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Governance and its societal responsibilities


If the quality of top management, the leadership they have to demonstrate and the example they have to set are to mean anything then boardrooms have to put their houses in order, and swiftly.

Increasingly, the public perception is that too many corporate executives have committed egregious breaches of trust by cooking the books, shading the truth, and enriching themselves with huge stock-option profits while shareholders suffered breathtaking losses. Meanwhile, despite a decade or more of boardroom reforms, it is a commonly held view, at least in the bar of the Crown and Anchor, that many directors seem to have become either passive or conflicted players in this morality play, unwilling to question or follow up on even the most routine issues. If the governance of the modern corporation isn't very badly dented then at the very least it is going through a severe crisis of confidence.

In many ways, Enron and its dealings with Arthur Andersen are an anomaly, a perfect storm where greed, lax oversight, and outright fraud combined to unravel two of the world's largest companies. But a certain moral laxity has come to pervade even the bluest of the blue chips. When IBM used $290 million from the sale of a business three days before the end of its fourth quarter last year to help it beat Wall Street's profit forecast, it did what was perfectly legal - and yet entirely misleading. That one-time undisclosed gain, used to lower operating costs, had nothing to do with the company's underlying operating performance. Such distortions have become commonplace, as some companies strive to hit a target even at the cost of clarity and fairness.

The inevitable result is growing outrage among corporate stakeholders. ‘I feel thoroughly disillusioned and disgusted,’ complains Eugene J. Becker, a small investor living near Baltimore. ‘These people cannot police themselves. Greed is their driver. It's time for stockholders to start showing their disillusionment in tangible ways.’ This year, for the first time, Becker is casting ‘no’ votes against management at the eight public companies in which he is a shareholder.

Unchecked, that rising bitterness and distrust could prove costly to business and to society. At risk is the very integrity of capitalism. If investors continue to lose faith in corporations, they could choke off access to capital, the fuel that has powered America's record of innovation and economic leadership. The loss of trust threatens our ability to create new jobs and re-ignite the economy. It also leaves a taint on that great majority of executives and corporations who act with integrity. Directors who fail to direct and CEOs who fail to execute moral leadership are arguably the most serious challenge facing corporate life today.

We are faced with the situation where in both the US and the UK most of the economic indicators are strong. Unemployment is low, inflation is low, interest rates are down which is good for business investment, the US Treasury Secretary has predicted good growth in what he says is a strong economy. The prospects ought to be looking good and set fair for sound economic development. Yet everywhere stock markets are in what appears to be a permanent, irretrievable downward spiral.

And the cause? Put simply, corporate greed and appalling mismanagement by leaders in industry have destroyed confidence in business and the desire of investors to support these enterprises with their hard-earned money. The consequent damage to pensions, to business, to the economy, to the projections for spending the contents of the public purse on much needed improvements to our public services is almost incalculable. Yet the main quality management models (EFQM, Baldrige, ISO 9000.2000) place a requirement upon enterprises to address their attitude to the society in which they work, in which they live and which they serve. In an increasingly global business environment this responsibility transcends national and regional borders, and the impact is more and more far-reaching.

At a recent gathering in Chalmers University, Gothenburg, some of the best brains in the quality field questioned the whole issue of what has been known for some time as Corporate Social Responsibility, seeking initially to put some boundaries around what is meant by the term. The point, of course, is that there are no real boundaries, other than those in our minds. The reality is that the whole issue of governance and the responsibilities it carries is far bigger, far deeper and far wide than perhaps what was in the thoughts of those who coined the phrase. It certainly means far more than handing out television sets to a local hospital, delivering computers to the local school or organizing a fund-raising event for a local charity.

We are now faced with a global crisis for businesses and for individuals created entirely by a failure of directors to realize the societal implications of their manipulation of the books and their insouciant disregard for the visitation of Armageddon on the world’s financial markets. What may have seemed like a convenient game of creative accounting is destroying lives, wrecking people’s plans for the future they have worked hard to secure, damaging, possibly irretrievably, the potential for sound growth and driving businesses with honest, straightforward management processes into terminal decline through no fault of their own.

A recent study, Developing Value, identified the ‘business case’ for sustainability in business to achieve benefits such as higher sales, reduced costs and lower risks from better corporate governance, improved environmental practices, and investments in social and economic development.

