A Book* Every GC - And CEO - Should Read Cover To Cover

Tuesday, July 1, 2008 - 00:00

Editor: Ira, you have had a close relationship with the leaders of GE over many years. How do you view Ben Heineman's contribution to GE?

Millstein: My introduction to GE's dedication to good citizenship began when I worked with Reg Jones, GE's CEO from 1972 to 1981 and Bob Estes, its GC at the time. It was a very different era. It was the era of dignified CEOs who had very little to worry about in terms of foreign competition. They could afford to be thinking of their stakeholders to a greater extent than they can today. GE was the idol of the world at that time, and Reg was the corporate statesman of the world.

Reg as CEO at GE and as a leader of the Business Roundtable used those bully pulpits to talk about the advantages of being a good corporate citizen. He was in many ways responsible for the forward-looking corporate citizenship positions that the roundtable of that era took. The roundtable's position statements about good corporate citizenship beginning in 1978 were not only clearly articulated, but also put into practice by its members.

I had a unique opportunity to view Reg's and Bob Estes's dedication to good corporate citizenship when I was teaching corporate governance at the Kennedy School at Harvard in the 1980s. Reg and Bob Estes came to school a couple of times to teach my class with me. They believed in good corporate citizenship and insisted that GE practice it.

As time went on, it became more difficult for a major corporation to practice what I am quite sure most boards and managers would like to do. Competition became keener, the markets became more ruthless, and there was much more pressure for short-term performance and pressure, not so much to discharge your corporate citizenship responsibilities, but to pay more attention to "shareholder value" and worry about how you were performing quarter to quarter. It has taken a while to incorporate "citizenship" into "shareholder value."

Ben has built on the legacy of Reg Jones and Bob Estes in a different and far more difficult time. His book demonstrates how General Electric has accommodated to the relentless demands of the current marketplace for high performance without sacrificing the highest standards of integrity.

Ben has substantially improved on the citizenship idea that Reg had initiated. He brought it to a new level at a time when this was much more difficult to do.

With the help of his management and a supportive board, Ben was able to keep GE well ahead of the curve in sustainability and good citizenship. If you look at the Citizenship Reports that GE has issued in the last several years, you will find descriptions in honest and practical terms of what a company of its size can and should do. I speak of this recognizing that economic performance will always be at the top of the list. Without a satisfactory economic performance, there's no way you can fulfill good citizenship.

GE has demonstrated how far you can take the corporation in terms of fairness and integrity and responsibility beyond what's technically required by the law. I admire what Ben has done. I believe that he's been the conscience of GE all these years in taking the original corporate statesmanship model established by Reg, adapting it in a highly competitive and difficult era, and improving on it.

Editor: Wearing your professorial hat, are you going to teach the book at the Millstein Center?

Millstein: Yes, I am, and Ben is coming to our center next week to lead a panel in our Annual Forum. We will have books for distribution, and I intend to incorporate the book into my course. I think it's very important. Ben is right about the central role of the CEO. The CEO is the vehicle for driving integrity through the whole organization. As Ben points out in his book, the board's role is also crucial because it must help define and support the "integrity" goal; it must pick a CEO who is dedicated to achieving high performance with high integrity, and it must authorize a compensation structure that rewards that effort. Obviously this entails an obligation on the part of the board to monitor the CEO's performance to assure that he or she continues to emphasize integrity.

Editor: Ben also emphasizes the role of the general counsel and the need for the GC to be backed by what he calls "A Players."

Millstein: Ben is the progenitor of the modern inside corporate law firm. I don't like the word "inside," but he is the progenitor of a corporate law firm within the corporation. He has built a corporate law firm inside GE which is at least the equivalent of any outside law firm and he has done this in a cost-effective way. When he came to GE, I understand that 30 percent of its budget represented the cost of the inside lawyers and 70 percent was for outside lawyers. When he left, it was just the reverse. It's not that he doesn't admire and use outside lawyers, but he uses them appropriately given the fact that he has built the kind of inside law firm which, as I said, is at least the equivalent of any outside law firm.

Now, how did he do that? He did it by being able to convince Jack Welch that it was worth spending the kind of money it took to get highly qualified partners of law firms to come inside. Jack Welch agreed, and they found it to be more cost effective by bringing in people like John Samuels, GE's tax lawyer, and others of comparable talents in other practice areas who were outstanding and capable of being senior partners at any law firm in the country. By bringing this caliber of person inside, he bought a level of talent and expertise that reduced the need to go outside - and in a cost-effective way.

It is penny-wise and pound-foolish to skimp on the salaries of inside lawyers and then not have the quality that you need and to have to go outside anyway. I recently attended a colloquium of inside lawyers from various companies, and practically everyone in the room acknowledged that Ben, in building an in-house law firm, was the model. The fact that he hired outstanding lawyers in their respective fields is evidenced by the fact a number of them have gone on to become CEOs of other companies. The fact that these people have gone on from Ben's internal law firm to run companies is the equivalent to what's happened to outstanding partners of major law firms. The law firms train them, they become great, and then they go on to what they consider are important alternative career choices.

