This isn’t about “touchy-feely.” I see core values as a hard-nosed business practice, just like reducing costs. It’s simply a way to ensure that everyone on the team knows what is important.

As owner, you can – and should – shape your company’s culture. You can let it happen or you can make it happen.

So, what makes up a culture? All sorts of things. Fun versus serious. Honest versus dishonest. Friendly versus confrontational. Lunch with others or eat at your desk. All this and much more is the stuff of company culture.

A big part of a business’ culture centers on its values. You may not care whether your employees eat at the desk or go out, but you darn sure better care whether they are being honest with your customers.

My recommendation: Determine what principles are important to you, and then inject them into the workplace.

If you don’t spell out what’s important, then the implication is that either nothing is important or everything is important – trouble either way.

Here’s an example: Barry is the new guy in sales. He was put place with no orientation on what’s important to the company. He brought some bad habits, including breaking promises to customers. His manager doesn’t find out until a furious customer calls him.

But George works at a company where breaking promises to customers is unacceptable. The owners and managers “walk the talk”, setting the example for others. It’s discussed in meetings and in new employee orientations. It’s used in performance reviews and job descriptions. Do you think George shares Barry’s cavalier attitude toward commitments to customers?

This is the difference between ignoring what’s important and building a values-based culture on purpose.

Adopting a set of values is not about picking a litany of lofty goals that nobody can live up to. A company must identify those principles that the top people are passionate about and can adopt without hesitation.

What values to pick then? Each company must answer that question for itself. The answer may be found in things like the founder’s personal values and vision for the company.

Whatever values are chosen – and a handful is plenty – the company needs to really work at making them second nature for all employees. This doesn’t happen overnight. About the time you think your staff is getting tired of hearing a message, that’s about the time it’s just starting to soak in.

Here is perhaps the most powerful sign that it’s working: Your employees start enforcing the culture. When you hear one of them tell another, “That’s not how we do things around here”, you’ll know your work is paying off.

Adopting and living up to a set of guiding values can literally transform your business. Don’t assume your people know what’s important. Tell them. It’s hard work and a long process, but it will eventually have a positive impact on your bottom line.

With this year’s Gathering rapidly approaching, we have been working on the case studies for this year’s All-Star roster. It was one story in particular about a Californian manufacturing company that brought itself roaring back from the brink through open-book principles that got me thinking: Why is it that it usually takes a crisis or catastrophe to motivate us to create change?

This question is especially relevant to the Great Game of Business since it seems that, despite more than 20 years of outrageous success stories, surprisingly few companies out there today employ open-book principles in their day-to-day operations. The ones that do play the Great Game often have been pushed to the brink before they make the move. Again, my question is: Why do companies wait so long?

Maybe it’s just natural that when we’re winning with a lead in good times, or at least breaking even, we don’t feel the need to change things up. It’s similar to when we wait until we’re sick or overweight before we decide to eat healthier or hit the gym. Maybe it’s only when we’ve fallen behind that we finally embrace open-book principles because we don’t have anything else to lose.

Or maybe, as Morgen Witzel recently wrote in the Los Angeles Times in his review of the book, Beyond Performance Management, business leaders simply don’t have the courage to give up the tradition of command-and-control leadership in favor of transparency and shared information.

I don’t know. I wish I understood why more companies out there wait so long. What do you think? What’s been your experience?

Yes, belonging to groups like these gives you a chance to share and learn from the experiences and best practices of our peers. But I’d say that’s only 30% of the equation. What makes belonging to these groups, and attending their events, so powerful is the people you meet, talk and go out to dinner with. The real takeaways are the relationships you build throughout your life and are then refreshed when you get together with each other.

The same is true of The Gathering of Games, which will be celebrating its 20^th anniversary May 9-11 in St. Louis – an event I’d like to share with all of you.

