Corporate Social 1 Responsibility:

Back to Basics

By Benjamin W. Heineman ]r.

Benjamin W. Heineman Jr, "Corporate Social Responsibility: Back to Basics," ACCA Docket 21, no. 1 (January 2003): 96-103.

9 6 ACCA Docket January 2003

The following article is an adaptation of Mr. Heineman's presentation at ACCA's 2002 Annual Meeting in Washington, DC. The article out­lines GE's view on corporate social responsibility and its approach to creating and adopting new corporate governance standards in response to the Sarbanes-Oxley Act and the proposed New York Stock Exchange listing requirements. The article explains how GE intends for these new standards to be a positive model for the corporate community to review and debate. The May 2003 issue of the ACCA Docket, which will address post-Enron lessons learned, will outline GE's new governance standards in full.

The subject of coiporate social responsibility is always timely, but it has a special urgency today because the first order of business for corporations is to regain the trust of investors and other stakeholders. This tnist has, of course, been eroded by the string of scandals that have been white-hot front page, not just business page, news. All the checks and balances that purport­edly serve the investing public have been under with­

ering attack and with good reason. Management (especially financial management), boards of directors, accountants, lawyers, financiers, ana­lysts, the business media, and the regulators themselves have all been found wanting in the notorious cases. And serious questions have been raised about whether these problems are systemic and not just incredible news reports about a few bad apples. This erosion of trust has also occun-ed because of the dramatic decline in the equity markets, the pro­longed problems in the United States and global economies, and the ris­ing chorus of globalization critics.

Copyright © 2003 Benjamin W. Heineman ]r and the American Corporate Counsel Association/Global Corporate Counsel Association. All rights reserved.

ACCA Docket

Benjamin W. Heineman Jr. is senior vice

president, general counsel, and secretary of the General Electric Company in Fairfield, CT.

I submit that acting in a socially responsible way is just as important to restoring that trust as posting good numbers. As I think about corporate social responsibility from an operational, as opposed to a theoretical, perspective, it has two dimensions for General Electric ("GE"): • Ensuring that GE complies as energetically and as

completely as possible with the myriad laws and regulations of the United States and all the other nations in the world where we do business.

• Taking important ethical actions beyond what the law requires—actions that enhance the company's reputation with various stakeholders and interested parties: recruits, employees, shareholders, creditors, customers, suppliers, GE communities, political

- leaders, regulators, key interest groups, the media, and the public at large.

COMPLIANCE

Let me speak first to compliance. I would make the case that compliance with law is the first task of a socially responsible company It is the foundation, along with the integrity of our financial results, on which GE is built. Lack of compliance with law is at the root of all of the corporate scandals, as the recent perp walks and the beginning flood of guilty pleas have made clear

Many theoreticians of corporate social responsibility focus heavily on ethics and downplay compliance because it is something companies are required to do. But compliance should be viewed as the core of corporate social responsibility because it does not happen automatically. It requires a tremendous expenditure of time, effort, and resources to build into business processes. Most importantly, it requires the deep, visceral engagement of business leaders, not just the legal and finance staffs. Just like ethical decisions, it requires conscious choice and focused effort to do well.

Compliance is at the core of business leadership because internal pressures combined with external trends require performance with integrity: • Internal pressures, such as demanding customers,

the desire to make cash flow and earnings num­bers, tough foreign markets, and competitors who may play by different rules.

• External trends, such as the outpouring of law and lawsuits, anticorporate pohtics and media, the criminalization of regulatory statutes, the unceas­ing growth in punitive damages, the quest for gov­ernment revenue, and increasing foreign enforcement trends. At GE, as we acquire and build internationally,

business leaders must drive compliance as a uniform global value that we can never compromise. This requirement is especially crucial in emerging markets where there may be no rule of law, endemic corrup­tion, conflicts of interest as a way of life, small out­posts with attenuated supervision and controllership, and employees with different cultural backgrounds. Leaders must create basic systems for preventing, detecting, responding to, and remedying problems. Such system building has many dimensions, includ­ing training, toolkits, checklists, a vibrant ombuds system, metrics, audits, close-out processes, early warning systems, acquisition integration, investiga­tions, disciplinary processes, system reform processes, and compliance reviews and review boards at all levels of the company.

