High Performance With High Integrity - Only The CEO Can Make It Happen

Tuesday, July 1, 2008 - 00:00

The Editor Interviews Ben W. Heineman, Jr., former Senior Vice President and General Counsel, GE; Distinguished Senior Fellow at Harvard's Kennedy School of Government; Senior Counsel at Wilmer Cutler Pickering Hale & Dorr; and author of High Performance with High Integrity, a publication of Harvard Business Press.

Editor: Ben, please tell us about the origins of your book.

Heineman: I have long felt that the governance debate of the last few years has focused too much on directors. There are two basic issues in governance - economic strategy and integrity. On economic strategy one can argue about what the role of the shareholders and the directors and the managers should be - obviously they each have some role.

When it comes to fusing performance with integrity, the only place that can happen is from the CEO down - what I call the third dimension of governance. The first dimension is the shareholder-company relationship, the second dimension is the directors-managers relationship and the third dimension is from the CEO down into the company to all the employees.

The book arose, in important part, from my disagreement with the emphasis in the corporate governance debate on the central role of the board. Of course, I recognize the importance of the board. There is a chapter in the book on the right-sized role of the board. A new idea in the book is that the board should use as the most important qualification for selecting a CEO not just personal integrity but also the experience, skills and intensity to achieve high performance with high integrity. I also advocate that in setting compensation for the CEO and other top executives, the board should make demonstrated success in fusing high performance with high integrity an important component of both cash and equity awards.

But, having said that, there is a deep belief on my part that only the CEO and top business leaders can create a culture of high performance with high integrity. With respect to integrity, they can only do that by providing the right resources and establishing systems and processes that embed necessary principles and practices deep in business operations. The CEO cannot shirk responsibility by treating integrity as a staff function for which the CFO, the GC and the HR leader are primarily responsible.

I want to make clear that this is not just a GE book - I spent a lot of time in my nearly 20 years at GE traveling around the world and talking to many different companies. So a certain amount stems from GE for sure, a certain amount of this is drawn from listening to other thoughtful business leaders, and a certain amount is based on reflections after I left GE when I was in an academic setting. All the principles and practices I discuss in the book are interrelated, and even though the book is short and, I hope, clear, it also presents a complex system.

I also want to make clear that to the extent that it is about GE, it is not because GE always succeeded. We certainly made our share of mistakes, but what I do think is true is that the CEOs and top business leaders of GE cared deeply about integrity and tried to translate that concern into action. The principles and practices in this book are the beginning of the debate, not the end of the debate. These are the kinds of issues we ought to be debating because it is only the CEO that can drive a high performance with high integrity culture.

Editor: Why do you feel that high performance must be fused with high integrity?

Heineman: I try to make the point in my book that there are two reasons why companies throughout the world need to have high performance with high integrity. One is to avoid the risk of scandals which now have consequences exponentially greater than they were 10 years ago and can, as we have seen, threaten the existence of the corporation and the tenure of the CEO. The other reason is that if companies generally adhere to the suggested principles and practices, I believe strong, positive benefits will follow: inside the company itself, in the marketplace and in the broader, global society - fundamentally the basic trust among all stakeholders so necessary to long-term success.

Editor: I frequently hear complaints from general counsel that they have difficulty convincing senior management to provide necessary funds for the compliance function.

Heineman: One of the key principles in the book is that the CEO must recognize the importance of the GC's and CFO's partner-guardian function and assure that they have the tools necessary to perform that function. If it is clear throughout the organization that integrity is the direct responsibility of the CEO and not a mere staff function, any reluctance about providing the necessary tools should end.

High-quality people in core staff functions are essential to enable both the GC and CFO to play their partner-guardian roles. Companies shouldn't skimp on providing compensation that will attract the best "A Players" to their teams. Return on investment is huge.

Editor: Isn't the book also a roadmap for achieving high performance with high integrity?

Heineman: I guess I would say it a little bit differently. I think it provides a framework that companies can use in fusing performance with integrity. I articulate eight principles that are fairly broad and under each of these principles there are four or five key practices. These eight principles are fundamental: demonstrate committed and consistent leadership; manage performance with integrity as a business process; adopt global ethical standards; use early warning systems; encourage the GC and CFO to be both partner and guardian; foster employee awareness, knowledge and commitment; give employees voice; and pay for performance with integrity. I tried to discuss only first-order principles and implementing practices - those principles are the foundation for any company, large or small.

Editor: Why do you view the fusion of high performance with high integrity as being the very foundation of the corporation?

Heineman: There is no question that the standing of corporations today compared to 10 years ago is significantly reduced because the drumbeat of scandals in this decade has undermined the positive public reaction to the floodtide of capitalism in the '90s. The trust that people have in capitalism and, in particular, corporations, has diminished. One of the problems of having greed prevail, not having discipline, not having integrity and not recognizing the importance of checks and balances in corporate life is that it then leads necessarily to more and more cries for regulation. I think there's certainly a place for regulation, but it's not best done in the moment of crisis when there may be overreactions.

In addition, laws are no better than the ways in which companies implement them. Employee values of honesty, candor, fairness, reliability, and trustworthiness are essential to any good organization, public or private, nonprofit or profit. You won't have those values in your employees unless you have robust adherence to the spirit and letter of the laws by the CEO and other members of management - and deep in the company - and unless you have global ethical standards that go beyond the minimum that the law requires.

Editor: Do global companies face unique problems?