I’m proud of the lineup this year, which will include a variety of informative breakout sessions and standout speakers like Kim Jordan, CEO of New Belgium Brewing and Brian Scudamore, founder of 1-800-GOT-JUNK? You’ll also find people like PBS business reporter Paul Solman, George Gendron, the former editor of Inc. magazine, and, as always, business writer extraordinaire Bo Burlingham, mingling in the audience as well.

But when I look back at the past 20 years, I’m humbled to think about the thousands of relationships from all walks of life that we’ve been able to build through our annual Gatherings. Like Ping Fu, founder of Geomagic, who shared her message of survival and hope. And Ari Weinzweig from Zingerman’s Community of Businesses, who taught us about vision. There was Terry “Moose” Millard of Southwest Airlines, who talked about courage and Bill Strickland of Manchester Bidwell Corp., who inspired us with his undying love of the human spirit. John Mackey, the founder of Whole Foods shared how he conquered the impossible while Richard Teerlink, CEO of Harley-Davidson, drove his bike onto the stage and talked about lifestyle. And who could forget Chris Sullivan, founder of Outback restaurants, sharing how he built balance into his life while Steve Sheppard, who after retiring from Foldcraft, where he built restaurant furniture, has since taken open-book management global through the Winds of Peace Foundation.

There’s also our friends and champions of the Great Game community, dedicated people like Alan Kent, Linda Hobbs, Ed Dorian, Glen Thoroughman and Corey Rosen, who continue to make the journey to the Gathering every year. They all share similar values in that they have shown that they have a great capacity to love their associates by developing businesses that allow anyone the chance to grab the brass ring. It’s the chance to meet and connect with people like this who have been so giving over the past 20 years.

While I have countless fond memories of the Gatherings gone by, the theme of this year’s reunion is “20 years of looking forward.” That means it’s time for all you newcomers to the Great Game to come and join us old-timers in creating an experience with people who share similar values like transparency, involvement, ownership, openness, an eagerness to learn and grow, caring about people and giving back to the community when it comes to running your business.

Give yourself a break and clear your head by spending some time with a group of joyous people. Come and recharge your batteries, make some new friends and maybe learn a thing or two you can bring back to your business on Monday morning. It will be worth the trip.

I look forward to seeing you there.

Jack Stack

PS – I almost forgot to mention Norm Brodsky, the most widely photographed executive alive today!

*To learn more about The Gathering of Games, visit the conference Website.

But there are many benefits in getting an appraisal of your company’s value – and that’s something we have been doing at SRC since we got our start. We understood early on that we needed a way to cash out our shareholders without crashing the whole company in the process. That’s why we made annual appraisals a part of the shareholder’s agreement we signed 30 years ago (it’s also a requirement for an ESOP – which we started 28 years ago).

Not only was that a great decision for the company, it has also helped us get pretty good at this appraisal thing, which has become a key part of playing the Game at SRC. We want every associate to understand how our company is valued because they are, in fact, the owners of it. If they can understand how the valuation process works, then they can have a better understanding of how to make the company, and their share of it, more valuable.

A real valuation will require a business valuation expert, which can run between $5,000 and $10,000 depending on the size of your business. It’s the valuation expert who will help you value your business relative to your industry.

While you need this expert’s help, you can also do a lot of the work yourself. To do that, you’ll need two key sets of data: a history of your cash flow and earnings (profit-after-tax). We use five years of data because we’ve been around that long. You’ll also need your projected earnings.

Let’s walk through an example to show how we can put them all together.

Part A: Earnings

First, let’s look at how we organize the earnings data:

This should look fairly straightforward: it’s a five year-history of earnings with projections for the next year. The thing that might look different is the line that says, “weight.” Without getting too technical, this is basically a way to get a more accurate running average of your earnings where more recent results, such as 2011/12, are weighted more heavily than older results like 2007/08 (we’ll come back to the projected earnings later).

