Risk Management

The CFO Duality: Mixing Business with Integrity

Author of a new book, former GE general counsel Ben Heineman dishes out plenty of advice for finance chiefs about doing the right thing without sac...
David McCannJuly 24, 2008

Ben Heineman got an eyeful of the C-suite during his 18 years as general counsel for General Electric Co. until his retirement in 2005. A book by Heineman published in June, High Performance with High Integrity, argues that a chief financial officer can and should act as guardian and protector of the company’s integrity without abandoning his role as business partner to the CEO. In an interview with CFO.com, Heineman, 64 and a one-time Assistant Secretary of Health, Education, and Welfare under Jimmy Carter, took some swipes at impatient CEOs, sycophant CFOs, anti-whistleblower cultures, and the SEC.

What motivated you to write the book?

First, I thought the corporate governance debate had spent way too much time on directors and not enough on where performance with integrity takes place, which is inside the company. Obviously that has to be led by the CEO, but with strong support from the finance, legal, and H.R. functions. One of the problems in most companies is that they try to outboard it to those departments, but it has to be led by the CEO and other business leaders.

Second, I really believe that high performance with high integrity are the foundational goals of the contemporary company and, indeed, capitalism. You must have a fusion of both to have a successful, durable company.

Why have there been so many corporate scandals?

The make-the-numbers mentality can clearly lead to corruption. How many times do we have to see this? How many cycles do we have to go through for this truism to be understood? It is so basic. In this decade alone you have the accounting scandals, the option-backdating scandals, even the credit meltdown — that’s partly a failure of business discipline, but my guess is that there are a lot of ethical and legal issues buried in there.

In your book you write that the ideal role for the CFO is to be simultaneously a partner to the CEO and the guardian and protector of the company’s integrity, and yet that often presents a conflict.

The danger is that CFOs become partners first, and then yea-sayers when the tough issues come out, because they’re so used to working with the CEO to get things done.

So being the guardian of integrity means not being a yea-sayer?

You have to be able to stand up and say, “No, you can’t do this — it’s too gray, too close to the line.”

If something is just flat-out illegal and the CEO goes ahead with it, you have to quit. But a lot of these issues are gray, where there’s no right answer. It’s not like anyone is saying, “Let’s do something that’s completely wrong.” It’s, “How far can we push it toward the red line?” And the CFO and the general counsel, in both reputational and ethical issues, have to be able to say, “Look, before you do this, while it may not be absolutely wrong, you really ought to think about the implications for the company in the longer term.”

And that’s not easy to do because of all the pressure to make decisions in a short time frame. The palace guard rallies around the CEO, saying, “Oh, you guys are always complaining.” The group dynamics when you’re in a hurry and people are sucking up to the CEO make it hard sometimes.

Is standing up just a matter of willpower? How do you overcome those inherent pressures and do the right thing?

One of my arguments is that you are a better guardian by being a good partner — that by helping the CEO accomplish business goals, you get credibility so that when the time comes you can stand up and say no. I think most CFOs would find this to be what they think their jobs are. In this day and age, when if there is a scandal the CFO goes down with the ship, you’d have to be brain-dead not to think this is pretty important.

Do you think there has been a lot of corporate corruption that hasn’t been uncovered?

Sure, absolutely. But also the rules change, so that what was maybe not corrupt 15 years ago crosses the line as it moves.

In the book I talk about one of the big changes in the last 10 or 15 years, what I call the legalization of the accounting rules. It used to be that if you had an issue in your 10-Q or your MD&A, you’d get a letter from the chief accountant’s office at the SEC and have a debate about the right interpretation. If the company determined the chief accountant was right, you’d make an agreement and fix the problem prospectively.

Today, you get a letter from the enforcement division: “Hi, we’re about to start an inquiry.” It has become much more adversarial. Rather than proceeding by rules, by having FASB or someone else clarify the rules, they proceed by cases. And that is sometimes unfair, because people in the past may have operated in good faith. If the regulators want to change the rules, they should do it by rulemaking, and if you operated in good faith, you should be able to change things for the future without being taken to the woodshed for past discretionary decisions that were within the range of reasonableness.

Of course, if someone commits accounting fraud or is grossly negligent, they deserve what they get.

You write that CFOs and general counsels can reconcile some of the natural tension in the partner-guardian role by “acknowledging the stress points.” Can you give a couple examples?

Let’s take deals. Today the diligence has to take a look at a variety of integrity issues, from corruption on the part of the target to terrible environmental practices. If you don’t do it, if you acquire a company with serious civil or criminal problems that you should have found during diligence, not only do your pro formas get blown but you don’t get a pass anymore for fixing the problems. That’s a big stress point — once the scent of the hunt is there, the business people often want to do the deal. You have to have a process that’s accepted by the business leaders that allows these issues to surface.

Another example is the principle of employee voice, where employees have an opportunity to really speak about internal wrongdoing. A culture of silence is what often condemns companies. The employees always know what’s going on — they know for months or years, but they’re afraid they’ll be retaliated against or that no one will pay attention. Some CFOs may say, why should we let the employees complain? In my judgment that’s vastly superior to having the U.S. attorney show up on your doorstep.

If a CFO does have to quit because he can’t support a decision the CEO makes, is his career irreparably tainted?

Not necessarily. Sometimes the CEO might not want to have a fight about it, and sometimes you can work your way out of it.

There are three scenarios: 1) Good board, good CEO: It’s rare that the CEO in that situation will do something completely improper, forcing a resignation. 2) Good board, bad CEO: Here you have a possibility of at least going to the board and saying, “It’s broken, I can’t work with the CEO anymore and he can’t work with me, let’s just have a reasonable ending and I keep my reputation intact and get some of the financial benefits I’ve earned.” That can work. 3) Bad CEO/bad board: You’re screwed.

CFOs ought to do due diligence on the CEO before they accept these jobs, and look very carefully at whether the CEO believes in the partner/guardian model. You’ll never know for sure, but a lot of people just take the job with the fancy company, lots of money, stock options, restricted stock units, the company car and the rest of it, but there’s nothing worse than being in a situation with a bad board and a bad CEO, because then you get out with your reputation harmed.

You wrote that you were fortunate to have had Jack Welch and Jeff Immelt as your CEOs at GE, because they wanted it straight. What are CFOs who aren’t so lucky supposed to do?

You tell me. How many CFOs have been indicted and convicted or pled guilty? It’s a pretty significant number. And as the CEO goes, so goes the CFO.

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