Michael R. McAlevey is the Chief Legal Officer and Business Development Leader for GE Aviation in Cincinnati, Ohio and is responsible for the company’s global legal, compliance, and business development groups. Throughout his career, Mr. McAlevey has held various roles in a number of areas including global securities law, capital raising, corporate law and governance, and corporate finance. In 2013, GE’s Chairman and CEO, Jeff Immelt, presented him with the Chairman’s Leadership Award for the development and execution of GE Aviation’s strategic plan. In 2006, Mr. Immelt also presented him with the Chairman’s Leadership Award for Mr. McAlevey’s oversight of GE’s SEC-related matters. He is a 1989 graduate of the University of Virginia School of Law. He received his undergraduate degree, magna cum laude, from Washington & Lee University in 1986, where he was a member of Phi Beta Kappa.
How Does It, and Should It, Help Shape Corporate Compliance?
At GE, we know processes that aim to prevent, detect, and respond to compliance failures help promote a compliant culture. Although these processes are necessary to ensure the compliant culture, they are not sufficient. We also recognize that to achieve our goal, our employees must accept personal responsibility for voluntarily abiding by a set of ethical standards that we cannot always enforce through process.
Process and regulation cannot and should not reach to every corner of corporate life.
Where process does not reach, or where it cannot always be enforced, we must depend upon ethical culture. At GE, we believe that an ethical culture correlates most closely to ethical behavior among corporate leaders. This is why we measure leaders on their success in achieving business outcomes, and equally on their success in creating an ethical culture through their actions.
Let’s step back. The famous British jurist, Lord John Fletcher Moulton, divided human behavior into three domains. At one end is the domain of law, where we are obliged to behave in a certain way with the weight of the criminal and civil law behind it. At the other end, he said, is the domain of personal preference and free will, where we may do whatever we want, without worry about sanction or even criticism.
Then there is a middle domain where our action is neither governed by law, nor absolutely free. In this middle domain, our actions are governed by things like moral duty, customs, manners, and norms. Each may restrain us to varying degrees, but none of them are strictly enforceable. Lord Moulton called this the domain of “obedience to the unenforceable.” It covers “all cases of doing the right thing where there is no one to make you do it but yourself.”
Now, Lord Moulton’s framework oversimplifies things. Human action does not neatly fall into these three domains. There is overlap. For example, the domain of law requires us to do the right thing when no one is looking because law enforcement does not have the resources to catch every law-breaker. That is to say, law itself is inadequate to control behavior. The law does not sustain itself. It depends on the willingness of citizens to accept it and obey it according to moral principles that are not themselves enforceable.
On the other side, one may ask whether the domain of pure free will really exists. Aren’t our actions always subject to some form of order, conscience or criticism? I am not sure what the domain of pure free will would look like, but I have an idea from watching “The Wolf of Wall Street.” What would Lord Moulton have thought of Jordan Belfort?
Despite its limits, Lord Moulton’s framework is a useful departure point to talk about the importance of ethics in corporate life. I submit that the breadth of the domain of “obedience to the unenforceable” within a corporation determines the core strength of its compliance program. It also determines the company’s competitive advantage to achieve commercial ends.
The domain of “obedience to the unenforceable” is where the corporation places its greatest trust in its employees to do the right thing. It is also where employees are given the greatest opportunity to exercise their individual freedom within a framework. Where trust and individual freedom co-exist, there is less reliance on process and bureaucracy. Behavior is guided by beliefs reinforced through practice. And in this zone, there is more creativity and innovation, which are the key determinants to commercial success. I do not think it is a far stretch to say that the prosperity of any business depends on its moral order as much as on its strategy, technology, and financial choices.
This behavioral “middle kingdom” within a company is under constant pressure from two opposing forces. First, there is the tendency among legislators, regulators, law enforcers (and even compliance officers themselves) to expand the realm of law and subject ever more corporate and employee behavior to rules and process. This tendency typically arises in reaction to a crisis. It is founded on the belief that more rules and process result in better compliance.
The risk of this tendency is that the compliance program grows haphazardly, without prioritization, and is always backward-looking. Also, over time, the volume of the rules begins to smother creative, productive behaviors. And, most importantly, the rules may not improve the underlying ethical culture, which is the most sustainable protection against future crises.
Compliance crises are not mostly process failures, but mostly ethical failures, and should be treated as such.
Crises should be used to teach moral lessons and the lessons should be consistently refreshed.
