Leadership July 7, 2009, 8:29AM EST

To Beat the Recession, Open Your Books

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Still, leaders can use the philosophy's tenets of transparency and accountability to empower workers, particularly in a downturn. At one division of SRC last fall, when monthly orders from General Motors fell from 2,000 engines to 200, workers agreed to short weeks, and 35 of the 160 employees accepted voluntary layoffs. The company structured the cutbacks so that Missouri's unemployment program would make up the difference. Five months later, after scrambling for new sales, the division was profitable again and returned to full employment—even rehiring the laid-off workers—with a new contract to make engines for the U.S. Postal Service, among other clients. Moreover, SRC's survey of morale in February recorded the highest score in 17 years. "They at least feel they can do something to avoid a disaster," Stack says.

Business owners can't change to open book systems overnight. First, they have to create a culture where employees want to be involved, and they need to understand the numbers they'll be measured on. "When a company is struggling, they do need to be careful how they present this to the employees. They want to lay out the reality, but in a careful way so they're not just scaring people," says Kent Forsland, founder and chairman of Designer Doors, an 80-employee, $17 million custom garage-door company in River Falls, Wisc.

"the idea spigot opened up"

Forsland, 54, started using open book management in 2003 after two bad years, including a loss in 2001. His biggest fear—that employees would demand more money if they knew details of company finances—vanished after he asked workers at a meeting what they thought the company's profits were. "Most people thought we were making at least 50% profits. There were some who thought we were making 70%," Forsland says. The reality: Designer Doors' net income was just 5% to 7% of sales. Once his employees learned that, Forsland says, he felt the culture shift immediately. He began training his entire staff in financials and explaining spending decisions. And employees started suggesting cost savings. "The idea spigot opened up," Forsland says.

Besides drawing employees into decision-making, open book management is intended to make everyone in the company accountable, which can provide a useful check on leaders. Rich Sheridan, CEO of Menlo Innovations, a $4 million software developer in Ann Arbor, Mich., says his 60-person staff can see when prospective clients are lagging in the sales pipeline. "They can call the CEO on the carpet and say: 'Hey, you're the one whose job it is to give these guys a call,' " he says.

Sheridan, 51, takes a collaborative approach not just to running the company, but to project management and even software design as well. The office is one open room. Note cards on the wall track the progress of every project, and programmers work together in pairs at each computer. Keeping employees in the dark can hobble a company, he says. "When you start pulling the information back, when you start retaining it for yourself, suddenly the organization can only move as fast as you can," Sheridan says. "I'd love to believe I'm the smartest guy in this room, but I'm probably not."

Tozzi covers small business for BusinessWeek.com.