Making Workers Owners
by David Morris
August 1, 1995
In 1983 Jack Stack and a group of managers bought the Springfield Renew Center, a bankrupt division of International Harvester with 119 employees. They invested $100,000 and carried $8.9 million in debt. That left no room for mistakes. To survive Stack adopted a simple yet far reaching strategy. He opened the books of the corporation to its employees and taught them how to understand financial statements. And eventually he sold one third of the company to the workers.
The results? The renamed Springfield Remanufacturing Corporation (SRC), with sales of $100 million and 750 employees is considered one of the great turnaround stories in American business history.
Word of SRC’s revolutionary strategy spread through the business world and business leaders began to make the pilgrimage to Missouri. Today thousands of executives pay $950 to attend a two day seminar in open book management.
Scores of companies have adopted the concept, which Stack explained in his 1992 book, The Game of Business. “Can you imagine taking a spectator to a baseball game and not explaining the rules, not showing them how they keep score and not giving them a stake in the outcome?” he asked. “The same thing occurs every single day when someone goes to work.”
The game of business has three principles. Teach the employees the rules of the game. Give them the information they need to play the game. Make sure they share in the risks and rewards.
That sounds like nothing more than common sense. But it turns traditional American business practices on their head. Fifty years ago the United Automobile Workers and General Motors signed a contract that continues to typify labor-management relations. “The products to be manufactured, the location of plants, the schedules of production, the methods, processes and means of manufacturing are solely and exclusively the responsibility of the corporation.” Management monopolizes the information and the power and disproportionately reaps the rewards of success. The result? Workplaces steeped in antagonism, secrecy and distrust.
Most U.S. businesses award pay and bonuses based on individual work performance. With most profit sharing programs, “the worker has no idea when he gets a check in the mail why the company made more money that year” says John Case, who coined the term open book management and has just published a book by the same name. “With open book management, they probably know before they open the envelope the amount of money they’ll find inside.”
Open book management is, according to one consultant, “empowerment with teeth”. Informed workers make for a powerful corporate team. Sandstrom Products, a $5.5 million maker of paints, coatings, lubricants and other chemical products embraced open book management in 1992. In 1991 the company had a loss of $100,000. By 1993 profits reached almost $800,000. Sales stayed the same. No new product lines were introduced. No new customers signed up. Knowledgeable, involved and committed workers had reduced production costs by almost $1 million.
Open book management works with and without unions. Xerox used it to fight back into contention when Japanese copier manufacturers had it on the ropes. “Xerox operates on the premise that no one knows the work better than the workers” says Gary Bonadonna, director of the Amalgamated Clothing and Textile Workers, which represents Xerox workers. “Management found out that employees are not the enemy.”
Bill Fotsch, then vice president for business development at Case Corporation had heard that SRC employees knew the business. He was skeptical. INC magazine reports that he visited the company and came across a worker polishing crankshaft journals. Fotsch decided to test him by asking the price of the crankshaft he was working on. The employee looked up and inquired, “List price or dealer net?” And went on to explain both prices, how they compared with SRC’s cost and what his own component of the cost was.
It is far easier to open the books than to teach people to understand the books and especially, how their individual performance connects to the big picture. Some companies have adopted ingenious teaching techniques. Foldcraft, a restaurant seating manufacturer in Kenyon Minnesota uses the Toll House cookie recipe on the back of a bag of Nestle chocolates to teach employees about income statements and cost analyses, variable and fixed overhead and product variances. Foldcraft’s CEO Steve Sheppard attended an SRC seminar in l99l. Foldcraft is l00 percent owned by its 300 employees.
The culture of American business can’t be changed overnight. Case says it can take four years to make the transition to a culture compatible with open book management. But the rewards, both for the company and for the nation, are high.
Jack Stack’s company has become a business school without the MBA degree. SRC has incubated 14 companies inside itself. Workers learn how business works and build up an equity in SRC which they then invest in starting their own businesses.
Stack says he is trying to “teach people capitalism”. Others might say that open book management combined with significant employee ownership is more like people’s capitalism. Whatever one’s politics this is one grassroots idea on which we can all agree.