IMPROVING
QUALITY OF CORPORATE GOVERNANCE
Dr. Madhav Mehra
Chairman, World Quality Council
Quality has long been understood to be a discipline that satisfies
customer expectations. Phil Crosby defines it as conformance
to requirement. This definition is a legacy of industrial
economy. In the warp speed economy of today the role of quality
is not so much as conformance to customer requirements but
anticipating and exceeding customer requirements.
Who are Corporation’s Customers?
The question is who are company’s customers. Employees have
already been recognized as the company’s internal customers.
It is now universally accepted that satisfaction of external
customers largely depends on the satisfaction of internal
customers. With globalization of economies, it is time that
this definition is broadened to include investors, shareholders,
creditors and vendors as well.
The ultimate role of quality is to add value for the customer.
In the new economy the value addition caused by improvement
in quality of product is increasingly facing the law of diminishing
returns, Wispy entities such as information, entertainment
securities & derivatives have become far more important
value creators than tangible goods like steel, construction,
automobiles or food products.
Focal point of quality or rather of total quality must be
maximistation of value for all stakeholders i.e. customers,
shareholders, employees, investors, creditors and suppliers.
The collapse of BCCI and Maxwell empire in 1980 in the UK
and the Asian collapse of 1998 is a sharp reminder of the
value losses suffered by customers because of the poor governance
of the corporations. These losses can be far more significant
than the loss due to quality of product. In India itself misgovernance
in the corporate sector brought a collapse of stock market
values by almost 150% between December 1991 and April 1992
and was in excess of $10 billion.
This can only be done by improving governance practices. Governance
is the manner in which power is exercised in the management
of national economic resources. Corporate Governance is the
manner in which the power of the board room is exercised in
the stewardship of the corporation’s total portfolio of assets
and resources with the objective of maximizing not only shareholders
values but creating value for all stakeholders. Stakeholders
include investors, depositors, customers, employees and suppliers.
It has assumed critical importance due to the globalisation
of economics and the speed with which capital can move in
the era of internet.
Good Corporate Governance requirements are becoming a market-driven
imperative in every country and not restricted to public listed
corporations. Business responsibility is increasingly regarded
as going beyond profitability and incorporate issues such
as compatibility with social objectives and legitimate social
concerns.
Transparency and accountability are being increasingly recognised
as a must for every corporate. A growing tribe of Chief Executives
have realised that trying to outwit markets through a complex
array of cross holdings, dubious financial disclosures, rubber
stamp boards and disregard of minority shareholders is a receipt
for disaster.
The Purpose of the Company
The biggest challenge before the boards is their clarity as
to “what is the purpose of the Company”? Answer to this question
would depend on who are your - shareholder, an employee, member
of a community or a customer. So the second question should
be “for whom does the company exist?” Every board must address
this question. In a study conducted by Ivor Francis author
of ‘Future Direction’, in Australia, US and Japan directors
were asked whom they owed a duty to. They were asked to rank
the following in descending order of priority:
* Shareholders
* Employees
* The Community
* Customers
* The Future
* The Company
* The Suppliers
* Lenders
* The Nation
* Other
The dominant response was that the company comes first, and
which consisted of shareholders, employees and customers.
But there were basic difference between Japanese and US directors
in the ranking order. The rankings have been shown in the
Figure 1 for Japanese Directors and in Figure 2 for US Directors.
80% of US directors in the sample gave shareholders the unique
first ranking compared to 11% for Japanese directors. Of the
US Directors only 10% gave customers the top ranking and 10%
for the company. For 33% of Japanese directors the company
came first and 22% gave customers the top slot. What is interesting
is that five slot. What is interesting is that five of the
six American directors who did not give shareholders unique
first ranking were current or former CEO/Chairman of very
successful major industrial, resource technology and financial
companies. In particular, the two who did not give first rank
at all to shareholders have been recognised as two of the
most outstanding business leaders in the United States. On
the other hand, five of the eight who did give unique first
ranking to share holders came from a more professional background:
banking, law, securities industry, and university (with business
school roots).
