8th Issue (Jan 1998)

Editorial

In a guide-map of corporate management, business executives bring in concepts like Quality Circle, ISO9000, Re-engineering and TQM to strive for excellence. Somewhere in a distant corner of this matrix-looking guide-map lies ethics. For some managers who practise quality management and TQM, they also advocate ethics and integrity, truly believing that the two complement each other and yet without a clear idea as to the causal relationship between the two. Some believe that ethical management is part of quality management while others regard high ethical standards and honest corporate culture logical results of TQM. Some managers even think that ethics is no more than a paradigm for improving corporate culture which is located at one far end of the guide-map. Its close comparatives, just to name a few, include team spirit, management by objectives, diversity...etc.

Big thanks to Dr K K TSE who gave the answer to this riddle. In his article 'Corporate Ethics and Quality Management', Dr TSE pointed out that central to visionary leadership which forms the foundation of all TQM efforts is core values. In daily management, such values are translated into codes of conduct and filtered down the corporate ladder to the managerial level . At the end of his article, Dr TSE even paralleled the cost of quality with the cost of corporate ethics. They both have the same components : the good, the bad and the ugly.

A new column "About the Trade" has also been introduced to apprise readers of some past real cases concerning particular trades and share with you lessons to be learnt.

"The Ethical Way" continues to invite your participation after the last time winner won a HKEDC pen for her answer. Take up this issue's challenge.

To wrap up the Business Ethics Campaign launched since May 1994 by the HKEDC in conjunction with the six leading chambers of commerce, an updated version of the Directory of Hong Kong Business Code of Conduct was printed and given out to those readers who had participated in the Campaign as a free gift.

Total Quality Management and Corporate Ethics
Dr. K.K. Tse
Managing Director, K K Tse & Associates

TQM in a Nutshell

TQM is a proven approach to enable the whole organisation to achieve customer-focused continuous improvement through visionary leadership and total involvement of all levels of staff.

The TQM Roadmap

Based on our experience in assisting numerous local organisations in TQM implementation, we have developed a very powerful roadmap as a guide for action. (Please refer to Figure 1). Let's briefly discuss the key elements in the roadmap in turn.

Visionary Leadership

The starting point of a TQM effort is the formulation of a compelling vision for the organisation. A vision is a vivid picture of the desired state in the future. It is common among local organisations that we have worked with to formulate a vision with a five-year time frame. Five years is long enough to allow room for imagination and breakthroughs but short enough for key personnel to think that they will still be around when the vision is realised.

Another key element of visionary leadership is core values. Again it should be the joint effort of the senior members of staff to debate and crystalise a set of core values which would then become the guiding principles for the journey in achieving the vision.

Closely related to core values is the corporate code of conduct. Whereas the core values constitute the guiding principles, the code of conduct spells out the specific ethical standards and desired behaviour for all to follow.

The relationship between vision, values and code of conduct is depicted in Figure 2:

Strategic Action Plan

After the vision has been formulated and communicated to all, a major challenge for management is to review all existing strategies in the light of the vision. It is often found that although some or most of the existing strategies are pertinent in achieving the vision, there may be some obvious gaps to fill. Additional strategies may have to be formulated and a comprehensive strategic action plan is to be designed.

Milestones and Measurements

A five-year vision can be a compelling and inspiring goal. But it must be supplemented with 1-year and 3-year milestones: what the organisation must definitely achieve within 1 year and 3 years if it is to realize the 5-year vision. Such milestones should be as specific and measurable as possible so that they can be used as meaningful indicators of progress towards the vision.

Performance Management and Staff Development

If an organisation is serious about achieving its vision, a truly effective and well executed performance management system must be in place. The performance management system comprises two key elements, namely, performance planning and performance appraisal. A well designed and user-friendly performance management system provides the crucial link between organisational goals and individual contribution. Without it, the chances of achieving the milestones and corporate vision would be very slim.

Closely related to performance management is staff development, which refers to the effort of systematically identifying the training needs of different levels and categories of staff, and executing the training programs with either internal or external resources.

Change Facilitators

This is the critical leverage of the entire TQM program.

Change Facilitators are a selected group of middle-level managers who possess the following characteristics:

• embrace the corporate vision & values
• understand rank-and-file concerns and aspirations
• competent in their own work
• eager to learn and improve
• respected by peers

Through their actions, enthusiasm, and contribution to the improvement effort, the Change Facilitators would become a catalyst for change in the organisation.

The Change Facilitators can be selected and trained in groups of 20 to 30. With more and more Change Facilitators joining the rank, the whole TQM effort would be able to take root at different levels of the organisation.