Professor Harvey Goldschmid of Columbia Law School who was at the same colloquium with inside counsel commented that if he was advising his son as to a career in the law business, he would advise him to become the general counsel of a great company, where the general counsel had the kind of model law firm that Ben created. He thought that this was where the action was. Harvey thought it would be even more fun, varied, and exciting as a career choice than becoming a partner in a major law firm. That was a high compliment indeed.

Editor: When Ben talks about good corporate citizenship, he talks about a cost-benefit equation in which a company should look to future benefits of a particular action to determine whether it should be taken.

Millstein: Yes. Ben makes it clear that you can tie good citizenship to benefits even if they involve intangibles like reputation - and the payoff is long range. This is a subtle area which Ben best explains with examples. He also mentions that some issues are so big and complicated that one company acting alone cannot have much impact. You can't expect a single business to cure climate change, but you can decide which piece of climate change might have an impact on your business and how you might do the "right thing" and make a good business case for doing something about it. He also mentions that there are strategies that can be followed to involve governments or to bring companies together to address a problem that is bigger than any one company can handle. The anticorruption strategies pursued by GE are illustrative of this. Every company should look at the issues that affect it and determine what strategies are available to it to improve the situation.

Editor: Tell us how GE attacked international bribery, a problem that it could not deal with alone.

Millstein: Ben helped organize Transparency International. GE helped put it together and supported it. He and Fritz Heimann were instrumental in getting the U.S. branch of Transparency International up and running and worked with me and others in recruiting other major corporations, for example General Motors, to join TI, get it on its feet, and make it the power that it has become. Ben has backed the work of TI, and Fritz in working with the OECD and the UN and has been there from the very beginning fighting corruption around the world. Our firm is proud of the help it provided. As a matter of fact, for the first five or ten years of TI, we provided it with space in our firm's Washington office without charge.

Editor: Tell us about GE's continuing interest in corporate governance.

Millstein: Bob Estes and Reg were also instrumental in starting the Institutional Investor Project at Columbia, which has done pioneering work on shareholder rights issues. They were the people who originally supported it, got the Business Roundtable involved in it and brought in other CEOs. Ben assured that GE would provide continuing support for the project.

Editor: One of the things Ben talks about in his book is that the goals of policy should be to look for bipartisan solutions and a nonpartisan stance, and that unwavering support for substantive principles serves companies better than unbalanced support for political parties.

Millstein: One of the things that Ben brings to the party is the experience he had in Washington. He was a law clerk to Supreme Court Justice Potter Stewart and served as Assistant Secretary for Planning and Evaluation with the U.S. Department of Health, Education, and Welfare under President Carter and had been a partner in a Washington law firm. Ben not only brought his huge legal expertise and his organizational abilities to GE, but he brought a thorough working knowledge of Washington. That was really important. He was not a novice, and he didn't have to take the word of lobbyists or local lawyers; he knew the territory. Therefore when he talked about putting things together and working in a bipartisan way, he knew from practical experience what he was talking about. This wasn't just some theory; he had done it. That's another one of the attributes that Ben brought to GE in building his law firm there.

Editor: Do you think that Ben's book will have a significant effect?

Millstein: Ben in a very careful and well-thought out way points out that there is no single magic bullet to performance with integrity. Integrity is something that you have to drive through the whole organization. Other people may have made a similar point, but I've never seen it so clearly laid out together with practical suggestions about the processes and tools to implement it. Ben makes it clear that driving integrity through the whole organization is the CEO's responsibility. It does not get magically done by the CEO going out and speaking to the troops or shifting the entire responsibility to a staff function. It gets done in a hundred different ways at every level of the organization. And that's hard work.

I'm very hopeful that people will take the time to read the book all the way through. My hope is that people don't glibly say, "Oh yes, that's a really great idea," but that they will take the time to read and study the kind of effort it takes to drive integrity through the entire organization.

In addition to his active legal practice, Ira M. Millstein is the Senior Associate Dean for Corporate Governance and the Eugene F. Williams Jr. Visiting Professor in Competitive Enterprise and Strategy at the Yale School of Management. In November 2006, the School of Management renamed its Corporate Governance Center in honor of Mr. Millstein, naming it the Millstein Center for Corporate Governance and Performance. Mr. Millstein is the Chairman Emeritus, having served as Chairman from 1999-2005, of the Private Sector Advisory Group to the Global Corporate Governance Forum founded by the World Bank and the Organization for Economic Cooperation and Development (OECD). He served as Chairman of the OECD Business Sector Advisory Group on Corporate Governance in 1997-1998. He formerly served as Chairman of the Board of Advisors of Columbia University's Center for Law & Economic Studies' Institutional Investor Project, as Fellow of the Faculty of Government at Harvard University's J.F.K. School of Government, and is an elected member of the Academy of Arts and Sciences.

* Ben W. Heineman, Jr., High Performance with High Integrity, a publication of Harvard Business Press.

Please email the interviewee at ira.millstein@weil.com with questions regarding this interview.