In the GE world, leaders must drive the traditional compliance issues: antibribery, antitrust, environmen­tal health and safety, fair employment, and trade con­trols. But they must also be ahead of the curve on emerging issues not only in the United States but also around the world: controllership, accounting regulation, corporate governance, consumer compli­ance in financial services, data privacy, money laun­dering, the antitrust implications of selling parts and services relating to original equipment, and the intel­lectual property ("IP") rights of others. But beyond creating the basic systems of prevention, detection, response, and remediation and beyond the need to be sensitive to emerging legal risk, the leaders must dis­charge an even more important duty: they must cre­ate a culture of compliance. They must communicate effectively to every employee in their organization that compliance is the core of competitiveness, that it is the first priority, and that everyone must approach

9 8 ACCA Docket January 2003

it with intensity. And the leaders themselves must live it with no double talk, no duplicitous body lan­guage, no winks and nods.

In our company, we place great weight on creating a culture of compliance. I cannot, of course, discuss the details of GE's compliance issues. But I can tell you that one of the strongest signals that GE sends on compliance is when we terminate officers for fail­ure to create a culture of compliance. For a company of 325,000 employees, we have only 200 officers, and when we terminate one for negligence in creat­ing a culture of compliance—^not for any overt, improper act—it is a thunderous message to the organization. And we have taken such action when a problem lasted too long or involved too many peo­ple—there was a cultural failure at the core of a com­pliance failure.

NO MORE URGENT SOCIALLY RESPONSIBLE ACT EXISTS, ESPECIALLY IN THIS POST-ENRON

WORLD, THAN CREATING A COMPLIANCE ~ CULTURE AND ENSURING A CORPORATION'S

COMPLIANCE WITH LAW.

Let me return then to why I view compliance as the first task of a socially responsible company. One reason, as noted, is that compliance requires an extraordinary systemic and cultural effort at the heart of business operations. A second reason is that a compliance miss can have enormous consequences for the company: huge diversions of time and resources; managers fired; managers indicted and jailed; market cap tanked; the resources of the com­pany depleted by illegal activity or by lawsuits; and the company's reputation tarnished, perhaps perma­nently. These consequences, in turn, can have a dra­matic deleterious impact on the company's stakeholders, not only the investors—the sharehold­ers and the creditors—but also the employees, cus­tomers, suppliers, and communities. No more urgent socially responsible act exists, especially in this post-Enron world, than creating a compliance culture and ensuring a corporation's compliance with law.

BEYOND COMPLIANCE

Let me turn now to the second broad dimension of corporate social responsibility: when should a company adopt ethical policies and practices that go beyond legal requirements? Obviously, a company can ask this question with respect to its stakeholders and public activities: • Charitable activities. • Employees. • Shareholders and creditors. • Customers. • Positions on public policy.

Some examples from the GE world of decisions that we have made about ethical practices and poli­cies go beyond what the law requires: • We build greenfield facilities outside of the

United States to industry or world standards that often exceed local law. With respect to acquired facilities outside of the United States, we not only comply with local law as soon as possible, but also immediately remediate any imminent threats to human health or the environment.

• We have banned bribery in all commercial set­tings outside of the United States, not just with regard to government officials as required by the Foreign Corrupt Practices Act ("FCPA"). We have a strong presumption against "facilitating payments," which the FCPA allows but which may be questionable under local law, and we have special processes for reviewing requests for such payments.

• Our nondiscrimination provisions apply to all GE employees around the world, not just to U.S. citizens.

• When we qualify suppliers, they must meet not only technical and quality standards but also ethical ones involving such issues as child labor,

prison labor, environmental health and safety, wages, and working conditions, even though we have no legal duty to inquire into these matters.

