Compliance, capitalism & Deming

Jun 01, 2009
<p>Capitalism is not totally broken, but the rules need review</p>

Capitalism is, in part, a system, approach or game we play in the US to reward those who develop the best product, service or price. As in the game of football, capitalism has rules and referees, without which the game would fail. It is also a system that is designed to reward those who work the hardest, and those who think of new ideas. Some countries don’t use this system and, as a result, new ideas and hard work are not always protected or rewarded. In some countries it’s not so much about how hard you work but rather who you know or how much you’re willing to pay to play. 

Now, capitalism is under fire. Because of serious ethics, fraud and integrity issues, some people have lost faith in capitalism. Many are starting to favor socialism: an April 2009 survey conducted by Rasmussen Reports showed remarkable support among US citizens for a move to socialism. Overall, 53 percent of respondents favored capitalism, with 20 percent believing socialism is better. The numbers are more stark among younger age groups. Only 37 percent of those under 30 preferred capitalism, while 33 percent would go for socialism, leaving 30 percent undecided.

It is a shame that we may move away from a system that has generated such a high standard of living just because we have not addressed issues such as ethics, integrity and honesty. A better idea might be to fix the ethics and fraud concerns rather than throw out a system that has served us so well for so long and made us among the wealthiest in the world. More importantly, these issues can easily be resolved.

The rules make the game

Capitalism is not an easy game to play. It requires a lot of rules – rules that protect intellectual property/patents and prevent bribery, monopolies and unfair business practices, among many other things. Furthermore, it requires enforcement of those rules.

Some countries have few rules and consequently can’t play the game of capitalism (or socialism). Other countries have rules but don’t enforce them; they are also unable to play the game of capitalism and as a result struggle with creating wealth. Taken to an extreme, the widespread lack of money, regulation and enforcement results in an unsafe environment. The principles of capitalism have been a big part of the evolution and advancement of civilized society.

Enforcing the rule of law in a regulated society remains an expensive proposition. Some countries spend a great deal of money on the enforcement of the rule of law, but this enforcement is largely ineffective. In the US we spend a great deal of money and time on enforcement, and for the most part we are successful.

The less the enforcement community has to do to enforce the laws associated with maintaining a free and fair business environment, the better. These resources could instead allow the enforcement community to focus on maintaining a civil and safe environment. Compliance is a way to reduce our expenses related to enforcement and address the issues of fraud, ethics and integrity, and that would please W Edwards Deming.

Redundant regulatory enforcement

So who is this Deming? Deming was a management guru and a master of management efficiencies and effectiveness. He believed it was inefficient and ineffective to have ‘checkers checking the checkers’, and advocated pushing the responsibility of checking to the front line or the person actually making the mistakes.

Right now we have a system that is redundant when it comes to regulatory enforcement. We have the people on the front line who are checking to see they and their teams are not making mistakes or violating company policies. The auditor checks their work. Then we have an outside auditor checking the internal auditors. On occasion we have legal experts checking all that. Then we have the enforcement community checking all the checkers. It’s very inefficient and very expensive.

On top of all this, the enforcement community can’t be everywhere and catch everything. Society is quite upset about corporate fraud, and rightly so. As a result, policing corporate fraud is becoming more expensive every day. In addition, there is little coordination among all of the elements of an organization’s enforcement effort.

Deming would have preferred it if the checking process was consolidated and had due authority to punish failure. He would have preferred audit, legal, risk managers, trainers, the board and other related responsible parties within a company to coordinate their regulatory checking. Had he been alive to see the current state of affairs, I believe Deming would have said, ‘We need to create a system to solve this problem and support the regulations that allow capitalism to flourish.’

When Enron, WorldCom, Tyco and HealthSouth congressional hearings were held, audit, legal, risk, the board and others were paraded in front of Congress. When asked, they all said, ‘Yes, I was aware of the problem but I was not responsible for it’ or ‘I was powerless to do anything.’ Deming would have said there has to be a better way.

Take the battle to the front line

He would have minimized the number of checkers checking the checkers. He would have pushed it to the front line. He would have said, ‘We need to coordinate the people who already provide regulatory enforcement services within our organization such as audit, risk, fraud examination, education and legal.’ He would have done away with the checkers checking the checkers by giving those closest to the problem due authority to remediate and discipline.

He would have focused on prevention by, for example, respecting those who identified issues. He would have had enforcement and discipline. In other words, Deming would had been a big supporter of compliance and ethics programs, appointing someone (such as a compliance and ethics officer) to manage the compliance program and giving him or her accountability, responsibility and authority. 

I am a student of Deming, but obviously I can only guess what he would have done. What I have no doubt about is that he would have saved capitalism; now it’s in our hands. More specifically, it’s in the hands of our CEOs and top management. If they don’t get behind some approach to restore the public trust, they will lose capitalism. And Deming will roll over in his grave.

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