Heineman: There is always tension when global companies try to adapt to conditions in the many countries in which they do business - when they try to be commercially sensitive and effective in those countries while maintaining the global integrity of the company. The integrity of a company consists of robust adherence to the law, as well as adopting global ethical standards that bind the company and its employees and have its employees live the values of honesty, fairness, candor, reliability and trustworthiness. These have to be universal and uniform across the globe and cannot vary by particular nation or region or culture - so that you don't bribe when you are in China, you don't bribe anywhere; you adhere to certain environmental standards everywhere.

At the same time, you need to be sensitive to the local society in terms of other cultural dimensions which do not go to integrity but which go to that society's culture in terms of how you present your products, how you make sales and how you adapt to special employee requirements in terms of food or dress or whatever it may be. So, you need to maintain a uniform global culture on integrity issues, while at the same time you need to be local in important ways. Companies that don't have a strong, global performance with integrity culture get in big trouble - Siemens being the most current example.

Editor: Is there a distinction between good corporate citizenship and corporate social responsibility?

Heineman: Let me step back for a moment. In my view there are three pillars of corporate citizenship. The first is strong economic performance. In my book, you can find the list of benefits that GE as a strong, durable and successful economic organization provides to its stakeholders whether they are shareholders, employees, pensioners, customers, suppliers, communities or creditors. So that's the first pillar and one that I say in the book that CEOs don't talk about often enough - the extraordinary range of benefits that a successful company provides to a range of stakeholders, not just to shareholders. The second element is adherence to the relevant financial and legal rules. The third element is the establishment of, and adherence to, binding global ethical standards that go beyond the letter of the law.

In deciding whether to adopt global ethical standards, the company has to make a cost/benefit assessment of the particular activity to determine whether it is beneficial for it in its enlightened self-interest to go forward with the activity. Costs must be viewed as investments and benefits may be measured by common sense judgment, not necessarily detailed metrics. But there will be certain things that people will ask of a company which are simply too expensive or uncompetitive for an individual company acting alone to undertake. A good example is implementing a program to address all the elements of controlling climate change.

In such cases, there has to be a societal answer not just a company answer, although companies on their own can reduce greenhouse gases and increase energy efficiency. A company can do certain things, but it can't provide education; it can't provide roads; it can't provide national defense, and it can't necessarily provide consumers with protection that applies to all consumer finance companies.

One of the problems with CSR is that it assumes that a company acting alone can accomplish changes that can only be accomplished by governmental action or through joint action of the many companies that contribute in some way to creating a problem. So, the approach of the good corporate citizen might be to urge governmental action to protect "social goods" or to look for ways that the companies involved can address the problem by joint action. The joint action of American transnationals to extend the Foreign Corrupt Practices to other industrialized nations through an OECD convention is an example.

Editor: How did you try to get GE ahead of the curve and attempt to shape rather than being surprised by future events?

Heineman: Another principle in the book is the vital importance of developing early warning systems on law, on ethics and on country risk. Systematic use of those systems by business management is critical. Such systems are made possible by having strong substantive experts inside the company (or hiring them outside if necessary). Such experts identify emerging issues before they have "emerged" and develop options to address them. Working directly with the GC of GE at headquarters are super-substantive experts (both lawyers and nonlawyers) in such areas as tax, environmental, health and safety, employment, labor, IP, mergers and acquisitions, litigation and trade who, among other things, look at the most important policy issues facing the company and come up with policy proposals to address them.

One of our most important initiatives was to drive specialized expertise deep into the company. GE is big enough so that in each of the business units we sought to have "A Player" professionals in substantive areas so that in total we have the bench strength of a large international law firm. The substantive experts meet and work with each other, so there is an employment practice group, an environmental practice group, a tax practice group, an M&A practice group, an IP practice group and an international trade group, etc. When the groups come together they discuss best practices, emerging problems and policy prescriptions.

In the book, I mention that some of the businesses have business leaders who are champions with respect to risk areas affecting those businesses and that they are paired with a lawyer who works on policy with respect to that risk area. This enables each P & L leader, working with the lawyer, to assess the risks across their different functions; Marketing has one set of risks, Engineering has another set of risks, IT has a different set of risks. Because the lawyer is paired with a business leader who understands the process very well, this approach to risk reduction proves to be very effective. You've got to build that foundation, and once you have it built, its easier to deal with change and adapt to early warning systems, but you have to have this performance with integrity infrastructure first, focusing not just on risk assessment but also on systems and processes for risk mitigation.

Editor: You characterize the GC as one of the guardians of a corporation's integrity and encourage occasional meetings between the GC and the non-management directors. What are the benefits of this?

Heineman: The board ought to have an opportunity to talk directly to the general counsel without the CEO or other members of management in attendance. At the same time, the GC must maintain the trust of the CEO, so the CEO may well want to know what the GC is going to say. I don't think that that is necessarily a bad thing because it may make the CEO even more sensitive to integrity issues, knowing that the GC has an independent line to the Board. Moreover, the CEO may also take the view that the GC may alert him or her to any concerns that the board may have about tough issues facing the company. So, the fact that the GC will be alone with the non-management directors may give the GC a little bit of leverage with the CEO, assuming he or she is politic about it and does it in an appropriate way. On the other hand, if the GC pushes that to a point where the CEO loses trust in the GC or gets angry - it may not work well. Like so many of the things in the real world, we can talk about processes and ideas, but a great deal depends on personal chemistry.