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For years, General Electric Co.’s reputation seemed immune to tarnish. The Fairfield, Conn.-headquartered conglomerate routinely landed on Fortune‘s list of most admired companies, its board topped BusinessWeek‘s “best boards” roster, and its CEO, Jack Welch, was a superstar. But during the past couple of years, GE’s golden image has suffered. Welch’s bitter divorce pushed his extravagant retirement package into the public eye. And as Wall Street grew increasingly leery of accounting tricks, GE’s “managed earnings” approach raised eyebrows. Current CEO Jeffery Immelt has set out to restore GE’s image. His push for greater financial transparency is evident in the company’s hefty 2002 annual report, which is a third longer than the 2000 report, Welch’s last. Just as importantly, GE has overhauled its corporate governance policies. Immelt assigned longtime general counsel Benjamin Heineman to lead this effort, which consumed the second half of 2002. The result? GE is one of the first businesses to pin down the slippery definition of an independent director, to wrestle with the contentious issues of board leadership and agenda-setting, and to require nonemployee directors to meet regularly with business unit leaders without top management present. Heineman has long been a champion of corporate responsibility and ethics, and his handiwork is obvious in GE’s new guidelines. So Corporate Counsel decided to ask this “founding father” for his take on corporate governance, both at GE and in the in-house profession overall. Staff reporter Catherine Aman met with Heineman in early February. Catherine Aman: Earlier this week, Tyco International’s former GC was led into New York trial court in handcuffs. Even though GCs at other companies didn’t end up in handcuffs, people are still asking: “Where were the lawyers?” Has the GC’s status as a source of disinterested information been besmirched? Ben Heineman: As a general matter, I don’t think so. But inside lawyers clearly have responsibilities in some of the areas where improprieties have been alleged: for example, in the creation of off-balance sheet entities, tax structuring, proper disclosure, and internal rules on corporate benefits. If [improprieties are] proven, then legal checks and balances — like many other corporate checks and balances — were missing, and inside counsel were responsible. They may not have hatched the schemes, but they let them happen. CA: There seems to be a shift in what in-house lawyers everywhere are being asked to do. Sarbanes-Oxley asks lawyers to play more of a watchdog or whistleblower function. BH: Inside counsel represent the company. We don’t represent the chairman, the CFO, or the vice-chairman, although they are critical embodiments of the company and are its moral leaders. The real lesson of all these troubled companies is that they lacked compliance cultures. The right culture is created by the CEO and the top business leaders, not the lawyers. Sarbanes-Oxley has nothing to do with culture. You either have it or you don’t. If you don’t have it, you’d better get it. And, again, all the rules don’t matter if there is a rogue culture where the lawyers and the finance folks are chasing everybody around trying to get them to comply — or, even worse, if legal and finance are part of that rogue culture. PERCEPTION VS. REALITY CA: What should general counsel do to combat this perception that the lawyers somehow failed? BH: General counsel tend not to speak for the companies. One thing general counsel should do is speak out more often on questions of governance, ethics, and corporate responsibility. CA: Do you think CEOs are going to be looking for something different in a general counsel, a different skill set? Tyco, for instance, hired [former International Paper GC] Bill Lytton, an alum of your department. BH: I don’t think the spec has changed one whit, really. The most important thing is that companies hire lawyers who will be independent and give honest advice, not happy talk. Every CEO pays lip service to this idea of candor, but not all follow through on it. The CEO has got to encourage honest and candid comments from the general counsel. And general counsel have to feel that their first duty is to the law and the good of the company. If they get sucked in by too much money, if they get sucked in by their position, they will not be effective. Of course, the key to the position is balancing the compliance role with being a trusted business partner. Indeed, being a trusted partner can be key in delivering the compliance message most effectively. But, every general counsel really has to have the ability to walk out the door if management and the board are not responsive. CA: Although not on trial herself, Arthur Andersen in-house lawyer Nancy Temple was pilloried by a jury last year — arguably for giving fairly routine legal advice to her clients. With lawyers now asked to be watchdogs — and subject to criminal penalties if they fail to do so — are we starting to put them in an untenable position? BH: Without commenting on the particulars of that case, let me just say: lawyers have