• We ask customers to certify that they will not use our products for certain unethical purposes or for purposes that are banned under local law. We also provide education and training to customers on this subject.

• For third parties representing GE, such as con­sultants, agents, sales representatives, and dis­tributors, we require that they agree to follow the

1 0 0 ACCA Docket January 2003

From this point on . . .

Explore information related to this topic.

ONLINE:

• ACCA's Corporate Responsibility page, available on ACCA Online^" at www.acca.com/legres/enron/ index.php.

• "After Enron: Issues for Boards and Audit Committees to Consider," available on ACCA Online™ at www. acca. com/legres/enron/After_enron.pdf.

• Mischa Buford, "Corporate Compliance Considerations," available in the Virtual Library^" on ACCA Online**" at www.acca.com/protected/legi-es/compliance/corporate.pdf.

• Congress' Conference Report on Sarbanes-Oxley, at www.senate.gov/~banking/docs/reports/reports.htm.

• "Enron and Andersen: Heed the Questions and Warnings They Raise for Your Company's Own Compliance Program," available on ACCA Online™ at www.acca.com/legres/enron/questions.html.

• Arlene B. Finkelstein, Peter W. Lilienthal, Gerald L. Maatman Jr., and Carole A. Spink, "Corporate Compliance: If You Don't Ask, they Might Not Tell You,"

~ ACCA Docket 20, no. 8 (2002): 62-87, available on ACCA Online™ at www.acca.com/protected/pubs/ docket/so02/compliance 1 .php.

• Jonathan L. Freedman and Bart R. Schwartz, "Audit Committees of Boards of Directors: How Much Responsibility Do They Have? How Much ResponsibiHty Should They Have?" ACCA Docket 20, no. 5 (2002): 48-63, available on ACCA Online™ at www.acca.com/ protected/pubs/docket/mj02/audit 1 .php.

• William B. Lytton and Winthrop M. Swenson, "The Effective Answer to Corporate Misconduct: Public Sector Encouragement of Private Sector Compliance Programs," ACCA Docket 20, no. 10 (2002): 42-57, available on ACCA Online^" at www.acca.com/protected/ pubs/docket/nd02/misconduct 1 .php.

• "A Model Code: XYZ Corporation Code of Conduct," sample form, available on ACCA Online™ at www.acca.com/protected/legres/conduct/model.html.

• New York Stock Exchange's Corporate Accountability and Listing Standards, at www.nyse.com/ abouthome.html?query=/about/report.html.

• Leo M. Pruett, A. Thomas Morris, and Sheldon B. Sommer, "After Enron: Maximizing Coverage in a D&O Policy," ACCA Docket 20, no. 8 (2002): 44-61, available on ACCA Online™ at www.acca.com/protected/ pubs/docket/so02/enron 1 .php.

• RealCorporateLawyer.com's "SEC Reform Portal" with hundreds of law firm memos on Sarbanes-Oxley, at www.realcorporatelawyer.com/SECReformPortal.html.

• Records Retention 2002 Infopak, available on ACCA Online'*" at www.acca.com/infopaks/recretent.html.

• Broc Romanek, Linda L. Griggs, and Sandra Leung, "New Compliance Challenges under the Sarbanes-Oxley Act of 2002," ACCA Docket 20, no. 10 (2002): 22-41, available on ACCA Online**" at www.acca.com/protected/ legres/compliance/sarbanes .pdf.

• Sarbanes-Oxley Act of 2002, at http://news.findlaw.com/ hdocs/docs/gwbush/sarbanesoxley072302.pdf.

• "Updated Model Audit Committee Charter," sample form, available on ACCA Online**" at www.acca.com/ protected/legres/corpresp/modelauditcom.pdf,

• U.S. Securities & Exchange Commission ("SEC") page about its Sarbanes-Oxley rulemaking, at www.sec.gov/news/press/2002-128.htm.