Priorities for Stakeholders: United
States Directors
Summary
| |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
11 |
12 |
13 |
14 |
1 |
=1 |
2 |
3 |
4 |
.>4 |
| Share holder |
2 |
1 |
1 |
2 |
1 |
1 |
2 |
5 |
4 |
2 |
3 |
2 |
1 |
5 |
1 |
4 |
5 |
1 |
1 |
2 |
| Employee |
3 |
1 |
1 |
1 |
|
1 |
3 |
3 |
1 |
4 |
4 |
2 |
1 |
1 |
2 |
5 |
1 |
3 |
2 |
|
| Community |
4 |
1 |
|
4 |
4 |
2 |
6 |
|
4 |
|
7 |
5 |
|
6 |
|
2 |
|
|
4 |
6 |
| Customers |
5 |
1 |
1 |
2 |
3 |
1 |
4 |
1 |
1 |
3 |
1 |
2 |
|
4 |
3 |
4 |
2 |
2 |
2 |
|
| The Future |
1 |
1 |
|
|
|
|
9 |
|
4 |
5 |
2 |
5 |
|
3 |
|
1 |
1 |
1 |
1 |
5 |
| The Company |
6 |
1 |
1 |
|
2 |
|
1 |
2 |
|
1 |
5 |
1 |
|
1 |
3 |
3 |
2 |
1 |
1 |
1 |
| Suppliers |
4 |
1 |
|
4 |
5 |
|
7 |
4 |
1 |
|
5 |
5 |
|
7 |
|
2 |
|
|
1 |
6 |
| Nation |
7 |
1 |
|
|
|
4 |
5 |
|
4 |
|
7 |
5 |
|
8 |
|
1 |
|
|
2 |
6 |
| Other |
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
1 |
Fig. 1
Priorities for Stakeholders: United
States Directors
Summary
| |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
11 |
12 |
13 |
14 |
1 |
=1 |
2 |
3 |
4 |
>4 |
| Share holder |
1 |
1 |
2 |
1 |
1 |
2 |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
1 |
8 |
4 |
2 |
|
|
|
| Employee |
2 |
2 |
2 |
3 |
|
2 |
|
2 |
|
3 |
1 |
1 |
2 |
|
|
2 |
6 |
2 |
|
|
| Community |
2 |
|
2 |
6 |
|
8 |
|
3 |
|
3 |
1 |
1 |
2 |
|
|
2 |
3 |
2 |
|
2 |
| Customers |
2 |
2 |
2 |
3 |
|
1 |
|
3 |
|
3 |
1 |
1 |
2 |
|
1 |
2 |
4 |
3 |
|
|
| The Future |
2 |
|
2 |
8 |
|
2 |
|
3 |
|
3 |
1 |
|
|
|
|
2 |
3 |
2 |
|
1 |
| The Company |
2 |
2 |
2 |
1 |
|
2 |
|
3 |
|
3 |
1 |
1 |
|
2 |
2 |
3 |
4 |
2 |
|
|
| Suppliers |
2 |
|
2 |
9 |
|
2 |
|
3 |
|
3 |
1 |
1 |
|
|
|
2 |
3 |
2 |
|
1 |
| Nation |
2 |
2 |
2 |
6 |
|
8 |
|
3 |
|
3 |
1 |
1 |
|
|
|
2 |
3 |
2 |
|
2 |
| Other |
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
1 |
|
|
|
|
Fig. 2
What is the Board’s Constituency?
It is unfortunate that both the major studies in Corporate
Governance in India namely “Desirable Corporate Governance
by CII and the Kumar Manglam Birla report have taken their
cue from the American system which regards maximistaion of
shareholder’s wealth as the prime responsibility of the Board.
CII’s report states “There is a global consensus about the
objective of good Corporate Governance :- maximising long
term shareholder value. Kumar Mangalam Birlas’ report on the
other hand recognises that Corporate Governance has several
claimants such as shareholders and other stakeholders which
include suppliers, customers, creditors, the bankers, the
employees of the company, the government and the society at
large. Nonetheless, the report states the fundamental objective
of Corporate Governance to be “enhancement of shareholder
value keeping in view the interests of the other stakeholder.”
Neither of the reports mention anything about the environmental/social
responsiblity of the Board of Directors.
While the work done in their reports is commendable, we must
be careful not to be criticised for copying codes which have
been written by managements of yesterday. Corporations in
the 21st century have to be regarded as an instrumentality
of the society charged with creation of wealth not only for
the company itself but for the society at large. Corporations
have a franchise from the society that requires it not only
to create wealth for the good of the company but applying
the power of the combined resources of the business to remedying
nation’s ills. It must be recognised that the primary purpose
of any business enterprise as stated in the latest report
on Corporate Governance by Sir Ronald Hampel in the UK is
“long term prosperity and not accountability.” accountability
without prosperity is irrelevant. The Hampel report also recognises
that “In the end of the day no enterprise can prosper without
adequate regard to its stakeholders.”
No business has a license to operate unless it deals with
environment in a responsible way. Finally, it will be worthwhile
to examine the views of one the most successful entrepreneurs
in the UK, Anita Roddick, about the financial aspects of Corporate
Governance. She says “Financial governance by the stock-market
is obviously not in the best interest of running a business
indicated of social & environmental change.”
There is no governance that says you should look after each
stakeholder, that your shareholders should get the most benefits
and as a result that customers are hardly considered. Certainly
the people that dedicate their lives to an organisation-the
employees - are not considered in any governance law.
Transparency and honesty are not part of governance law. Cleaning
up your mess in terms of environmental management is not governed.
There is no governance of human rights, or of your behaviour
in countries which may have behaviour standards perceived
to be lower than your own.
There’s no governance in terms of sustainability. Code of
Ethics beyond what you do if one of your employees steals.
I don’t see anything about when you mess up an entire nation
or when environmental degradation such as was caused by Union
Carbide in Bhopal, or is being done now by Shell in Nigeria,
devastates millions of people. You’ve done, what you’ve screwed
up on, and how you’re going to fix it, that’s just masturbation.
Environmental Statement
Even though environmental statement has not been made a mandatory
part in the corporate governance codes of UK and US, most
forward looking companies are making it a point to report
their achievements in this area in their annual statements.
The example of Polaroid Corporation in adopting environment
agenda testifies how industrial activity in harmony with the
natural eco system so as to achieve the minimum adverse effect
on land, air and water quality. Such a statement should be
the minimum requirement for any companies seeking to be listed
in the Stock Exchange.
Environmental protection is a continuing responsibility of
each company and it is time that the financial aspects of
Corporate Governance take into account the principles of environment
accounting. The impact of the Environment programme in the
Polaroid Corporation when evaluated after 5 years indicated
:-