To get your weighted average, therefore, you:

1. Multiply each PAT figure by its weight ($90,000 * 1; $73,000 * 2; etc.);
2. Add up the five results ($1,704,000);
3. And then divide by 15 (the total of the five weights).

When you complete the equation in this case, the result is $113,600.

You’re next step is where your valuation expert comes in. In our case, the expert would conduct research on market conditions in the on-highway and off-highway vehicle industry, future economic conditions and, various other variables like long-term interest rates and inflation to come up with a “multiple” we can then apply to our weight average PAT figure. In this case, the expert gave us a multiple of 5.8. (We’ll get into these estimated multiples in a future blog post.)

After we multiply our weighted average PAT by 5.8 ($113,600 * 5.8), we come up with a figure of $658,880.

Now, if we wanted to account for the debt we owe as well as any cash we might have in the bank, we’d do that here. But let’s keep it simple for now. We’ll mark the $658,880 as our “Multiple of Sustainable Earnings Capacity” and put it aside for later.

Part B: Cash Flow

Now we’ll perform a similar calculation using our five-year cash-flow history:

Just like we did with earnings, we’ll go ahead and calculate a weighted average of the cash flows by performing the same calculation we used with earnings, which results in a figure of $140,800.

Now we’ll take the multiple our valuation expert hands us – 4.75 in this case – and multiply our weighted average cash flow figure ($140,800 * 4.75), which gives us a result of $668,800. This is our “Multiple of Estimated Sustainable Cash Flows.” Again, we’ll put this aside for a moment.

Part C: Projected Earnings

The third figure we need to properly value our business is our multiple of projected earnings. This is where we can capture the future earnings ability of the company. If we return to the earnings chart we used earlier, we see that our projected earnings figure for 2012/13 is $208,000.

In this case, the math is easy. Our valuation expert has given us a multiple of 4.8, so when we multiply those two figures together ($208,000 * 4.8), we get a result of $979,200, which is our Multiple of Projected Earnings.

OK, we’re almost done.

Part D: The Valuation

To get our final valuation, we need to grab the final numbers from each of the first three steps:

The last steps in the process are to again assign weights to the figures we’ve assembled. In this year, cash is king, which means we’re going to weight the company’s ability to generate cash more than our earning’s history and our projected earnings since much has changed since 2008. (We’ll explain how the valuation assigns the weight in a future blog.)

Next, we need to multiply our actual figures by their weight, add up the results and then divide by six (the total of the weights).

When we do the math, we end up with a figure of $717,227 – the valuation of our company.

Now, there are a couple of more steps we would need to take, such as discounting that figure by 10% because we’re a private company with an uncertain market ($717,227 * 0.9 = $645,504), but this is fairly close to our final number.

Our final step is to divide our valuation by the number of outstanding shares (10,000) we have in our company: $645,504 / 10,000.

Which leaves us with a stock price of $65. The value of our associates understanding how we got here: priceless.

This is a good template to determine what the company is worth. But if another company wants to buy you for strategic reasons, for example, they might be willing to pay a premium over this. Conversely, if you are forced to sell for some reason, you might need to sell at a discount.

Again, in the end, you’re only worth what someone is willing to pay.

SRC has for years been my baseline for what well-managed communication should be. I’ve been taking clients and young communication practitioners there for years. After their visit I explain: “Now when you’re confronted with a communication problem, you can ask yourself: ‘What would SRC do?’”

Open book management is a leadership philosophy that’s grounded in the notion of creating businesses of business people where everyone in the organization thinks and acts like business owners.

People in open book companies are steeped in business literacy, work daily to improve the financials, have huge amounts of financial information available to them (hence, the term open book) and their rewards and recognition are tied to financial performance. People who see open book for the first time are “blown away.” Their words, not mine.

Here are some quotes from SRC people:

“VP’s and above don’t really know much. It’s the wisdom of the crowd that makes us much smarter.” (Comment from an EVP)

“In traditional organizations, leaders go to bed every night not knowing what they don’t know. We know what we don’t know because everyone is so involved.”