• John K. Villa, "How Will Recent Changes in Corporate Governance, Public Auditing, and the Role of In-house Counsel Affect You?" ACCA Docket 20, no. 9 (2002): 124-129, available on ACCA Online™ at www.acca.com/protected/pubs/docket/on02/ethics 1 .php.

• Gretchen A. Winter and David J. Simon, "Code Blue, Code Blue: Breathing Life into Your Company's Code of Conduct," ACCA Docket 20, no. 10 (2002): 72-89, available on ACCA Online™ at www.acca.com/ protected/pubs/docket/nd02/codeblue 1 .php.

lanuary 2003 ACCA Docket 1 0 1

ethical and legal requirements contained in our integrity guidelines, both the spirit and the letter.

• When our employees are directors of noncon-trolled affiliates, they are required to attempt to have those affiliates, through appropriate corpo­rate decision-making, adopt and follow policies corresponding to our spirit and letter.

• We have a global ombuds system for reporting concerns that commits to anonymity and nonretal-iation and, indeed, makes it a firing offense for anyone to retaliate against a person reporting a concern.

• We have money laundering prevention practices that go substantially beyond what is required by laws around the globe, such as restricting forms of payment that we will accept.

• We have tried to be a corporate leader in the global initiative to strengthen antibribery and anti-corruption laws and to take a public policy posi­tion that, although generally beneficial, is less directly in our immediate interest than other posi­tions that we may take.

• The GE legal department helped found the Pro Bono Partnership, an organization that links the legal needs of our communities' nonprofit sector with the skills of our in-house lawyers to give those lawyers significant pro bono opportunities. The list of ethical actions that we have taken

beyond what the law requires could go on. So could the list of ethical actions that we are considering or that others demand that we take. How does GE decide these questions of ethics? We do not have a senior vice president for political philosophy. Our chairman does not sit in his comer office deciding between natural rights and utilitarian theories. Our starting place is a traditional business method: risk-reward analysis. But it is a much broader, more com­plicated equation than might normally be the case in business decision-making. Taking an ethical action or failing to take an ethical action could cause harm or benefit to our reputation, which, in turn, could cre­ate economic risk or benefit. Our action or inaction will have a reputational effect on some or all of our stakeholders and interested parties: recruits, employ­ees, GE communities, shareholders, creditors, cus­tomers, suppliers, political leaders, regulators, interest groups, the media, opinion leaders, and the public at large. All of these stakeholders are of great importance to the health of the enterprise. Yet, on

the other side, most ethical actions, although they may have long-term or indirect economic benefit, may also have a very real economic cost. And this gets us back to the more complex risk-reward equation.

Of course, to say this is just to start a discussion that would require, at the end of the day, the consid­ered judgment of the senior leaders of the corpora­tion and, in important cases, the board of directors. For example, who is that "reasonable stakeholder"— like the "reasonable person" that we all know from tort law—to whom we should respond? Should cor­porations just quietly "do the right thing," risking a lost opportunity to enhance their reputations with a broad audience, or should they promote their good works, possibly setting themselves up on pedestals to be toppled by critics, the media, or regulators?

THE LIST OF ETHICAL ACTIONS THAT WE HAVE TAKEN BEYOND WHAT THE LAW REQUIRES COULD RO ON SO COULD THE LIST OF ETHICAL ACTIONS THAT WE ARE CONSIDERINR OR THAT OTHERS DEMAND THAT WE TAKE

Starting with reputation, not just in the sense of the New York Times test, but in a much broader, longer term sense, is, we have found, a useful framework for thinking about these decisions, even if it does not yield easy answers. It connects to relations with stakehold­ers and ultimately to the health of the corporation, and it avoids abstract arguments about morality, which are great in the academy but difficult for public companies charged with increasing shareholder value.

