Incentivize whistleblowers ?

New article in the CRO online (Corporate Responsiblity Officer) about a study done for the National Bureau of Economic Research in the USA, where the conclusion is that corporate whistleblowers might need a monetary nudge. The researchers found that between 1996 and 2004 whistleblowing decreased in post Sarbanes-Oxley. Before the new SOX legislation 20.7% of fraud allegations were from whistleblowing. After the legislation was passed, only 15.6% of fraud allegations came from whistleblowing. 82% of whistlebloweres were either fired, quit under duress or had significantly altered responsibilities. The authors claim that maybe whistleblowers need to have incentives, such as the 15-30% monetary reward undet the "false claims" action against the government.

Let's get this straight - the objective of the whistleblowing part of the SOX legislation is to make it easier for employees to put on the brakes if irregularities are happening in their organisation. The objective is not to see the number of whistleblowers increase. It is a sort of internal behavior quality control, and I am totally against monetary rewards to incite people to rat on their colleagues. What is shocking is that SOX does not offer better protection for the people who have had the moral courage to stand up and point out irregularities. We are still in a situation of "no good deed goes unpunished"...

Comments

[Björn Rohde-Liebenau]

Absolutely right, Beth. The objective is not to see the number of whistleblowers increase.

Now, what could a decrease in the number of whistleblowing cases stand for ? We are looking at a “before and after” question. We have something that is generally considered a significant change in the environment of corporate control, which is obviously also the environment relevant for whistleblowing. So, we could expect a numerical change, even if there were no specific whistleblowing regulations in Sarbanes Oxley.

If we wanted to draw conclusions, we would need to know, how the effectiveness of other mechanisms with relevance for governance, compliance and risk management has changed through SOX. Probably not easy to draw a definite picture, but from what I heard, especially internal audit and to a somewhat lesser extent also external auditing seems to have improved post SOX significantly. So, the classical control mechanisms have improved. That was the intention of the legislation.

Next, we might ask, whether the total number of relevant incidents has also increased. If it has – wonderful and also intended. If it hasn’t we should not be surprised if certain risks are detected by the earlier or preferred mechanisms – like auditing – rather than whistleblowing. But even if total numbers of detected incidents have increased, better supported mechanisms could take away some of the whistleblowing rata.

Whistleblowing has wrongly been termed as an early warning system. If we look at it more closely, so process is so burdensome that it usually takes years for a whistleblower to go public. Therefore it is much rather a last warning.

So many studies have shown that it is not the whistleblowers who need a nudge. On the contrary – there may already be too much nudging of whistleblowers and usually in the wrong direction.
Instead whistleblowers are stopped by the fear of being ignored (not to make the desired change) or even harassed. The pending harassment would not stop the whistleblowers, where they could expect to effect a change. The whistleblowers’ dilemma is just that the first (and usually also the second and third) instance they should normally turn to for a responsible reaction to the risk information they are providing, are at best not interested and at worst conspiring in the perceived wrongdoing.

So what do we need ? We need (preferably positive) incentives for managers to listen and welcome the information that actually exists inside their company. Week by week we see companies hat have to report on gross faults and serious risks that could have been harnessed early on, if important information had not been hidden or blocked away internally.

RCC Risk Communication Concepts welcomes the new flood of whistleblowing hotlines. It is, however, very important to note that a hotline alone should lead no one to expect more flow of information. What we need to understand, by observation and practice, is that communication is a two-way process. You cannot expect others to engage in it with you, if you are not willing to participate in a trustworthy manner. There needs to be a response. Employees need to observe and experience this before they come out themselves. That means not only, there needs to be a response, but the process should be as visible as possible so that management commitment to listen and engage becomes credible and staff can learn to trust. Then a designated communication by-pass will still be necessary on some occasions – but the common and bi-partite dangers of whistleblowing will be lessened to the greatest extent.