Ethisphere recently caught up with Ben W. Heineman, Jr., former General Counsel for General Electric, currently senior counsel at Wilmerhale Law and author of the recent book, High Performance with High Integrity, to discuss his background and experience as General Counsel for one of the largest corporations in the world.
E: Your most recent book, High Performance with High Integrity talks about the idea of a values based system versus a rules based system in corporate governance. At the heart of that, you say, is the goal of fusing high performance with high integrity. Can you please explain what you mean by that?
BH: Integrity in my judgment has three elements. Element number one is robust adherence to the letter and spirit of the formal rules, whether they are financial or legal. This is an extremely difficult task which requires complex management systems and processes embedded into the business operations, and this involves intense business leadership and significant resource commitments.
Second is the adoption of global ethical standards that bind a company and its employees. For example, companies prohibit bribery, public or private, anywhere in the world. They adopt a system of ethical sourcing that requires third party suppliers to avoid child and prison labor, have environmental compliance systems and provide decent wages and working conditions. You make global decisions about ethical precepts that go beyond what the law requires.
When I was at General Electric, we bought a lighting plant in China. By accident, I was the first one there– I was on a trip to China. I found out they were literally using mercury in their manufacturing process, which is incredibly dangerous and toxic.
And the third element may be the most important – having employees who manifest core values; honesty, fairness, candor, reliability and trustworthiness. Those values are essential to a great company. Bad companies have back biting, turf fighting, selfishness and people who can’t work together – they have their own agendas. Great companies have an unselfish commitment to getting the job done.
E: Can you give us an example through your own experience where adopting those three elements was a necessity?
BH: When I was at General Electric, we bought a lighting plant in China. By accident, I was the first one there– I was on a trip to China. I found out they were literally using mercury in their manufacturing process, which is incredibly dangerous and toxic. This was then being poured into the gutters and flowing out into the rice patties behind the plant. We had an imminent hazard to human health and the environment. This was against the law—but the law was unenforced. Ethically we had to act immediately. Going back to the third element I mentioned, if we didn’t address that problem our employees would think we were hypocrites.
A: GE was and is a big government contractor. Now the government is trying to make moves to mandate ethics with their new federal acquisition regulations. How effective do you think the new regulations will be?
BH: If they’re rules, they’re not ethics. Ethics is something you do voluntarily, rules are things you have to follow. There’s a penalty by public law, so if it’s a new FAR, it’s a rule.
Europe sort of tried to say, “You have to have some kind of CSR,” but it never got anywhere because it’s either going to be legislated or isn’t. I believe strongly that we should have an ethical process. I write in the book that you can have a process whereby you look at all the stakeholder issues and prioritize them, analyze them and decide on them, and that is different than adherence to positive law, constitutional law or international law. Both processes are very difficult, and I think the people who focus just on ethics make a big mistake because law is positive morality.
Adherence to law is enormously complex. Enormously complex. I mean when you think about the hundreds of laws that we have to face in the United States – federal, state and local – and then you go to 100 jurisdictions. GE is in 100 countries around the world, many of which also have some kinds of federal systems or split divisions within the governments. For example, the EU has member states and China has central, regional and provincial governments. It’s enormously complicated to assess your risks, what kinds of risk abatement processes you’re going to have and all the points in manufacturing, sales, engineering and IT where the law intersects those processes.
How you risk assess, abate, prevent and respond is really hard stuff. Really hard stuff. When you add to that ethical precepts that you impose upon yourself, that’s yet another dimension of it.
A: You touched upon a lot of points. Let me come back to one follow-through question. Obviously it’s a historic moment in Washington, with the election and the new administration. They’re taking a very high road on the ethics component when hiring for positions in terms of the role of lobbyists and so forth. What regulations would you envision will be coming down the pipe that would be helpful or harmful and, on the flipside of it, can businesses really self regulate in the absence of regulations?
How you risk assess, abate, prevent and respond is really hard stuff. Really hard stuff. When you add to that ethical precepts that you impose upon yourself, that’s yet another dimension of it.
BH: I think that we’re not going to be able to mandate ethics. That is something that each company is going to have to decide for itself. Each company is going to have to look at its stakeholders, decide on the priority issues and make decisions about whether or not they want to act. For each set of stakeholders, for each business in different industries, those issues may be different. For this reason, it’s very hard for the government to mandate ethical behavior.
Governments can certainly mandate all sorts of laws, such as executive comp, which I think will target more than just the financial services sector; or quality and safety in the supply chain, in which there are myriad issues; or manufacturing standards in the United States, harmonized with manufacturing practices in the EU for medical devices and medical equipment. How do you get the data on what’s actually happening out there? I think the answer to your question is we have clearly left the era of Reagan deregulation. I believe in my deepest bones that the best way to do it is internally, but I recognize that there have to be external pressures brought to bear to restrain corruption.
E: A general counsel of a big company once told us that “it’s impossible to prevent bribery overseas, I’m not sure why we even bother trying.” What kind of response would you provide to someone like that?
BH: The answer I’ve always given are that there are three reasons why you don’t bribe at all. First of all, the internal quality of a company, the internal culture, the values of candor, fairness, honesty, reliability, trustworthiness are essential to a company. If you bribe and you hide it, then you’re a hypocrite and those values are undercut. So I always tried to say to Jack Welch – and he agreed with me – that the main reason we want to do this is to promote the kind of employee population we want to have, and to make clear for what we, as a company, want to stand for. If we condone bribery, then our efforts to create an integrity culture won’t be taken seriously.
Reason number two is to reduce then possibility of catastrophic risk. The fines, penalties and settlements from an integrity lapse in this area have increased exponentially in the past 15 years.
It used to be if GE showed up at the Justice Department with a target company implicated in overseas bribery, DOJ would say, “Fine, you get a pass because of your reputation. We’ll get a few individuals but we know you’ll bring your compliance system, so there will be a civil disposition for the company.” They don’t do that anymore. They say, “You buy it, you get indicted. If you want to buy this company, let the company resolve it first.”
Three, if you are a small company you may want to be bought by somebody. The big companies have gotten to a level of sophistication in due diligence that we’ll find any bribery. At a minimum, we’ll require a price adjustment between the MOI and the close—or we may not do the deal at all.
On top of that, the behavior of the regulators has changed. It used to be if GE showed up at the Justice Department with a target company implicated in overseas bribery, DOJ would say, “Fine, you get a pass because of your reputation. We’ll get a few individuals but we know you’ll bring your compliance system, so there will be a civil disposition for the company.” They don’t do that anymore. They say, “You buy it, you get indicted. If you want to buy this company, let the company resolve it first.”
This is a really big change at Justice. If you want to buy a global company, let it come forward and work out its deal. If you close before it’s worked out, it becomes your problem, and there will be a GE indictment. Even though it happened on someone else’s watch, and it was Widget Inc, all of a sudden it becomes front page headlines as a GE problem.
So those are some of the reasons to prohibit bribery in all activities—and be vigilant about it in global transactions. At the end of the day, you have to ask yourself, “What kind of company do we want?”
