of all managers agreed their people would perform better if they were made privy to their organizations' critical numbers.

Popular Misconceptions

So why hasn't open-book management taken hold at more companies? The most often cited objections are related to staff and money. Many worry that making the books accessible will result in employees seeking a bigger piece of the pie. Others are afraid their employees won't understand the information or that sensitive information will fall into the wrong hands. However, a comprehensive study of seven open-book companies by the Financial Executives Research Foundation should put these fears to rest. The study found that:

&#;Little information leaks to competitors.

&#;By detailing the numbers most valid to incentive compensation, open-book companies are able to keep remuneration expectations synchronized with productivity.

&#;Both formal and informal training is an effective method of developing the financial acumen necessary to make open-book management work.

Perhaps the biggest barrier is cultural. Open-book management requires a shift from the traditional top-down business model firmly ingrained in most organizations. It means blurring the lines between executives and employees, creating an environment of openness and accountability. If there is one important lesson that can be learned from successful open-book companies, it's that corporate culture is an integral part of an organization's success.

A Matter of Trust

Consider one of the most famous and successful examples of open-book management: Jack Stack's turnaround of Springfield ReManufacturing Corp. (SRC), a manufacturer of components for automobiles, agricultural equipment, and construction vehicles.

SRC was an ailing division of International Harvester when Stack assumed control as part of an employee-led buyout. The biggest change under his direction was cultural. The company created and embraced an environment of open communication, learning and development, and trust. SRC taught its employees how to read a balance sheet and began sharing key financial information. Employees learned how key performance measurements such as defect rates and order backlogs impacted the bottom line. The result? Since the company's sales have grown from $16 million to more than $ million!

Contrast SRC with another employee stock ownership plan, United Airlines', and the power of culture becomes even more evident. United, unlike SRC, never succeeded in getting its employees to think like owners. This is because United's employee stock ownership plan was an effort primarily to coax wage concessions from employees instead of a strategic effort to reinvent the company's culture. United's corporate culture, one marked by an antagonistic relationship between management and labor, finally proved to be its undoing.

With distrust of business so prevalent among shareholders and employees, open-book management is a timely business tool. Trust is one of the cornerstones of a winning workplace. Companies cannot expect employees to expend discretionary effort in their duties if they do not believe their employers will do right by them.

Trust, however, is a two-way street. It is not enough to gain the trust of your work force. You also must trust them to do their work and make sound decisions, especially in a down economy when their expertise can mean the difference between success and failure.

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