“Many leaders have a Santa Claus complex. They only want to share good news.”

“It’s liberating to give people the information they need to make better decisions.”

“Our leadership meetings help us identify where employees are constrained from doing what they want and need to do to get things done.”

The four key points from last week’s visit:

Communication management is, as it should be, future focused through the windshield. Most companies manage communication historically by reporting what has happened—through the rear view mirror. Sure, we want to know if we’re winning or losing but the emphasis should be on numbers we can do something about.

Don’t think about top down and bottom up. That’s old thinking. Think about lateral conversations—people collaborating to get the job done better. Ban we-they thinking and language.

Focus on the critical number you’re trying to improve—the one that provides organizational focus and that everyone can influence. So-called “messaging” becomes old way because the focus is less on talking points and more on the numbers that represent the real game that’s being played in business.

If you have a trust problem, open the books. If you won’t open the books—even a little—you’re perpetuating the trust problem. Can you continue to lead if you’re not trusted?

What’s your biggest barrier to opening the books? Leaders who don’t trust their people? Fear of exposing reality? Saddled with the myth that the SEC won’t let you?

-Jim Shaffer is a long-time friend of The Great Game of Business and an internationally recognized thought leader in improving business performance and managing large scale organizational change. He helps business leaders in a variety of industries significantly improve and sustain operating and financial performance while achieving exceptional returns on the investment made in generating the improvements. 

As a recap, I blogged last time about how challenging it can be to focus on numbers that tend to change even after you’ve technically closed the books on an accounting period. It can be difficult and confusing to determine what number you’re starting your new period off with because your books close so many weeks after the period ends.

This affects you most when you try and build a bonus program around a critical number for the beginning of a New Year without the advantage of having the closing number available until several weeks into the New Year.

You’re going to run into this any time you choose a critical number that comes from the balance sheet or cash flow statement. It’s much easier to work off the income statement because it uses figures that have been accumulated over a 12-month period of time. There’s a lot of history there so you tend to have a pretty good idea about where you’re going to end up at the end of the year, which makes for a more accurate starting point. That also means you can get your bonus program going before the year starts with a more certain feeling of accuracy.

With ratios that come from the balance sheet and cash flow statement, you have a lot more variables to deal with – everything from payment to suppliers to receivables from your customers – that throw off your beginning and ending numbers. The reason is that these numbers are more current, just like when you deal with the balance on your checkbook. Since it’s real-time information, it’s constantly changing. When you have such a moving target, it becomes really hard to figure out where to start and end a bonus program.

That’s why I think many companies playing The Great Game of Business shy away from choosing critical numbers based on the balance sheet and cash flow statement.

So how are you supposed to create a bonus program based on a critical number when that number seems to change by the hour, right?

That’s really the lesson I want to get to. If you don’t know what number to start with, go to where you want to end up at and work backwards from there.

Let’s return to our example we used in Part One.

During our high-involvement planning process in October 2011, we determined that debt would be our critical number for 2012. (Remember our year starts in February). When you begin your planning process four months before a New Year begins, you’re challenged at determining what numbers you should use to build your bonus program around. As a result of the decision to pay off our shareholders, we knew that debt would be our critical number for 2012. But we had two challenges to tackle:

1. Determining what the opening debt would be on Feb. 1, 2012.
2. Setting a goal in reducing the debt to a level that the associates could achieve by the end of the year that the company could benefit from.

Our planning process starts in October and picks up speed by early December, at which time we have all the corporation’s forecasts and financial plans for 2012 with estimates on opening and closing financial ratios. It was at this time that the forecasted and estimated accumulated debt for the end of 2011 was approximately $38 million. The ending forecast for 2012 indicated that the closing debt would be approximately $31 million. To put that another way, the organization would produce about $7 million over and above capital needs to pay down debt.