GE'S PROCESS APPROACH TO CORPORATE GOVERNANCE

Let me conclude by briefly mentioning our process approach to corporate governance, which mixes legal compliance and ethical actions and goes to the heart of the current discussion of corporate social responsibility

Like you, GE is in the process of complying with Sarbanes-Oxley and the New York Stock Exchange

1 0 2 ACCA Docket January 2003

Listing E^cquii'cmmLB. Wc aiinojinncd a cixi]pj?hcii-9lv^ apptyiach [i^ ^rnuTiL^E Ihi itiid-N^jiVLinht^r; publishLfig C4ir approK^h u i n n£^ u^ri^^TBtt gDvn~-narKevF"eljsiK ^wwwee_ctK^^^ O L U pffijccss .^Ijf^ed m Willy Aupi5t 2002^ ^ hai wt: smt the IHIBTTI of d j r ^ t o n a detaiE^d, 20-p£f^ iiicniQratiduiTi r^iKing cbic key Eovcmuiic.c ]SBut5 poE^ b^ the iww Icj^l Kquii'em^nu and b^ tLie ipate n f EcandaLi We aL^o lop^nidcd a not^bcck with selstted r^iding^ on coi-pmff'c ^^cnut ic£ . In cnwljf Scpccnibizr to help sCimul^te uud Eccus dEscussLon, w : sent the board ^ daLailDd ;JIL cif roconhi icndaLiinris mti c^Lh mf ih^si: m/nad issues We thsn ujnJiill> TT? ]e wd cmtl r ^ ^ e d OH?? ri^ecmnt^ndflHan^ w]lh ihe tcBTd in a chrce-hour sfcudl dinirtr mcrtin^ Iwfoi* (hs rtgu-i^rl^ u:lii:^u[£d ^piEfnlxzi'hc^rd iiKi:1ihig^a mat ing ^ d , pfl^-h^'-pfl^H b^ cuiTOtO- 'l>I uui t k t t ^b^ bcdtd n cntLi ia:, VH'C i^nl tJH bo^fd dialU ot the folloi^ing dutunwnls:

> 2l£i[cm£n1 ctfi ccjp^fJLlc sm^dtiuiu^ ttom 1tie c-h^JTUvin.

* Kevised SalciiKJit of coLmrale ipjvwiGixK piirpzuplra. * Rj^vls^ i^hanerh of ouf i ^m f>$n :ii loi^ eudfci, gniiv-

L mH vC- and pHiblk L'CBponsib]b<Ks ccmunittcH-i-p[icfv^crf[bekeypf5Ctlce5.oJe^h of ihose

LflinnnHees. * PnHl^aBBls 11:41 rfVIShUn:^ Ot bo^nJ Snd ^ECULIVe

ufnpen^t lcf i . We tiave tH^n guKkd h^ cui- G\0 '^ de^K LO aci

quickly and nut ^uit foi tlw foiioBl efJcctEve dflt« >:LLBtJhhc^ 1:^ the lah . io meet the Rpitit and n u J M ^ the Ictttr of lhc iww rcquirenMnis. Emd to go bevund Lhctii LHJ d^yclchp a posliivi^ nu'Kkl IFLBL iht co/pirH- c^ t-ummujiil) Emd othens LBJI review Jiitl dcbulc. ftit ^noit iGi 'v^. ih 1 cjni^d'atc "iDciB] reipi:»ti$i bllli^ 1^LH IS one un ^hu^h v e have dtuided to br out ITVCH- at Icail 111 theCimingofojr KCinniiti re^pon'^lo m^^iT i h a n ^ i ]n publit- puhtj". Mi^h ot ^'Kn v^ JIB euL'pDi'atr: ecKJhiBfl de. in divcci civ jndii '^t ways^ i^ wurV en fc^uH of toipwale I CCIE I respun&ifcMlit^ Thct¥ hoB ni 'er bccik a mDn: •]:]^ilm£ c? <:halLengihig tiidi; 4o du ^ . n

j0>njiT/y 2l]tlJ .*CC iiW^fl 1 0 3