The recent airing of corporate corruption is distinguished, perhaps, only by the magnitude of the dollars involved. The fact that the “police” (namely the auditors) participated in the corruption also is neither surprising nor new.
Proposed remedies may increase the probability of detection, but clever crooks will always be able to find ways to beat the system. And if the detection system is not 100 percent effective, it is unlikely that increased penalties will be effective as deterrents.
Only appropriate mores can prevent corruption.
The basic question is how can an appropriate culture (one that relies on honesty and takes into account long-run corporate health) be infused into today’s corporate milieu? One resoundingly successful way to do that is via Total Quality Management.
TQM is used to improve the way businesses do business. However, one of the unemphasized benefits of TQM is the culture it engenders in the organization: a culture antithetical to managerial greed and corruption. If stockholders and their representatives, the board members, truly wish to minimize corruption, they should insist that their managers adopt the TQM philosophy of management.
Societies are law-abiding because the socialization process designed to produce law-abiding citizens has been successful. The socialization process is derived from the culture of the society. Corporate corruption occurs because the culture of the organization either encourages it or fails to promote honest corporate morality.
The culture of any organization is determined by its upper management: the board, the CEO and his/her direct reports.
There may be many corporate cultures in which the socialization process encourages honesty even in extremely competitive environments, but TQM virtually guarantees such outcomes. TQM does not trumpet morality; it champions elimination of waste, increases in efficiency and above all customer satisfaction as routes to benefit all stakeholders including stockholders.
There are tangible benefits to this system.
The stock price of Malcolm Baldrige Award winners far outpaces that of any comparison stock price index.
Honesty and morality are byproducts rather than centerpieces of the system. But TQM has not been widely adopted by American corporations despite its unequivocal success.
2 issues explored
There are two issues to explore. First, how does TQM socialize an organization’s participants to behave honestly and morally? Second, if it is so successful why has the system not been widely embraced?
The keystone of the system is long-run customer satisfaction.
Stockholder satisfaction is nearly always of a lower priority. Customer needs must be anticipated and satisfied. Once customer needs are understood, satisfaction depends on providing a product or service that meets or exceeds customer needs at a price and quality unmatched by the competition.
To do so, a corporation must reduce both waste from its operations and administrative processes, and flaws and defects from the product or service.
To achieve the twin goals of efficiency and quality requires satisfaction of a chain of customers, internal and external.
Each step in the process, from order intake, supplier shipments, inventory, operations scheduling, etc., is a customer of the preceding step in the chain of operations, and each is a supplier to the succeeding step in the process.
In order to satisfy the external customer, each customer in the internal chain must be satisfied, i.e. supplied with product or service of high quality, on time and at the least possible cost. Further, decisions affecting cost, quality and customer satisfaction must address the firm’s long-run ability to sustain those satisfactions. This will affect decisions on investment on human resources, capital and R&D, as well as a variety of operations decisions that could reduce short-run profitability but increase the probability of long-run profits.
Consider the morality of such a system.
Given commitment to the goal, nothing will be done to undermine customer satisfaction. There will be no cheaper substitutes in parts or supplies, no billing for hours not actually worked, no running of machines without scheduled maintenance in order to achieve bonus-level outputs. Customer satisfaction, both internal and external, can only be achieved when all participants are honest with one another. If all decisions consider customer satisfaction, then allocation of resources from the highest through the lowest levels of the organization will attract customers and increase customer loyalty and so in the long run benefit stockholders and potential stockholders.
Proposals to benefit individual managers will almost always come at the expense of the satisfaction of some customer and will be immediately manifest to other participants in the organization. If they can’t veto such proposals they would be in a position to make such derelictions known.
In other words, the culture fostered by TQM requires and demands honest effort and honest dealing.
Morality is the byproduct of quality.
Why, despite its success and obvious long run benefit to stockholders, has TQM not been more widely adopted?
There are at least two reasons.
First, it requires that upper management cede decision-making power to lower levels in the organization. This not only requires relinquishing power, but also a trust that employees at lower levels can make effective decisions.
Serious psychological barriers prevent American managers from adopting such a system.
‘Walk the talk’
Second, it’s not easy!
A successful TQM company requires full-time commitment from all participants in the organization. The CEO must “walk the talk” in order to perfuse the culture of TQM throughout the organization. It must be Priority One for all of upper management. It’s much easier to dictate how things will be done than to enlist and trust others in the decision-making process.
To iterate, it takes time and it’s not easy. What then is the remedy?
The situation is encapsulated in a quotation attributed to J.P. Morgan. Responding to a question about how he decides to lend money, J.P. Morgan is reported to have said, “The first thing is character … because a man I do not trust could not get money from me on all the bonds in Christendom.”
Morgan recognized that neither surety nor a policing system was as good a guarantee as an honest character. Beefing up the auditing system, increasing penalties, removing incentives to cheat by separating auditing from consulting — all may help somewhat, but the problem will not be solved until those being audited have nothing to hide.
System faces reluctance
People will have nothing to hide if they are recruited into an organizational milieu that fosters honesty and morality as the preferred method of competition.
Because American managers are loath to adopt this philosophy despite its proven success, outside incentives must be provided. Stockholders must insist that their managers establish a culture of honesty.
The tested way of so doing is to adopt TQM or some variant.
If stockholders don’t care enough to demand such behavior, then it won’t happen. We will continue to see recurring cycles of corruption as newer and different methods of deception are devised. If stockholders opt for short-run profits, that’s how their managers will act, but the side effects have already been observed and will recur.
If the stockholders insist on a quality culture, they will more likely enjoy long run gains and relative freedom from corruption.
The ball is, as it always has been, in their court.