In December, based on everyone’s estimates, it appeared that we could have a critical number program ready by simply starting out the 2012 year with $38 million worth of debt. We could then put an incentive program in place that would realistically drive down that debt to a point where associates would not only be rewarded, but the company would also be stronger as a result of tackling this vulnerability.

We talked with our associates at the corporate level and agreed that we would strive to reduce the debt in 2012 by $10 million – $3 million more than what was forecasted in the original plan. Our policy has always been to start a New Year incentive program based on the closing number of the prior year. The reason we do this is to encourage continuous improvement. So we thought it would be very attractive for all parties concerned to build an incentive program that would drop our debt from $38 million to $28 million, which we could accomplish in 10 steps ($1 million a step) with a 2% reward toward compensation for every $1 million we attained in marching toward the goal. If they hit the full goal, the corporate associates would receive a bonus equivalent to 20% of their salaries (subsidiaries have their own critical number program).

But what happened is that at the end of January, the organization got aggressive about improving on the $38 million number – because receivables came in early, payables went out late and inventories were way below expectations – which led to a closing figure of $33 million.

Can you see the dilemma? We had done well in setting the expectations that we would start out with $38 million in debt. Now, with the year-end closing performance, we would have to revise our figures where the starting number would be $33 million. And, if our earlier estimates were correct and we thought we could still reduce debt by $10 million, the new ending would be $23 million if the logic of our estimates were the same.

But, wouldn’t you know it, four days after we closed the books, we took on another $5 million in debt, which brought us back to our original forecast of $38 million.

When we close the year and audit the books, the ending debt figure will be $33 million. But when we do a deeper dive in terms of what the difference was between the opening day and four days later, we realized that all the money received to pay down the debt was more of a timing issue since $38 million was much closer to actual starting point than the books will show.

That’s why timing the balance sheet and cash flow statement will drive you crazy.

As a result, we entered into a significant debate with the associates to try to determine what we could actually do in 2012. We agreed upon the fact that our prior forecasting showed that we would end up with $31 million in debt, and that was what really mattered. We then discussed whether or not we could stretch a little bit to $28 million as the ending point of the critical number program and finalize the incentive program. After scratching our heads for a short period of time, we all agreed this was the right thing to do.

We’ll let you know in blogs to come about where we stand against our corporate critical number.

We share this story with you because we don’t want you in your company shying away from choosing a critical number off the balance sheet or cash flow statement just because it seems like you’re trying to shoot a moving target. Just start with where you want to end up and go from there.

Emily Litella, in one of her typical on-air rants: “What’s this I hear about computer parking lots? We’re in a recession, people are losing their jobs, and now we have parking lots for computers! It’s an outrageous waste of land and money!”

Jane Curtin, with her typical disdain for Emily: “It’s commuter parking lots.”

Emily: “Oh … Never mind.”

A note to those of you too young to have experienced Saturday Night Live’s original cast from the 1970s: Look up Emily Litella on Wikipedia. Better yet, see her on YouTube. Played by the late, great Gilda Radner, Emily was a commentator for the SNL Weekend Update news. Emily always jumped to rash and incorrect conclusions because she never had the right facts.

Do your employees do the same thing?

I constantly encounter business owners who are worried that their employees will find out either how well or how poorly the company is doing. Of course, lately it’s trending toward the “poorly” end of the spectrum – but either way, here’s my usual response:

“Your employees aren’t dumb. They’ll probably figure it out. But even if you can hide the truth, why would you? In the absence of facts and information, your employees will make assumptions and jump to conclusions. Their decisions and behaviors will be based on these false assumptions. How do you expect that to work out?”

A little transparency goes a long way.

That word – transparency – seems especially relevant today, given our current state of affairs. Think about the world of big-business, banking, and high finance. A string of crumbled companies, bankruptcies, lost pensions, mass firings, devastated families and broken dreams. Don’t even get me started on Congressional “leaders” who make deals behind closed doors and ram legislation through without even allowing their members to read bills before voting.

