Here is an excerpt from a classic article written by Ben W. Heineman, Jr. and published in the April 2007 issue of Harvard Business Review. . To read the complete article, check out the wealth of free resources, obtain subscription information, and receive HBR email alerts, please click here.

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As the chief legal officer at GE for nearly 20 years, I was part of the senior management group that sought to fuse high performance with high integrity. No one was more demanding about hitting financial targets than Jack Welch or his successor, Jeff Immelt. But both knew that employees up and down the ranks face the temptation to make the numbers by fudging the accounts, cutting corners, or worse. Unconstrained, these internal pressures—made more intense by corruption in emerging markets, demanding customers, and unscrupulous competitors—can lead to corrupt capitalism.

The changes in laws, regulations, stakeholder expectations, and media scrutiny that have taken place over the past decade can now make a major lapse in integrity catastrophic. Fines, penalties, and settlements are counted in the hundreds of millions (or billions) of dollars, not the millions or tens of millions of a decade ago. And worse, in some cases (as Enron and Arthur Andersen demonstrated)—a company can actually implode.

Performance with integrity has been a central concern of governance reforms but, almost exclusively, the focus has been on the board’s role. Certainly, when the rot is at the top, governance checks and balances must come from the board of directors. But, for GE, as for most companies, governance is not solely about the board’s selection and compensation of the CEO or about its periodic oversight of major risks and opportunities. The more pervasive governance issue is the responsibility of the CEO on down: How does top management drive a demanding performance culture built on unyielding integrity throughout a complex enterprise? The integrity land mines that can blow up in the face of most companies are all across the globe, not just in the corner office.

It is now time to shift this debate about corporate integrity from board oversight of the CEO to how the CEO and top company leaders can most effectively fuse high performance with high integrity at all levels in a challenging, fast-changing, and at times hostile world. This is a grinding, complex, day-in, day-out task that is difficult in the best of circumstances to do well. GE has certainly learned its own hard lessons along the way, sometimes dealing with integrity violations that went unnoticed and unreported for far too long.

This article highlights how GE has tried to build a culture that fuses high integrity and high performance using a series of core principles and key practices. In it, I outline how the company has attempted continually to improve its systems and processes and to build a culture where executives and employees are motivated to do the right thing, even in GE’s famously high-pressure business environment.

Core Principles and Key Practices

Ultimately, it is a company’s culture that sustains high performance with high integrity. Leaders and employees compete ferociously and meet tough economic goals lawfully and ethically not only because they are afraid of being caught and punished but because the company’s norms and values are so widely shared and its reputation for integrity is so strong that most leaders and employees want to win the right way.

By forcefully communicating guiding principles, company leaders help create that culture. But it’s also necessary to implement a set of practices that have real consequences and use significant resources to drive the message home. In our efforts, we recognized that we weren’t about to repeal human nature, but by learning from our missteps we could continually try to reduce improprieties to a minimum. Based on my experience at GE and many discussions I’ve had with executives at other multinationals, I believe the following principles and practices—especially as they interrelate and reinforce one another—are essential to creating a high performance–high integrity culture.

Demonstrating consistent and committed leadership.

In no area of corporate life is leadership commitment more important than in creating an integrity culture. And nothing is more effective in manifesting that commitment than a seamless consistency between leaders’ personal attributes, their public and private statements, and their direct and indirect actions. Companies are preternaturally attuned to leadership hypocrisy. The stirring call for performance with integrity at the large company meeting can be eroded by the cynical comment an executive makes at a smaller meeting, by the winks and nods that implicitly sanction improprieties, by personal actions (dishonesty, lack of candor) that contradict company values. It is fundamental: A culture of high standards for employees requires high standards from the CEO and the senior operating and staff officers.

There is no more important task for the CEO than demonstrating that the top executives will be held just as accountable for lapses in integrity as they are for missing their numbers—and that the generals will be held to higher standards than the troops. Jeff Immelt began and ended each annual meeting of GE’s 220 officers and of its 600 senior managers by restating the company’s fundamental integrity principles: GE’s business success is built on our reputation with all stakeholders for lawful and ethical behavior. Commercial considerations never justify cutting corners. Upholding this standard is the specific responsibility of the leaders in the room. For any serious lapse, the warning was clear: “One strike and you’re out.”

GE’s senior managers and officers knew the CEO was serious because, as it turned out, every year or so, a senior manager who had knowingly or recklessly violated company rules for commercial or personal reasons was terminated. For example, in one emerging nation, an individual was let go for failing to conduct required diligence on shady third-party distributors that had a reputation for improper payments. People were dismissed even when the business consequences were painful—when, for example, the local national in question had extensive knowledge and experience in a tough market.

An even more thunderous message is sent when a senior leader is removed not for failing to follow key rules but for failing to create the right culture. During my time, there were two seminal examples. Both involved acts hidden for a number of years that were clearly understood by many in the respective business units to be suspicious or wrong but had been tolerated to keep difficult customers satisfied. The first involved fraud in a Middle East procurement contract financed by U.S. government funds in the late 1980s and early 1990s. The second, early in this decade, had to do with acquiescing to an Asian customer’s request that GE falsify supplier documents included in regulatory submissions.

A thunderous message is sent when a senior leader is removed not for failing to follow key rules but for failing to create the right culture.

In both cases, when the lapses came to light, the first thing top GE leaders did was to determine the facts, resolve the matter with the governments, fix the broken systems (specifying how to deal with improper pressure, instituting better process checks), and discipline lower-level employees clearly engaged in wrongdoing. But the hardest issue to resolve—and one of the most important integrity questions we ever faced—was how to sanction the leaders of the respective business units. They had no personal knowledge of the acts, and they were widely seen as “good guys” by senior managers. But in the end it was decided that they had failed because improprieties within their organizations had gone unreported for too long (more than five years) and had involved too many people (20 to 30). At the core of these major compliance failures was a deep-seated cultural failure. Accordingly, both executives were asked to leave the company. The message was clear: Top leaders indifferent to an integrity culture are soon gone.

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Here is a direct link to the complete article.

Ben Heineman has held senior positions in business, law, and government, is a senior fellow at Harvard’s Law and Kennedy Schools, and is author of High Performance With High Integrity (Harvard Business Press, 2008).