Executives need to get smarter about when to open up and when to withhold information so they can enjoy the benefits of organizational transparency while mitigating its unintended consequences.
Transparency in the business world—think of buyers and sellers rating each other on eBay, Airbnb, and Uber—is generally considered a good thing. It accelerates information gathering, helps people coordinate their efforts, and makes those in positions of authority accountable to others.
What about transparency within organizations? Again, many emphasize the benefits of sharing information freely, as a way of empowering frontline employees and improving the quality and speed of decision making. For example, transparency is one of the key principles in the increasingly popular Scrum methodology for project management: “In my companies, every salary, every financial, every expenditure is available to everyone,” says Jeff Sutherland, its inventor. Compared to knowledge hoarding and secretive behavior, it is easy to agree that greater information sharing is a good thing.
But there is also a “dark side” to transparency. Excessive sharing of information creates problems of information overload and can legitimize endless debate and second-guessing of senior executive decisions. High levels of visibility can reduce creativity as people fear the watchful eye of their superiors. And the open sharing of information on individual performance and pay levels, often invoked as a way of promoting trust and collective responsibility, can backfire.
There is a fascinating paradox in all this. It’s possible in a digital age to track activities in real time and to share information widely at almost zero cost (in theory, at least, improving decision making). But, in many cases, the innovations that have brought this about have reduced effectiveness, thanks to an emerging “accountability gap” where information is in the hands of people who may not use it wisely.
Executives may, therefore, need to become smarter about when to open up and when to withhold information. This article looks at three main areas where too much transparency creates problems and offers some guidance on how to get the balance right.
Transparency in day-to-day business activities
Thanks to technology, companies can now monitor business activities in minute detail, from verbatim logs in a call center to real-time GPS tracking of component supplies. Such information isn’t necessarily restricted to top executives: some firms now make video recordings of their meetings so everyone can see what went on; others have opened up their strategy-making process by allowing employees across the firm to read and review a wide range of planning documents.
The argument for transparency lies in the wisdom-of-crowds effect: by broadening the number of people involved, we will make smarter decisions and we will increase buy-in. But there are also problems with this approach. One is lack of speed: “It takes us so much longer to make decisions because so many people are involved,” admits Jim Whitehurst, CEO of software company Red Hat, which has pioneered a highly inclusive approach to strategy making.
The other, and bigger, concern is that people weigh in without relevant knowledge, or without any responsibility to see things through. One university we know well provided faculty with detailed information about the student demand for elective courses, resulting in a number of proposals to cut certain courses and grow others. The proposals were well intentioned, but were later rejected because the faculty did not know the trade-offs that had to be managed to introduce new classes. Both faculty and senior management were frustrated.
Some companies have sought to overcome this accountability gap. For example, the Amazon subsidiary Zappos recently experimented with an ambitious form of self-management called holacracy, in which work is done in self-governing teams without any formal management roles, and employees have a “duty of transparency.”1 But implementing this new transparent way of working has not worked for everyone, with 14 percent of workers choosing to leave since it was introduced. One study noted that it “has been confusing and time-consuming, especially at first, sometimes requiring five extra hours of meetings a week as workers unshackled from their former bosses organize themselves into ‘circles.’” Another company, Shift (founded by former Zappos manager Zach Ware), abandoned holacracy after less than a year because it led to too many meetings and vague decision-making authority.2
Such cases reveal an important truth: many people do not want to know the full details of how their firm is doing, nor do they want to be held fully responsible for its outputs. Instead, they want to know enough to do their job well and they want to have the right to know more, but for the most part they are happy for someone else to process and manage that information on their behalf.
So how do you get the balance right? The first rule of thumb is to strive for a match between transparency and responsibility. If client service is everyone’s responsibility, then data on service levels should be available to all; but if decisions about which product lines to invest in and which ones to cut are the CEO’s responsibility, he or she should have privileged access to the information needed to make those decisions. If employees can access this type of privileged information anyway, it is useful to create a team or task force with responsibility for sifting through and channelling the views of employees to the ultimate decision makers. A works council in Germany or an employee committee like the one at retailer John Lewis can give employees a voice without the entire decision-making process grinding to a halt.
Transparency in employee efforts and rewards
Employee earnings is a second and highly controversial dimension of transparency. About one-third of US companies have “no disclosure” contracts that specifically forbid employees from discussing their pay with coworkers.3 In most others, pay is implicitly a private matter between boss and employee. But in recent years a number of firms have experimented with radical pay transparency, even in large firms such as Whole Foods Market. Reasons for this shift include a desire to treat employees as adults, increase trust, and spur competition.
But sharing pay information can backfire—badly. Consider the example of a Canadian engineering firm. Each year, just before Christmas, the founder and CEO of the 30-year-old company used to look over each employee’s contributions for the year, and then award each person a bonus based on his personal beliefs about the value of those contributions. Sometimes the bonuses would be large—say $30,000—and other times the bonuses would be small ($5,000 or nothing at all). There was no formula, only the judgment call of the founder.
As the organization grew, however, the CEO requested that company leaders develop a rational and transparent process for determining allocation of bonuses. The leaders worked for a year to create a fair bonus system based on pre-established key performance indicators, and launched it through town halls and workshops so that everyone was clear how their bonus would be calculated. A year later, after the bonuses had been calculated and distributed according to the new system, employees acknowledged the increased transparency, but their perceptions of the fairness of the bonuses were significantly worse, and they trusted the employer less (exhibit). Even those who had received as much or more than the previous year were significantly less satisfied with the fairness of the more transparent system, and trusted the employer less.
This article is by Julian Birkinshaw and Dan Cable. First published in the McKinsey Quarterly, February 2017.