Everyone is proclaiming the importance of transparency. It’s mentioned in the Wall Street Journal almost daily and we hear it promoted in the quarterly earnings calls of Fortune 500 companies. To be financially transparent a company must present financials that an outsider can easily read and understand. The numbers should give the reviewer a feel for the strengths and weaknesses of the company. Sarbanes-Oxley is all about helping companies become more transparent.
The benefits of sharing the numbers are tremendous, as Joe has seen firsthand at Setpoint Systems, where they have an open book philosophy. Each employee is trained to understand financial statements — shared weekly. Bonuses are tied to the company’s performance.
The employees at Setpoint feel psychic ownership — they care about how the company does week-by-week and they want to see the numbers moving in the right direction. Financial transparency has helped Setpoint create a committed workforce.
Over the years Setpoint has seen amazing things happen because of financial transparency and psychic ownership. One of our favorites is what we call the motorcycle story. Early in Setpoint’s history, the two founders (both engineers) decided to develop an all-aluminum motocross frame. This was is the early ’90s, and they felt that a good light motorcycle frame did not exist. They assigned one of their Setpoint teams to develop this frame. Joe was a part-time CFO consultant at the time and told the two founders that this idea did not make sense financially. After some research they found out that it would cost several million dollars to market this new frame in trade magazines and at motocross races. For a small start-up company the idea was not viable. The project was killed.
Setpoint Systems tracks two key metrics based on the business of capital equipment manufacturing automation. One of the key numbers that drives profits is gross profit per hour. Everyone in the company knows that if GP per hour is high enough, they will qualify for a bonus.
About two years went by. One day a shop technician was out of work, his project completed. He went to one of the founders and asked him if there was something he could work on. The founder said, “go to my garage and get the partially assembled motocross frame and engine. If you work on it for a couple of days, we could be riding the motorcycle by the weekend.” Later that day, as Joe was walking though the shop, he saw the technician working on the frame. Joe thought, “Oh no, I thought we killed this project long ago.” Joe walked up to the technician and asked him what he was doing. His answer was music to Joe’s finance ears. He said, “Joe, I’m not sure what I’m doing but I do know that I am generating zero gross profit per hour.” After reporting this answer to the founders, the frame was removed and the technician was reassigned to more profitable work.
Financial transparency, along with clear key numbers that everyone can focus on, can help to drive profitability and success. It was true long before it was a buzz word on Wall Street. And it’s still true now.
Originally published on Harvard Business Review Blog.