to be careful in giving advice to make sure that what they’re recommending is lawful, and that they’re using words that are as unambiguous as possible. Everybody’s been mindful for a long time about the risks of e-mail. People tend to write too quickly and too imprecisely. Lawyers, of all people, need to be precise. One result of the Andersen case for us is that I specifically asked for an audit of our document preservation program. GE’s emphasis has always been, first, on preserving all documents required by law. We used to have, like a lot of companies, a 30-day auto-delete policy on e-mail so our servers didn’t back up. But we’re abandoning that. We want to be on the safe side of document preservation. CA: GE has long had a sterling reputation for integrity. Despite this, the board passed a very sweet retirement deal for former CEO Jack Welch in 1996, and, because of the way it was structured, it didn’t become public. Doesn’t that kind of costly and hidden perk go against what we think of GE as standing for? BH: The employment and postretirement contract was in fact disclosed in the proxy statement, and the full contract was in the 10-K and received attention in the business press prior to the recent controversy. So it’s not accurate to say it was not disclosed. CA: But wasn’t GE paying for things like postage and dry cleaning? BH: A number of small items that got a lot of media attention were, as Jack would be the first to say, personal “incidentals” that were not covered by GE in the original postretirement contract. Jack paid for these. TESTING THE SYSTEM CA: How has your own job been altered by Sarbanes-Oxley and the NYSE listing requirements? BH: There are two dimensions. Number one, there is even closer interaction between management and the board. Number two, the requirement that the CEO and CFO certify the quarterly financials has caused us all to carefully review our internal controls and disclosure controls. Having said that, I don’t believe there has been that much change. GE has always had extremely good processes for making sure the numbers were right and we were disclosing fairly. But clearly there can be improvements in those areas, and those have been stimulated in part by Sarbanes-Oxley and in part by Jeff Immelt’s desire for greater financial transparency. CA: What about the increased duty to report possible wrongdoing that lawyers now have under Sarbanes-Oxley? BH: The inside lawyers have always had that duty. We’ve had an ethics policy for years where every employee of the company is required to report concerns about possible legal or policy violations. You will be disciplined for failure to report just as you will be disciplined if you in any way harass or seek to injure someone who did report. It’s very clear. ‘A LARGE, UNUSUAL ANIMAL’ CA: Have you seen more people coming up to your office with concerns? Or do you see this as precipitating a wave of inquiries? BH: No. But I never want to say that GE is typical of anything. We are what we are: sort of a large, unusual animal. My experience, even since the scandals and Sarbanes-Oxley, has been that there have been relatively few concerns reported about accounting issues. We get a big flow of concerns every year, most of which don’t prove to be serious, some of which do. We view the fact that there’s lots of volume in the [ombudsman] system as a very healthy thing. CA: To whom do employees report these concerns? BH: To the ombuds system, or to me, the CFO, or their managers. Every one of these reports is very systematically logged in to the ombuds system, and followed, investigated, and closed out. In terms of the outside lawyers, we have to see how it all plays out. Outside lawyers are supposed to report to me if they see a material violation. I would hope they would have done that prior to the new requirement. Were we to get such a report, we would properly investigate it, disciplining those at fault, including firing if needed and changing the systems to prevent such problems. We investigate concerns all the time, you know. CA: Violations happen routinely? BH: Not routinely, but we certainly have, as every big company has, compliance violations. But the process of investigating and reporting to the board is something that’s routine, if the matter is important from a reputational, financial or precedential perspective. The one thing that is unclear is how we’re supposed to satisfy the outside lawyer [making the complaint] that we’ve done the right thing. But if it were anything even halfway serious, I would have already told the board or the audit committee about it prior to completion of the investigation. CA: So you don’t see yourself reacting any differently to allegations of wrongdoing as a result of Sarbanes-Oxley. BH: I don’t. I don’t see us or our lawyers acting differently. The only thing that now changes is that I have to get back to an outside lawyer who decides to lodge a complaint. But the reality is we already have a system where employees who register concerns are informed about the outcome of our inquiry. That practice would now apply if it came from outside counsel.

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