Continuous Improvement

A hallmark of success in a TQM program is the number of continuous improvement projects undertaken in different parts of the organisation. The initial challenge is to instil the continuous improvement mindset among all levels of staff. To the extent that this is successful, a number of continuous improvement projects could be launched in such areas as quality or service improvement, customer satisfaction enhancement, productivity improvement, waste reduction, safety enhancement, cost saving, cycle time reduction, work flow streamlining, etc. etc.

Business Process Improvement / Reengineering

Business Process Reengineering is the fundamental rethinking and radical redesign of business processes to achieve dramatic improvement in such areas as cost, quality, service and speed.

In order to plan and launch reengineering, it is essential for the entire top management team to go through intensive training in the subject. This is a must; otherwise it is doomed to failure. Again, top management must play an important part in steering and supporting the reengineering effort.

Self-directed Improvement

One of the ideal outcomes of a TQM program is the self-directed improvement effort at all levels of the organisation. This is not easy to achieve and requires the following:

• training and education
• visible results from improvement projects
• presence of a growing team of Change Facilitators
• sustained management support
• appropriate reward and recognition systems

Quality & Business Results

It is obvious that the above-mentioned activities could have a favourable impact on quality and business results. The 1-year and 3-year milestones as well as the Key Performance Indicators across the organisation can provide useful measures of success and progress towards achieving the vision.

Stakeholder Delight

The ultimate goal of a TQM effort should be to delight the major stakeholders which include not only the shareholder but also the customer, the staff, the business partners, the supplier and the like.

TQM is a Journey

It has been aptly said that TQM is a journey without an end. Indeed it is.

Once an organisation embarks on the journey, there is no return. TQM is a journey of continuous improvement and corporate renewal.

Cost of Quality and Cost of Corporate Ethics

In TQM, there is a powerful statement claiming that "Quality is Free" (indeed this is the title of a classic study by a leading quality expert (Philip Crosby).

Quality can be completely free because the cost of non-quality could be prohibitive. We can best understand this by looking at the three components of cost of quality: the good, the bad, and the ugly. A close parallel can be drawn for the cost of corporate ethics as the following table suggests:

In quality management, we recognise that all three types of cost are present; they make up the total cost of quality which may be as high as 20-30% of total revenue. The proven strategy has been to invest in the "good cost" (prevention) to drive out the "ugly cost" (failure); the "bad cost" being considered as a necessary evil.

As far as corporate ethics is concerned, we believe the same is also true. Investing in the "good cost" could substantially reduce the "ugly cost", while putting up with the "bad cost" at the same time.

In quality management, it is often said that a $1 investment in good cost can drive out at least $100 ugly cost. It may not be possible to do similar estimates for corporate ethics costs, but the magnitude is indicative of the impact.

Just as in quality we don't evaluate every action in terms of dollars and cents, likewise we don't see the need to subject corporate ethics to cost and benefit analysis. Nevertheless, the comparison of cost of quality and cost of corporate ethics does provide a new angle to look at the important issue of corporate ethics.

About the author
Dr. K.K. Tse is the founder of K.K. Tse & Associates, the leading local management consulting firm committed to changing the face of Chinese management in Hong Kong and China. The company specialises in TQM, reengineering, corporate cultural change and top team management.

About the Trade

What has Gone Wrong ?
Can you imagine a junior employee earning $9,000 a month could end up defrauding his employer of $147 million? All the more amazing is that this junior employee worked for a bank which is well known for its good control measures in place. How could this happen? What has gone wrong? Below is the real case.

A 26 year-old junior bank employee joined the XYZ Bank in 1987 as an assistant dealer in the treasury department. He was transferred to the loans department in 1988, entrusted with the negotiation of transactions of up to US$50 million (HK$386.4 million).

This employee used a simple scheme to cheat his employer normally. Borrowers who had succeeded in obtaining loans from the bank would be informed by phone or telex after the money was credited to their accounts. After a transaction was negotiated, this employee would call the customer and tell him to ignore the confirmation, which he claimed was erroneous. He then entered the details of the false placing on a funding memo to transfer the funds to an account in a false name. Between December 1989 and January 1991, five such forged transactions totalling $147 million were transferred to this account.

Red Flags
During the period, this employee was known to have :

• bought a flat at Laguna City;
• bought three expensive cars, namely a Porsche, a BMW and a Peugeot;
• rented a flat at Old Peak Road at $50,000 a month;
• speculated in foreign exchange and lost $5 million; and
• paid $300,000 medical expenses for his father.

