June 3 (Bloomberg) -- Benjamin W. Heineman Jr. was the top lawyer for General Electric Co. from 1987 until 2004 and is regarded as a pioneer in developing the concept of the in-house corporate law group. From his vantage point, he saw the details of how the only original company still in the Dow Jones Industrial Average built itself through globalization, acquisitions and environmental and political changes under both Jack Welch and Jeffrey Immelt as chief executives.

Heineman, 64, retired from GE in 2006 after overseeing global policy for two years. He now teaches at Harvard University's John F. Kennedy School of Government and Harvard Law School and is a senior counsel at Wilmer Cutler Pickering Hale & Dorr, a Washington law firm. He spoke with Rachel Layne and Carlyn Kolker of Bloomberg News at the Kennedy School about his new book, ``High Performance With High Integrity'' published by Harvard Business Press.

Bloomberg: Why did you write the book?

Heineman: After nearly 20 years at GE and in global business, I came to believe deeply that the twin goals of contemporary companies must be the fusion of high performance with high integrity. This fusion avoids catastrophic misses, but it also has strong affirmative benefits in the company, in the marketplace and in the broader global society. Ultimately, it creates the fundamental trust of shareholders, creditors, employees, recruits, customers, suppliers, regulators, communities and the public at large upon which capitalism's enormous power and freedom is based.

The bookshelves are crammed with volumes on high performance. There are far fewer on high integrity, mostly written by people who have not been involved in business. I felt that a book was needed from a person who had worked on the front lines and that sought to bring these two critical perspectives together.

So, this was a deeply personal issue to me given the prominence it had during my time at GE.

Three Elements

Bloomberg: What do you mean by integrity?

Heineman: Integrity has three elements. First, robust adherence to the spirit and letter of formal rules, legal and financial. Second, voluntary adoption of global ethical standards that bind the company and its employees to act in its enlightened self-interest. And, third, employee commitment to the core values of honesty, candor, fairness, reliability and trustworthiness -- values which infuse the creation and delivery of products and services and which guide internal and external relations.

This last element -- core employee values -- is vital to a strong, mission-oriented business. It avoids the backbiting, turf fighting and selfish behavior that are antithetical to strong business teams. But you cannot have those values without a strong commitment to the first two elements.

CEO's Job

Bloomberg: What's the role of the CEO?

Heineman: Only CEOs can fuse high performance with high integrity. I believe strongly that the governance debate since Enron has focused too much on boards of directors. The first dimension of governance is shareholders and company; the second is board and management; and the third is the CEO down into the company. This third dimension -- governance on the front lines -- is where performance with integrity is going to happen.

The CEO has to create a performance with integrity culture by voicing aspirations but also driving actions: by making business leaders responsible; by creating systems and processes embedded in business operations; by choosing ``A'' players; by holding people really accountable.

Without all this, ``tone at the top'' is eyewash. And without all this, the board meeting 8 to 10 times a year can't make it happen.

Welch, Immelt

Bloomberg: How would you compare former GE CEO Jack Welch and current CEO Jeff Immelt on these issues?

Heineman: Both were strongly supportive and provided vital leadership. For Jack, it was more of an internal issue: He did the right things -- making it a priority for business leaders, hiring outstanding people, making tough disciplinary calls, expressing the affirmative benefits. Jeff has done all those things but also spoken about it more in public as a foundational goal of companies. This is because they lived in different eras. Business-in-society issues are of increasing public and investor concern in this decade.

Bloomberg: What's the board's role?

Heineman: It is critical. There has to be a new spec for CEO selection: a person not just with integrity but one who has the experience, capacity and commitment to fuse high performance with high integrity. Second, boards have to develop systems not just to ``pay for performance'' but to ``pay for performance with integrity'' -- compensation principles which should apply to all top leaders.

Cost of Investigations

Bloomberg: What is the main thing a CEO should take from your book?

Heineman: The extraordinary time and effort spent responding to a full-blown government inquiry, even before any liability is established. Avoiding this kind of diversion is one of the reasons why fusing performance with integrity is so important. Keep these kinds of events to a minimum.

What people don't understand sometimes is that it's not just the ultimate result which can tank the market cap and get everybody fired. It is the process. One or two years of responding to these investigations, where the regulators are going to hold the CEO and top management to account in terms of how they handle it, and the board for that matter, requires an enormous amount mental capital.

One of the things I talk about in the book is that today there's a multiplier effect. The Justice Department and the SEC will investigate you, attorneys general will investigate you. The plaintiffs will sue you. Regulators in other jurisdictions will investigate you. All of a sudden, a one-front war becomes a five- front war. Rules are different in different jurisdictions, and the legal teams and the auditing teams become humungous, and it becomes a real conflagration.

Small Business

Bloomberg: How does this apply to small and medium companies?

Heineman: Whether you are big or small, you want your employees to exhibit the values. You don't want employees to lie, cheat, steal. At another level, you've got to comply with the law. It's not an option. You can comply with the law with a Mini or a BMW7. You have to decide how much risk you've want to take, but you have do the minimum.

There are two things about small companies. One is that, if you do get into the gunfights with regulators, you can get destroyed. GE can take almost any hit and we're not going to be destroyed. Small companies can be crushed. No. 2: A number of smaller companies want to be bought, though not all. When the GEs, Microsofts, Pfizers or GMs of the world come around and say, ``I want to buy you,'' that's payday. But big companies also do due diligence and increasingly won't do the deal or demand a significant price reduction if the target has real problems.

Emerging Markets

Bloomberg: What about emerging markets?

Heineman: A transnational company must have a uniform, global culture on these critical integrity issues. It cannot vary by local jurisdiction. You can have different products and be sensitive to local culture. But you cannot vary on this -- no bribes anywhere, for example -- or the hypocrisy of that variation is a cancer that will destroy a performance-with- integrity culture.

To contact the reporter on this story: Carlyn Kolker in New York at ckolker@bloomberg.net; Rachel Layne in Boston at rlayne@bloomberg.net.

Last Updated: June 3, 2008 00:01 EDT