The collapse of high-profile business giants such as Enron rammed home like never before the importance of strong and ethical corporate governance. But is good corporate governance, as standalone principle, sufficient to placate stakeholders; those with vested interest in an organisation, whose backs have been against the wall at the spectre of fraud, mismanagement and unaccountability in the boardroom? For while strong corporate governance is certainly important, it is only fully effective if organisations also strive for business excellence.
Business excellence can be achieved by combining the parallel philosophies of ethical corporate governance and total quality management (TQM) into best practice model that keeps both customers and stakeholders satisfied – not to mention the regulators.
While businesses have always focused on providing good customer service, this is no longer sufficient. They now need to take an additional step and give customers even more than they expect. Improving customer services has fallen largely within the domain of quality management systems.
Corporate governance and stakeholders’ interests, meanwhile, gained global attention in the wake of the collapse of Enron and other major corporations such as WorldCom, Tyco and Parmalat and the subsequent emergence of slew of new regulatory requirements.
These high-profile bankruptcies sent major shock waves across the world and served as red alert to countries like New Zealand and other members of the OECD to concentrate more on how companies are run by having closer focus on regulatory compliance and corporate governance principles and how they are influencing behavioural changes in organisations.
These failures and corruption scandals resulted in reforms to corporate governance principles, highlighting the cyclical nature of corporate governance crises and reform: increased regulation occurs during periods of recession, corporate collapse and re-examination of the viability of regulatory systems.
The Sarbanes-Oxley Act 2002, for example, significantly changed the corporate governance and reporting requirements applicable to all companies, including those outside the United States, which are required to file reports with the Securities and Exchange Committee.
Similarly reforms came in the shape of the New Zealand Securities Commission (NZSC) Corporate Governance Principles and Guidelines introduced in February 2004, the Australian Stock Exchange (ASX) Corporate Governance Council’s principles presented in March 2003 and the OECD Principles of Corporate Governance of 2004.
The common theme is best practice through compliance within flexible framework. Corporations need to be armed with the necessary tools to prevent corporate fraud, crime, greed and corruption by putting regulatory compliance and corporate governance policies in place.
John D Sullivan of the Centre for International Private Enterprise (CIPA) proposed the following simple corporate governance model in his 2000 paper Corporate Governance: Transparency Between Government and Business:
• Shareholders elect directors who represent them;
• Directors vote on key matters and adopt the majority decision;
• Decisions are made in transparent manner so that shareholders and others can hold directors accountable;
• The company adopts accounting standards to generate the information necessary for directors and other stakeholders to make decisions; and
• The company’s policies and practices adhere to applicable national, state and local laws.
The failure of companies such as Enron and WorldCom also resulted in boards of directors being the subject of criticism in recent years, especially since these firms had corporate governance systems in place, but still failed to address major misconduct and corporate failure. This raises the issue of the quality of corporate governance.
World-class corporate governance is now imperative for stakeholders, those who have vested interest in the decisions and actions of company, such as clients, employees, shareholders, suppliers and the broader community.
This pressure has seen boards of directors being brought to task for failing to demonstrate sense of responsibility to their shareholders and for failing to supervise businesses as efficiently as they should and not driving the highest levels of performance and shareholder value.
Criticism has also been levelled at boards for not accepting or demonstrating responsibility to society or the environment.
If corporations are going to regain the trust of their stakeholders they need to achieve transparency – the full disclosure of financial and key performance information.
At the same time directors have to focus on their quality management systems and should strive for business excellence: the other side of the coin to corporate governance.
Business excellence is achieved by amalgamating strong corporate governance principles and quality management systems into best practice model.
There are many parallels between the aims, objectives and scope of strong corporate governance and quality management system. Corporate governance aims to achieve stakeholders’ trust through sustainable levels of high performance, while quality management system seeks to maintain customer satisfaction by striving for constant improvement.
Both disciplines are concerned with setting and controlling standards while also ensuring that they are kept in place. At the same time, both disciplines focus on keeping organisational risk to minimum and on how the organisation can be managed in the most beneficial manner.
Business excellence – as combination of the philosophies of ethical corporate governance and quality management – provides best practice model for how organisations can serve customers and shareholders.
So, in addition to strong corporate governance, businesses also need to focus on their quality management systems if they wish to satisfy and retain customers and to achieve business excellence.
The core philosophy of quality management is to lead and operate an organisation successfully through systematic and transparent manner of direction and control.
TQM is set of systematic activities carried out by the entire organisation to effectively and efficiently achieve company objectives to provide products and services with level of quality that satisfies customers, at the appropriate time and price.
The Australian and New Zealand Standards Authorities (AS/NZS ISO 9000:2000) developed the following quality management principles: customer focus, leadership, involvement of people, process approach, system approach to management, continual improvement, factual approach to decision making, and mutually beneficial supplier relationships.
An important element of TQM, which is complementary to business excellence, is the Six Sigma approach. This is measure of quality that strives for near perfection and uses all the TQM tools to improve on processes.
It is disciplined, data-driven approach and methodology for eliminating defects in any process, from manufacturing to transactional, and from product to service.
Many of the early winners of the Malcolm Baldrige National Award for business excellence (on which the New Zealand Business Excellence Awards are based) were supporters of the Six Sigma approach – which aims to deliver world-class performance, reliability and value to the end customer.
Achieving business excellence is essential if organisations are to survive in the current corporate environment, and it is an issue that has implications for businesses on global scale and certainly in New Zealand.
Managers need to take stock of their performance in this area, as they face increasing competition in global markets and as the pressures for best practice governance are rapidly becoming the critical success factor for the long-term survival of organisations in every sector.
• Dr Siham El-Kafafi is senior lecturer in manag