Concerns about sustainability issues and about development among policy-makers, consumers and investors have risen dramatically during the 1990s and will continue to grow. Businesses which were unaffected by these issues three years ago are today affected, and businesses that seem unaffected today may well find themselves affected three years from now.

Before Enron's collapse, nobody much cared about audit committees or auditors. Now both are under fire. Strikingly, audit committees' most common response to growing scrutiny is to cover their backs. Many audit-committee reports this year have come with disclaimers to say that the accuracy of the firm's accounts are not their responsibility.

If anybody is going to take responsibility for a firm's accounts, it should be the external auditor. Following Andersen's humiliation at Enron, this duty is now being taken much more seriously. Yet serious conflicts of interest remain for audit firms that continue to do consulting work for audit clients. Andersen, notoriously, earned more from providing Enron with non-audit services than from the audit.

Given the crucial importance of the audit, everything possible ought to be done to eradicate any conflict of interest that might reduce effectiveness. Non-audit work for audit clients should clearly be prohibited. It would also be wise to introduce mandatory rotation of auditors after, say, five years, to stop auditor and client becoming too cosy.

So much for the condemnation of what is happening, but it was the quality movement that had a hand in writing and agreeing the models, it was the quality movement that accepted the standards they enshrine, it was the quality industry that set and maintains the auditing and verification standards that are applied to the models. It is, therefore, the quality movement that needs to review the standards it has set for the worlds of business and of government and define what it really means when it seeks to address the societal aspects of commercial and public enterprise. The blinkers have to be taken off; the issue needs to be addressed across its entire breadth and throughout its entire depth for if people are to believe in the values we propound as quality professionals we have to be seen to be doing something to address an issue that appears to be growing in its compass and in its effect. The temptation to use icebergs and the bit that lies beneath the surface as an allegory is considerable, but to do so would be to belittle those many directors, managers and entrepreneurs who actually do struggle honestly and with integrity fully to exercise their responsibilities. Indeed, the importance of redefining the parameters is paramount not just because it is necessary to hold to the fire the feet of those who seek to work round the rules. It will also to help to nourish and guide those who wish not only to play by the rules, but by their example help us to write them.

The battle against corporate abuse has to be conducted holistically. We must inquire and we must seek to understand why corporations behave as they do, and look for ways to change these underlying motives. Once we have arrived at a viable systemic solution, we should then dictate the terms of engagement to corporations, not let them dictate terms to us. It is important to remember that corporations were invented to serve mankind; mankind was not placed on this earth to serve corporations. Corporations in many ways have the rights of citizens, and those rights must be balanced by obligations to the public.

Many activists cast the fundamental issue as one of ‘corporate greed,’ but that’s off the mark. Corporations are incapable of a human emotion like greed. They are artificial structures created by law. The real question is why corporations behave as if they are greedy. The answer lies in the design, the structure and the framework of corporate law, which leads many companies to believe their duty to the public interest involves simply compliance with the law. Obeying the law, however, is in many cases seen simply as a cost it must be minimized. This is achieved using devices such as lobbying, legal hairsplitting, and jurisdiction shopping. In many cases, little thought is given to the damage these activities may inflict on society and on the public interest

We can seek to change that design, that structure, that framework. We can attempt to make corporations more responsible to the public good by amending the law that says the pursuit of profit takes precedence over societal considerations. If the global quality movement is serious about its beliefs and its message then the time to demonstrate that is now. This briar of governance and its societal responsibilities has to be grasped and standards set that offer a meaningful, balanced and practical framework within which organizations can work and through which they can demonstrate their adherence to acceptable norms.

Gothenburg didn’t come up with any answers. Indeed, we weren’t even sure by the end of our four days together if we knew what the questions should be. However, it was a start, and if anyone out there is listening this short article may have shoved us a little further along the path to doing something about an issue which faces the world quality movement with a challenge the like of which it has not previously faced. It is certainly something the Institute of Quality Assurance will seek to address nationally and internationally, looking for the improvements that will strengthen the application of the standards by which business is governed. It is the quality of governance that needs to be reinstated so that the strengthening of a Corporation’s business position becomes as important as its bottom line figure; and in any event better bottom lines follow those corporations whose success is built n the solid foundation of the quality of all that they do.


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