A magazine writer asks: How do companies deliver bad news to their employees? More specifically, how should they report poor year-ending or quarter-ending financial performance to their employees? Can you offer insight on do's and don't to communicating bad news internally?

Let's start with what great leaders do to avoid the problem implied by the writer's question, and then address ways to attack the issue if avoidance doesn't work.

First, the best leaders believe that earnings problems shouldn't show up at the doorstep unannounced. They believe poor performance should never be a surprise to employees in an organization.

That's because they believe that one of their biggest responsibilities is to create a high performing organization built, in part, on rigorous and relevant information sharing.  They believe that, all other things equal, informed people always outperform uninformed people. 

At the core of this kind of environment is a fundamental belief that people should work together as partners, and that being less than honest with your partners is a form of betrayal.  It means appreciating the fact that increasing or decreasing relevant information-sharing has corresponding implications to operating and financial performance. 

So, great leaders create open, trusting environments where surprises are minimized. 

But, what do you do if things don't go as planned--that despite your best efforts to create an informed workplace, you didn't?  How do you admit that the CFO's regular source of information about performance wasn't as accurate as the guys down on the loading dock who knew sales were off because smoke breaks were longer than usual and they were packing fewer trucks?  
Three interrelated recommendations. 

1. Tell the truth now more than ever.  Most of us didn't contribute to the recent epidemic of corporate malfeasance. Nevertheless, there's a feeling that people at the top lack integrity, are greedy and have no sense of ethics.  Perceptions of being honest (along with being forward-looking, inspiring and competent) ranks at the top of what people want from their leaders. In an era of obfuscating corporate-speak, candor is more important than ever. Isn't it refreshing to hear the CEO of Toyota apologize for letting people down in the wake of quality issues the company had recently?  Contrast that with US automakers who seem obsessed with blaming everyone but themselves for the mess they got themselves into. This leads me to the next recommendation. 

2. Don't make excuses. When we were working with the late Mike Walsh, CEO of Union Pacific and then Tenneco, he implored his leadership to practice "no excuses management." He believed that blaming the union, fickle customers or rising health care costs puts leaders in the victim role.   Communicating that sales are down because the housing market went sour isn't the same as communicating that sales are down because your forecasting was lousy. The first approach makes you a victim. The second addresses the root cause. My sailing colleagues have a maxim: "You can't change the weather but you can always adjust you sails."  Adjust what you can. Admit what you can't adjust. Those around you know you're human. They like it when you demonstrate you know this as well.  It reinforces your authenticity and credibility. 

3. Learn from your mistakes and stop making the same ones over and over again. Today's pace doesn't make it introspection or proactive problem-solving easy. But, competitive pressures don't offer the luxury of ignoring these practices either.  When bad news pops up and you have to admit that you didn't anticipate it, manage it appropriately, but learn what went wrong and install a poka yoke, otherwise known as mistake proofing a process. Get at the root cause of the problem that caused you to communicate something you didn't know before yesterday. And don't let it happen again.

Most of us learned these three concepts pretty early on--perhaps as early as kindergarten. Why then was it necessary for the writer to ask the question? Why do late quarter- or year-end reports still surprise our people--our business partners?  
It's not because bad news gets any better with time. Hiding results until later postpones your attack on the root cause of the performance problem.  And hiding results from your partners only shakes the confidence of the very people who you need to fix things.

Most of us also learned early on that adopting fundamental business concepts is about 10% of the game. By far the toughest part is the other 90%--disciplined, focused execution.
More on execution in another report.