Lessons to be Learnt
In this case, the XYZ Bank ultimately lost $40 million. The employee was charged with conspiracy to defraud and false accounting and sentenced to jail for five years.

On the face of the case, what the junior employee had done seemed to be a "clever" trick which he made use of in the purview of his work and duty. However, if we take a more critical look, we could not help ourselves from asking the questions: had his supervisor exercised due care and diligence in supervising his staff? Could this seemingly mishap be avoided? As a responsible supervisor, had he reviewed whether such an excessive delegation of authority to a junior staff was inappropriate? With a little common sense, the supervisor should have been aware of the extent of temptations he had subjected his staff to.

Focusing on the employee, there should be hints and traceable behaviours that his colleagues and supervisor could observe as he was obviously engaged in a lavish life style which was incommensurate with his income. Although this alone could not definitely confirm impropriety on the part of the employee, his supervisor should have paid more attention to his work and behaviours. This could in some way help to prevent or at least minimise the losses to the bank by discovering such misdeeds at an earlier stage. In this specific incident, the malpractices had gone on for more than one year unnoticed.

While it is essential for the people in the banking industry to be well aware of the importance of observing the legal requirements as well as regulations covering the industry, it is also of paramount significance that efforts should be stepped up in corruption prevention and promotion of a clean and honest culture within the workforce. By instituting system control measures and developing an honest corporate culture, staff will know what is the right thing to do and practise a high standard of ethical behaviours.

If you wish to know more about the consultancy and training services for banks provided by the HKEDC, please call 2587 9812.

Watch out for the next issue! The trade to be introduced will be the Construction Industry!

Ethics at Work

The way that a corporate code of conduct is implemented can be very versatile. The Hsin Chong Group adopted a different approach to promulgate its corporate code. After the code was drawn up, it was incorporated in the company handbook. The development of the code was also prominently featured in the company's newsletter.

In 1996, Hsin Chong Group participated in the ICAC Business Ethics Participation Programme which aimed to encourage and assist companies to promulgate their codes to staff. A video was produced to promote the company's profile and its corporate code. In the video, a chapter was devoted to explain the company's code of conduct. Dr. M.T. YEH, Chairman of the Group also appeared in the video and encouraged all staff to uphold a high business standard because "honesty, integrity and fairplay are important company assets in business".

The video was not only shown to all serving staff but also new recruits in the orientation courses. Moreover, copies of the video were also shown to the company's clients, suppliers and sub-contractors who could then clearly know Hsin Chong's conduct in business dealings. Trust of the clients and business associates was further enhanced.

EDC News

In view of the overwhelming response towards the past seminars for finance and accounting managers, the Hong Kong Ethics Development Centre and the Hong Kong Society of Accountants coorganized the fourth seminar of its kind on 2 June 1997. 152 finance and accounting managers participated and showed interest in Hong Kong and the Mainland's anti-corruption laws.

An "Ethics in Practice" Seminar for Sales and Marketing Managers jointly organized by the Centre and the Hong Kong Institute of Marketing was successfully held on 28 October 1997, and was attended by 91 participants in the sales and marketing field. Apart from sharing insights of the three keynote speakers, the participants also discussed actively in the dialogue sessions convened by renowned personnel in the field.

The Ethical Way

Out of the answers sent in by the readers to help Sally solve her problem, Ms. Dora SIN's answer is selected as the best answer and she had received a pen from the HKEDC.

If you too wish to win a prize from the EDC, just take a look at Clara's Nightmare and send in your answer together with your name, address, contact phone to the Editor "Ethics in Practice", 1/F, Tung Wah Mansion, 199-203 Hennessy Road, Wanchai, Hong Kong; or by fax : 2824 9766; E-mail:hkedc@chevalier.net.

Clara worked for Maria, the buyer of a gourmet food department. They received a shipment of thin little wafers from England that had a cream filling flavoured with strawberries and raspberries. They were packaged in foil-covered boxes, but somehow they had become infested with insects. Perhaps not all of the boxes were infested, because not all of the customers brought them back; but obviously they could not continue to sell them. They couldn't inspect the packages and keep the ones that were not infested, because there were too many - about $90,000 worth - and because they would have to tear the foil to open each box.

Maria said that the manufacturer would not give a refund because the infestation doubtless occurred during shipment or even during storage at their own warehouse. Maria told Clara to get rid of them. Clara thought that she meant to arrange to have them taken to the dump, but Maria said, "Absolutely not. Call YY and KK. They operate down in the new towns and can sell anything. We've got to get our money back." Clara was shocked.

Should she follow Maria's instructions? Would it be better if she told YY and KK the truth? What if the goods brought in thousands of complaints?