Much of the strength of GE Aviation’s compliance culture derives from management’s reaction to a massive compliance failure that occurred in the late 1980s. Beginning in the mid-1980s, GE agreed to sell its powerful F110 military engines to the Israeli Air Force for application on F-16 fighter aircraft. Over the course of a few years, GE Aviation’s Chief Marketing Officer and Israeli Air Force General Dotan conspired to direct about $11 million to Swiss bank accounts meant for the construction of an engine test facility in Israel.
Embarrassingly for us, the test facility never even broke ground; it was totally fictitious. Our investigation revealed that GE leaders failed to establish a basis for approving the various transactions. Instead, in many cases, they simply relied upon the person below them or above them in the approval chain to get it right.
GE ultimately pled guilty to multiple criminal counts and paid about $70 million to resolve the incident. Israel returned about $6 million to the US government and Switzerland seized millions of dollars from Swiss bank accounts. General Dotan received 13 years in Israeli prison.
Importantly, GE Aviation fired about 20 GE leaders, not just for bypassing process, but also for not having taken steps to promote an ethical culture. To this day, in our compliance training, we retell this story and emphasize our expectations for ethical behavior and adherence to compliance process.
I return to the second force that threatens to shrink the corporation’s domain of “obedience to the unenforceable.” This force is the opposite of the first. Instead of broadening the reach of law and process, this tendency is to claim that companies should be largely unregulated zones of free expression. Serious business consultants and crass hucksters champion freedom in corporate life as the pathway to improving creativity, innovation, profit, and even “self-fulfillment.” The risks arising from this tendency may be seen in the morally questionable and commercially catastrophic behavior of companies like Enron and Worldcom.
Finding the sweet spot, where the domain of “obedience to the unenforceable” is largest, is difficult because things get complicated. Studies suggest that moral relativism (e.g., changing morals to fit a situation) does, in practice, result in more corruption, but it also keeps us open-minded. Conversely, studies show that law and moral absolutism (e.g., good morals never change) are better to keep us on the straight and narrow, but they also breed intolerance. We must find an acceptable balance between the two tendencies.
So how does a company responsibly preserve and even broaden the middle domain? For me, it starts and ends with leadership and tone at the top. Aristotle set down as the fundamental fact about education that we learn by imitation. Employees learn what a company values by watching leaders and they improve their chances for success in the company by imitating the leaders.
In making ethical decisions, all corporate leaders should start with a “Categorical Imperative.” By this, I mean “to act as though the principle of your act can be a universal law” and always treat other people not as a means to an end, but as ends in themselves. These are not my ideas, but those of arguably the most famous Western philosopher on the subject of ethics, Immanuel Kant.
Kant said that a way to activate the Categorical Imperative is to put oneself in thought in the place and point of view of others and, having done so, act consistently. If corporate leaders follow this procedure, they will most likely do the right thing and set a good example, while those who fail to follow this procedure are almost certain to violate a duty and undermine an ethical culture.
One may see how the Categorical Imperative plays out in various ways. For example, conflict of interest polices and insider trading policies ensure that corporate officers put themselves in thought in the place and point of view of the person with whom they are dealing and consider the consequences of their actions as they affect the other person.
Recently, I was with a group of business leaders from a foreign operating division that was experiencing compliance issues. At dinner, we had two bottles of wine, but the bill only charged for one. It was almost certain that no one would have noticed in time to stop me before I walked out. But having been a waiter in earlier life, I knew that a common practice is for restaurants to charge a waiter for not having correctly charged a customer. Putting myself in the position of the waiter and the restaurant owner, I asked the waiter to please change the bill.
The commercial leaders were shocked, and we shared the joke that I may be on the evening news as the first person in that country to self-report a miscalculated meal ticket. But we all recognized that there was a serious point to be made.
Compliance starts with leaders who put themselves in the position of others and act consistently and according to a code that can be universally applied.
Despite the challenges we face as compliance professionals and lawyers, there is hope. Not all moral relativists are miscreants. Not all moral absolutists are cult members. These concepts live in tension. Finding the right balance depends on strong, tough, educated leadership determined to act ethically. Working together, we can preserve and strengthen the domain of “obedience to the unenforceable” in corporate life.
This article was based on a presentation delivered by Michael McAlevey at the University of Cincinnati’s 28th Annual Corporate Law Center Symposium entitled “Rethinking Compliance.”
This article originally appeared in Ethisphere Magazine’s Q4, 2015 issue.