Many of America’s economic woes could have been avoided, but for a lack of transparency.

I’d argue that transparency gives rise to leadership.

In an open environment, leadership is a must. It requires you to carefully choose the “people on the bus” who are worthy of trust and who will act in the business’ best interests with the information given to them. It also means that you’ll have to explain the information – to mentor and train your team – so they’ll know what it all means.

Transparency allows full and effective delegation. “Here’s the goal. Go make it happen.” Knowing the organization’s goals, financial status, and available resources allow confident decision-making.

Integrity – a cornerstone of leadership – goes hand-in-and with openness. Shady business practices are like fungus and vampires. They don’t thrive in the bright light of day.

Business owners who worry that their employees will know the company’s status are withholding information and keeping their employees in the dark – and still expecting good results. It’s much like asking someone to play a sport without keeping score.

Delegation? A secrecy-cloaked environment throws a blanket over every potential solution. Aside from the top leaders, nobody has the big picture: “What should I do? What can I do? What resources are available? What methods make sense for our current financial situation?” The lack of information will result in questions, false assumptions, and faulty decisions … making micro-management necessary.

So often, the small business community looks to the captains of industry for answers. It sure seems to me that the example set lately by the big business community calls for a shift in thinking.

Why can’t the small and mid-sized business community set the tone for a change? Let’s start a revolution of our own. Let’s be the example-setters. Let’s be the poster-boys and poster-girls for transparency. For integrity. For solid business practices. And for leadership.

The Emily Litella act was funny on TV. It’s not funny in your organization. Open up and get Emily off your payroll.

Case in point: At SRC, we have forecasted that year-end closing more than fifty times. The process has been more interesting in recent years as a result of all the banking changes that have occurred since the downturn in 2008.

One result of that is that last year we zeroed-in on reducing our bank debt as our organization’s critical number. We had set a goal at the beginning of the year to close at $13.7 million in bank debt (our total borrowing capacity is $40 million).

But in mid-year, things changed. We had been debating for some time about when the company should become 100 percent ESOP. To do that, though, we needed to take on debt to pay off the company’s original shareholders. Given the risks of the downturn, we were hesitant to pull the trigger until the timing was right.

All of a sudden, the signs pointed to yes: Our balance sheet was strong. We were diversified and our markets looked good. In general, we knew it would be good to make the move when things were looking up, even if shareholders might be leaving some money on the table.

So we pulled the trigger to go 100 percent ESOP, which amounted to a $26 million investment. To pay for it, we did a combination of three things: we took cash off the balance sheet; we borrowed an additional $7 million from the bank; and then we issued a series of three-year and ten-year notes to the selling shareholders.

Everyone in the company knew about it and participated in ownership culture meetings to learn about the risks and rewards they were about to enter into.

While this was a good plan, it had not been designed at the beginning of the year. We had our work cut out for us. We had just bumped up the projected year-end debt figure for the company from $13.7 million to $20.7 million.

In October 2011, we began estimating what numbers we were going to close the year with. It was our team’s opinion that we would close the year with a total of $16.9 million in debt. If you do the math ($20.7 million – $16.9 million), this meant that they had figured out a way to absorb $3.8 million of the $7 million we had tacked on to the debt target we had set at the beginning of the year. The crowd went wild!

When December rolled around, the real fun began. Our year-end is January, but it’s in December when the twists and turns began. Vendors delivered unexpected inventories. Some shipments became questionable due to part shortages. Customers’ month-ending closings were not in-line with ours, which means receivables would be off by a day and collections would get pushed into the next year. Etc., etc., etc.

When we added it all up, we estimated that we would be off $4 million from the last projection, which offset that $3.8 million we had been celebrating. We were back to looking at a year-end debt figure of $20.9 million. It looked like a push.

