Thinking Ethics

Whistle-blowing gone bezerk

There are several instances when whistle-blowing has been diverted from its initial objective.

One perverse effect of whistle-blowing to the government is where whistle-blowers get rewarded on a percentage basis of the money recovered. This gives people an incentive to spill the beans. But it also gives them a motive to fabricate evidence in order to get the reward, or to tell on a project they have themselves been involved in. Normally planners of initiators of the fraud do not get the reward, but they are not always caught. Article in the New York Times on the subject here.

Another abuse of the system, is in employee suits against their employer to recover incentives/bonuses after they have left the company. Apparently, some unscrupulous lawyers tack on to their lawsuit allegations of whistle-blowing or sexual harrassement, because they claim it raises the temperature, and makes it easier to get a settlement out of court. There is a case in point of trying to get the lawyers to follow a code of conduct.

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"...

Fire the messenger

Non-performing loans in Asia are a subject of concern to investors. The West has spent years cleaning up its savings and loan scandals, and tightening up credit risk assessments. In Asian cultures, where "favor" with important people and networks is even more important than in Europe and the US, it is hard not to think that their ratios of non-performing loans would exceed what was found in  the US. The non-performing loans that came to the surface  after the meltdown in Thailand are still being cleaned up. And since cronyism and corruption are still very much part of the culture in China it is more than likely that the problem is not being dealt with as strongly as western investors would hope. Two factors influence this - the lack of a risk assessment culture and trained professionals, and the will to do it (would not help their balance sheet).

An article in the New York Times describes the firing of the senior risk advisor (an American) who repeatedly tried to warn about the hiding of non-performing loans at China's largest state-owned bank, the China Construction Bank. So it looks like this: a Chinese bank wants to raise capital, so hires a senior risk officer to give the impression that risk assessment is under control and properly done. The risk officer warns about irregularities, and gets fired. After all the stories we have read in the last 20 years about savings and loans, whisleblowing in banks and companies, it is hard to believe that there would not be some truth in this matter.

What influences whistleblowing ?

In what environment does whistleblowing florish ? I don't mean the kind of whisleblowing taking place in France during the second world war to settle scores with neighbors (or actually still happening now if you consider the Clearstream case). I mean the kind of moral courage needed to stand apart from a group and say "enough". Be it misbehavior or fraud. Protection of whistleblowers is certainly a factor. Also if the organisation views this as constructive and considers these people to be helping, as  opposed to branding them ratfinks, and punishing or firing them. In the public sphere, the political agenda might influence the amount of whistleblowing taking place. An article in the New York Times shows what is happening in the US as we near elections. Which raises the question of visibility - there might be a snowball effect taking place as more people follow the example of those who have divulged facts or behavior before them.

New EU rules on whistleblowing

Bjorn Rohde-Liebenau of RCC Risk Communication Concepts sent in this information

A study on "Whistleblowing Rules: Best Practice; Assessment and Revision of Rules Existing in EU Institutions" has been presented to the European Parliament last week by its authors RCC Risk Communication Concepts,

Hamburg

.

The study consists of a 50 pages English language main body, plus summaries also in French and German several charts and Annexes, including a benchmarking.  The importance and meaning of Whistleblowings is explained from its context. A best practice and requirements for EU improvements are derived from international precedence as well as the good management experience (risk and quality management).

Apart from the sometimes urgently needed improvements on rules and practices, the study suggests measures to improve the internal risk dialogue and for an integrated ethics management, which would enable the EU to reach standards of international best practice and international conventions. The study also addresses the situation in

Germany

as well as in other European member states. Apart form the

UK

, whose Public Interest Disclosure Act defines best legal practice, most Member States provide a certain level of encouragement to whistleblowers, usually even a duty to report on some issues. In practice this is outweighed by exception and restrictions to disclosures, as well as the fact that whistleblower protection tends to be practically irrelevant – e.g. for reasons of the burden of proof.  More...

Whistleblowing resources

Good site for information and resources on ethics and more particularly whistleblowing at BusinessChambers.com.

Whistleblowing in France

As mentioned in my Sept. 27th post on whistleblowing in France, a judge from the CNIL (Commission Nationale de l'Informatique et des Libertes) ruled  that the Sarbanes-Oxley regulations for public companies pertaining to whistleblowing were illegal in France for three main reasons: it is illegal to transfer private information across borders, such a practice could incite people to denounce unfairly, and this does not give the incriminated party a possibility of denfense.  Since then, the SEC and the CNIL have entered into negotiations, and the alternative solutions seem to be circling around 1) depersonalizing the whistleblowing (denounce facts and not a person - but anonymously, which could be considered unethical); 2) restriction of the number of people who can whistleblow - people at headquarters, in management or executive positions; and 3) involvement of the representative of the workforce during the drafting of the policy. At this stage I think it fair to assume that the solution will have a distinctively French flavor.

Whistleblowing at the UN

Björn Rohde-Liebenau, of Risk Communication in Germany,  just sent me the new regulation (effective January 1, 2006) of the UN on whistleblowing. Lots on when and who to report to, as well as protection of the whistleblower. Took a long time coming - but well worth the wait.

Whistleblowing on the web

The Network Abuse Clearing House helps the internet community to report and control network abuse and abusive users. They keep a data base for users and point to more resources to deal with abusive messages.

Whistleblowing in France

Sarbanes-Oxley requires that companies listed on the US stock market provide a hotline for whistleblowers, so that the company can know about these concerns.  This causes difficulties when applied in other countries than the US. For instance McDonalds and Exide Technologies tried to have a company wide hotline, with the data base in the US. A French juge with the CNIL (Commision National de l'Informatique et des Libertes) condemned the practice in both cases for the following 3 reasons: transfer of private information across boarders; could incite to denounce unfairly; and lack of possibility of defense for incriminated party. The only one that really holds up in court would be the transfer of private information across boarders, the rest is just filler and can be refuted, as well as providing the French with an opportunity to criticize the US. However it does pose problems for US subsidiaries abroad. The unions in France are also not too hot on ethical codes - they claim it can put the employee in a position where he knows something is wrong, but cannot do anything about it. Article in french on the subject on novethic.fr.