GE, where Ben W. Heineman Jr. worked for nearly 18 years as senior vice president-general counsel and senior VP for law and public affairs, has become known as a sustainability pioneer.  Its “ecomagination” strategy tackles issues of climate change and global warning while simultaneously doing it as a winning business strategy.  Heineman even coined the mantra of the ecomagination initiative: “Green is green.”  His latest book, “High Performance with Integrity” (Harvard Business School Press, 2008), also deals with this concept of companies meeting and solving both social and commercial needs, not as a PR effort but because it’s good, sustainable business.

In Part 2 of our continuing “First Person” series, where leaders impart firsthand wisdom on various issues, HOW Online’s Dov Seidman gets HOW contributor Heineman talking about the role of the CEO in engaging employees in high performance while adhering to rules and ethical standards, and in creating integrity-based corporate cultures and sustainable practices.

• Read Part 1 of the series
• Part 2 of the series
• Read Part 3 of the series

Ben Heineman Jr.: “High performance with high integrity starts with culture, and culture is both what your values are and what your actions are, so the culture is absolutely critical.

But the culture doesn’t happen unless the CEO leads it; it cannot be the board.  The board has a very important role, but it does not direct-connect with the thousands of employees (hundreds of thousands in GE’s case).  Only the CEO and the top business leaders can create the culture and can fuse performance with integrity.

You can create the culture in a lot of different ways.  There are eight principles in my book that discuss them.  Among the most important is to make performance with integrity a business process, to make it operational, to drive it deep into the businesses and to make the business leaders accountable for it — to make sure they have the resources, that they’ve hired the right people, that they’ve looked at all their processes, whether it’s in marketing or sales or engineering, and seen what the legal and ethical issues are with respect to those processes, whether they are in the United States or in Europe or in Asia or in South America.

So it’s a question of, ‘Where are there risks in terms of law or ethics?’ and then ‘How do you control those risks?’  Dealing with those issues is hard work, requiring systematic analysis and robust processes embedded in business operations.

Business literature has long used a fundamental distinction between leadership and management: Leadership is the ability to adapt to change; management is the ability to adapt to complexity.  In infusing performance with integrity, the CEO has to do both.  The CEO has to show the way, create the aspirations and show how the world continues to change and how they all need to adapt.

But the CEO and business leaders as managers must deal with very complex circumstances: different business processes; different laws or ethical precepts; different control points; different methods of risk abatement; different ways of educating and training; and different kinds of compensation practices and business management development.  Making this all really operational creates the culture; it’s not just the aspiration.  If you don’t drive the performance-with-integrity systems and processes deep into the business operations, then ‘tone at the top’ is just eye wash.

While at GE, anything that I did was enabled or made possible by the support of the CEO.  The staff leaders, while they’re important, really derive their power in large measure by the trust given to them by the CEO.  So if the CEO believes in fusing high performance with high integrity, there are demands made on the business leaders in all sorts of ways.  The staff leaders themselves can be very supportive in creating tools, in education and training, in evaluating processes and developing controls that are embedded into the businesses.  There are lots of ways in which you relate to the business, but without the unstinting support and endorsement of the CEO, the effectiveness of staff leaders on this core set of issues is minimal.

One of the other dimensions of this, and one of the principles, is that we need to start paying for performance — but performance with integrity, not just performance.

My book starts with what I think is a rather realistic view of capitalism: Business is very prone to huge integrity lapses because there are forces of greed, there are forces of stupidity, there are forces of corruption that make people phony- up the numbers or not do the numbers right or make terrible decisions, as we’ve seen in the current financial sector fiasco.

Basically, you need to have performance integrity to deal with these core pressures inside of capitalism that will pervert it. You really must have the checks and balances, both in performance, risk-taking with risk management and then performance with integrity to keep capitalism balanced, durable and sustainable.

The essence of strong business is comprised of two related balances: the balance of risk-taking and risk-management and the fusion of high performance with high integrity.  I believe this is the fundamental truth about real business success — in one sentence.  The tragedy of Enron and WorldCom is that corrupt CEOs intentionally committed financial fraud and blew out all the systems.

But in the current financial crisis, the CEOs did not even understand the risks their corporations were taking; the sector-wide failure was more a question of negligence than intentional acts.  All systems failed: finance, accounting, risk, law, human resources, operational leadership, top leadership, the boards of directors — where there should have been checks and balances, there was greed.  We saw a complete lack of balance between risk-taking and risk management across a whole sector where greed and stupidity, and likely some corruption — although that hasn’t come out as much yet — have perverted our great financial institutions and our financial systems, and have nearly driven capitalism over the cliff.

Never have we seen the kind of government activity to deal with the results of this, whether it’s the credit crisis, the solvency crisis, the mortgage crisis, the looming recession.  Within a couple of months, we are, however,  going to be dealing with the causes of this massive failure in leadership, and it will change the face of capitalism, with a much greater role for regulation and much more constrained business self-determination because business failure to have basic balance has led to forfeiture of trust.

In 2009, we will have to deal with the causes of the financial sector meltdown and face the fundamental question, ‘How do we control greed, stupidity and corruption and achieve basic balance inside private financial institutions?’  Now, no one is going to say that we’re not going to take risks - it’s not to say that people aren’t going to fail — but what’s happened this time is that it was not an individual company, it was a whole sector, and it was a critical sector to the global economy.

That’s why the economy is on its knees right now.

If companies cannot balance risk-taking and risk-management, cannot fuse high performance with high integrity, then they will default to government — with the likelihood that to achieve necessary soundness and stability through more regulation, we will sacrifice some innovation and creativity that comes with corporate self-determination.

But after the excesses we have seen, who trusts financial-sector self-determination today?”

Last 5 posts by Ben W. Heineman Jr.
• The Leadership Failure That Led to Salary Caps - March 4th, 2009
• Beyond What the Rules Require - December 15th, 2008
• High Performance, High Integrity - December 2nd, 2008