But the year wasn’t over just yet since we had six weeks to go. People got to work. Innovation kicked in. Everyone focused to such a degree that we crossed the finish line at the close at $15.1 million. Amazing! The forklift truck parades began anew and the patting of backs and the slaps of high-fives could be heard throughout the halls. We had spiked the ball in the end zone and looked up at the exploding scoreboard. We had closed the year on a high note.

After looking at a worst-case scenario of $20.9 million in debt, the team had closed the year at $15.1 million – which meant that we had wiped off $5.6 million of that $7 million in corporate debt we had added mid-year to pay off the shareholders. Oh what a place!

Then things got interesting. Again. Three working days into the New Year we took on $4.8 million in additional debt. In other words, we had to start all over again from the top. Timing…it will drive you crazy.

In the next blog, we’ll talk more about the difficulties in closing a year, opening a year and setting the critical number for the New Year.

I hold a staff meeting every week here at SRC. We go over the financials of the company and anything else of material significance. This is a critical part of how we communicate to our associates. It keeps a constant flow of information coming and going. You always hear a lot of companies talking about their “communication problems.” Well, I think the problem is that we don’t give people enough information to communicate.

Our last meeting came after President Obama’s State of the Union speech. If you watched the speech, you know what the major theme was: the economic disparity plaguing the country today.

I’ll admit that I didn’t think much of the speech. In fact, I’m really tired of hearing about the “99-to-1” problem facing our country. I agree there is a growing problem of the “haves” and the “have-nots,” but I’m frustrated that nobody is talking about how to fix it.

With this being a very current topic, I decided to talk about it in our staff meeting. We opened up a discussion about it where we tried to avoid using any of the political jargon or taking anyone’s side.

There were a lot of financially astute leaders in that room. We got great questions and perspectives on things. What follows are some of the highlights of our discussion.

We tried to define what the “99” and the “1” really meant. We had mixed opinions. Some were talking about the “income earners” while others were talking about “wealth accumulators.” There’s a big difference between the two and I think it tripped a lot of us up. I can see why politicians are confused.

I think a lot of us fall into a trap of focusing on salaries instead of income, such as money earned as wages, as opposed to wealth, which is accumulated capital in the form of money in the bank or held in company stock. Mitt Romney, for instance, pays a lower tax rate on the business income he earns – the profits and dividends – from his accumulated wealth. So while everyone gets worked up about how much he paid in taxes, they’ve overlooked the key concept: how did he accumulate all that wealth? That’s where we should begin looking for answers of how to level the economic playing field.

When you really look at the numbers, I think you’ll find that the top 20% of the people control 85% of the wealth. The bottom 40%, on the other hand, control a minuscule 3/10 of 1% of the wealth. That’s a massive gap. So how did that 20% accumulate so much wealth? I think the vast majority of the cases would show that people became wealthy because of business income.

I hope you noticed that I said business income and not wages. I would contend that we as a country have focused more on wages than on business income over the past century. By paying attention to wages over patient long-term capital as in equity, the owners of capital experienced the true engine of wealth creation. Sadly, by focusing on keeping wages high rather than at competitive rates, we forced business owners, who are accountable to their stakeholders, to move those jobs someplace else, where wages were significantly cheaper. While we lost jobs in the U.S., business owners kept their equity and business income, which increased the domestic wealth gap.

Again, the big question is how do we go about shrinking this gap? We just recently became a 100% employee-owned company. That means that every associate in the company now has what we call a Stake in the Outcome or, more plainly, an equity stake in the company just like Mitt Romney had in Bain Capital. But to get there, we had to take on debt to pay off the company’s original shareholders.

Here’s how the math plays out. Since our associates own the company, they theoretically could pay themselves whatever they wanted. Raises for everyone! Or, they could continue paying themselves competitive wages and focus on paying down the debt on the books to convert toward greater wealth for everyone in the company. Under our current stock appraisal, for every $1 million we pay down in debt, the share price of the company will go up $1 until the original shareholder debt is completely paid off, assuming steady earnings from one year to another. Obviously if earnings continue to rise, so does the value of the associates’ shares.

