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Company Value Added by OBM

"The numbers on open-book management"
editorial by George Gendron, Editor-in-chief, INC., June 1998, page 11.

Open-book management (OBM) is a participative style of management that involves:

Sharing information (i.e., opening some or all of the company's books) and educating employees so as to become "business literate."
Having an incentive compensation system such that employees have a stake in the business outcome, good or bad.

George Gendron reports a study conducted by the National Center for Employee Ownership and partially sponsored by Inc. Fifty companies were examined before and after they implemented OBM. "Revenues of open-book companies grew, on average, 1.66%/year faster than those of their competitors, and 2.2%/year faster if the open-book company also had an employee stock ownership plan (ESOP)." His example compares two hypothetical companies growing 5%/year (base case) and 7.2%/year (2.2% higher case with OBM).

Here is my version of the OBM effect. The business value impact of the management strategy is illustrated by three cases:

Base case (company without OBM)
Same company with OBM implemented but without an ESOP
Same company with OBM implemented and with an ESOP

	Company A	OBM Company B	OBM+ESOP Company C
Sales at Start Comparison	$10,000,000	$10,000,000	$10,000,000
After-tax Net Margin*	3.47%	4.63%	5.00%
OBM Growth Bonus	0.00%	1.66%	2.20%
Sustainable Growth Rate*	5.00%	6.66%	7.20%
Annual Sales after 10 years	$16,288,946	$19,055,300	$20,042,314
Net Income	$ 565,226	$ 882,260	$ 1,002,116
Value Method 1
Company value = 10 x NI	5,652,264	8,822,604	10,021,157
OBM-Added Value		$ 3,170,340	$ 4,368,892
		56%	77%
Value Method 2
Company value = 1x Sales	$16,288,946	$19,055,300	$20,042,314
OBM-Added Value		$ 2,766,354	$ 3,753,367
		17%	23%

* I used Gendron's growth rates to mean "Sustainable Growth Rates" and fitted model parameters for what I believe are reasonable cases. SGR=plowback x Return On Assets. Gendron assumed 10% margins, although 5% (my OBM+ESOP assumption) is more consistent with the growth rates in his example. I assumed a no-dividends policy and Debt/Equity =0.50. Sales/Assets = 0.96 provides the fit to the reported growth rates. The After-Tax Net Margins were computed so as to provide the target Sustainable Growth Rates. My model with the income-multiple valuation shows considerably greater value improvement with OBM because (a) I backed-in to Net Income to match to the target Sustainable Growth Rates, and (b) Net Income is very sensitive with the thin margin.

As shown, company value is substantially enhanced with either valuation method. Further, owners and managers in OBM companies can sleep much better knowing that their employees are also thinking about problems and opportunities of the enterprise.

I've got the book and am reviewing their data. The small book Open-Book Management and Corporate Performance looks good. You may order it ($30 for non-members) from
    NCEO
    1201Martin Luther King Jr. Way.
    Oakland CA 94612
    (510) 272-9641 (phone)
    (510) 272-9510 (fax)

Related sites: Coaching for Success^{^{^®}} Trainers and consultants supporting OBM.
Fostering cultures where Employees Think Like Owners

The National Center for Employee Ownership (NCEO)

—John Schuyler, June 1998.