In other words, they can turn that debt into equity, which is their share of the wealth of the company. This is a straightforward example of how we can convert risk (in this case, debt) into ownership. But rather than a single person taking on that risk like we see in most companies, it’s a shared mission for everyone who works at SRC.

This is a lesson in the literacy of the language of business that we teach every one of our associates through The Great Game of Business. Employee ownership is also, I believe, a way that we as a country can take a proactive approach to closing that wealth gap we’re looking at.

Focusing on raising wages isn’t the answer. Nor is it about taxes and giving the government the power and responsibility to redistribute wealth. It’s not about increasing the minimum wage – it’s about teaching everyone how the “haves” made it. This is one of the most significant challenges of our time.

We have to be careful here because I think we’re putting the American Dream at risk. Why would anyone gamble by climbing a slippery and difficult ladder when, if they do succeed, everything they gain will be redistributed anyway? The reward is what makes the climb worthwhile. But now it’s almost like we’re trying to hold down the climbers and I’m not sure how that makes any sense.

Shouldn’t we all want to be climbing the ladder rather than pulling down those that want to try? Isn’t that what the American Dream is all about?

As you can imagine, this topic provoked an interesting debate in our staff meeting. Now I’d like to know what you think. What kind of critical number can we come up with as a society that would help shrink the wealth gap without taking anything from anyone? How can we get everyone, including folks like teachers and firemen, to participate in finding that balance between creation and distribution of wealth? What kind of incentive program can we create that gives everyone a chance to grab the brass ring?

 It’s hard to argue with that piece of wisdom. That said, here’s another old saw to consider:

          “If everything is important, then nothing is important.”

Between these two valuable quotes is a balance and a guideline for business owners.

All businesses have certain numbers that define success. Some, like profit, are universal. Every business must take in more than it spends, so an argument could be made that this number – profit – is a definition of success for every business.

But what about other numbers? There’s certainly no shortage of other things to measure – sales, costs, margins, cash … the list goes on and on.

They’re all important. But don’t forget: “If everything is important, then nothing is important.”

Focusing on a small, carefully-selected handful of numbers and actually doing things to improve them is much more likely to lead to overall success than scattershot oversight of dozens of different numbers.

Some business owners create a scoreboard or “dashboard” of metrics – to pull selected numbers out of the blizzard of income statements, balance sheets and other reports – and single them out for an appropriate amount of attention.

This is how the “What gets measured gets managed” piece comes into play.

So, how do you cut through the scads of potential metrics which might be worthy of your undivided attention, and discover the select few which will truly make a difference?

Think about your business. Two questions:

1. Are there things related to your specific business model that are absolutely critical to ongoing success? For instance, if you are the low price leader, then cost of sales is likely a primary area of focus.
2. Are there things going on in your business right now that deserve attention? Examples might include things like declining quality, too much dependence on one customer, or high employee turnover.

If you find that there are specific things that warrant a permanent place on your scoreboard, then add them and leave them there. Or, perhaps you’ll discover that a temporary issue needs attention – so it gets a spot, only until it is resolved.

In most cases, these big-picture, corporate-level “critical numbers” will have underlying “drivers” – activities which must be done to move the number in the right direction. A simple example: weight loss. If your critical number is pounds, the drivers would be calories in (eating) and calories burned (exercise.)

The best drivers measure activities and behaviors, as in this weight loss example. If you want to change a number, you’ve got to change someone’s activities or behaviors.

These are the numbers that deserve a significant amount of time and attention. That’s not to say other numbers aren’t important. They’re just not as important.

Identify and break out your critical numbers and drivers. Get them on a scoreboard for all to see. Talk about them. Teach and learn about them. Assign responsibility for them. Track them. Most importantly, be sure to move them in the right direction.

Your business will be more successful for the effort.