Whistleblowers: disgruntled employees with malicious or reckless intent or virtuous individuals driven to fight corporate misconduct, negligence, and carelessness? Although it is true that some individuals may act with ill intent resulting on workplace disruption and potentially harming the career and reputation of others that are wrongly accused, whistleblowing in a business or government have the power to denounce wrongdoings such as abuse of power, sexual harassment, and many other malpractices that, if left unattended may result on more employees suffering and greater financial loss to the company. When an organization fails to build a well-structured whistleblower policy, it may risk losing employee morale and productivity, increase the company’s risk exposure, and suffer greater financial losses.
On a broad and theorical sense, a company’s whistleblower program is intended to receive anonymous complaints from individuals on allegedly illegal activities, wrongdoings and violations to the company’s code of conduct. The type of valid complaints may depend on several factors, but they typically range from issues such as discrimination and harassment to conflict of interest, among other types. Once a complaint is received, the company can evaluate it and commence an internal or external investigation if it finds that the complaint has merit.
At the end of the investigation, a company decides whether the claim is valid and the type of action that needs to be taken, if at all. Some investigations may result on a claim being dismissed, some other investigations may result on more serious consequences such as suspension, employee dismissal, or even criminal charges.
In practice, a majority of organizations have the flexibility to choose the structure of their whistleblower program. There are exceptions such as the SEC whistleblower program, which was implemented due to the Dodd-Frank Wall Street Reform and Consumer Protection Act. Some have a designated department that takes care of it, others designate such responsibilities to the human resources department. Some allows all types of complaints to be reported, others only accept complaints after a set of procedures are followed. Several factors may influence a whistleblower program, the most important common being the values upheld by the company.
Whistleblower programs can be a powerful business tool for many organizations in upholding the company’s values, possibly demonstrating some level of due diligence to governmental bodies, and protecting human, tangible, and intangible assets. Unlike traditional governmental whistleblowing programs, that are mostly concerned with wrongdoings related to securities law, a company’s whistleblowing program can serve for employees to report on illegal activities, wrongdoings, or any violation that breaches the company’s Code of Conduct. A list of whistleblowing cases in business can be found in a Fortune article.
There are several benefits to implementing and properly managing a whistleblower policies, but here are the top 5 reasons for a company to have a whistleblower program:
A whistleblower program gives employees the ability to alert employers of possible wrongdoings that the company would not have otherwise become aware of. For example, in cases where individuals misuse a company’s asset, it can be difficult for the company to catch the wrongdoing, unless managers are alerted, or the asset is broken or lost. However, several individuals may feel discouraged to report to their managers due to fear of repercussions or reprisals. Further, employees may feel even more discouraged to report if the alleged wrongdoing is conducted by a manager or someone higher in the hierarchy. Therefore, a whistleblowing program that prohibits negative repercussions to the complainant for complaints made in good faith is key.
Of all detection methods, whistleblower tips represent 40% of all the methods of detection, rendering it the most common technique for fraud detection (ACFE). By allowing anonymous reporting, employees may feel encouraged to report wrongdoings since they know that they will be protected from negative repercussions. It is worth noting that the company needs to secure an employee’s anonymity and respect it in order for this to work. This may involve a strong cybersecurity encryption, unbiased whistleblower personnel and many other areas. Otherwise, lack of trust in the program may result on diminished reporting, rendering the outcomes of the program less than optimal (OECD).
According to the Association of Certified Fraud Examiners, organizations with internal whistleblowing programs are able to detect fraud 50% faster than companies without one. Blowing the whistle has serious repercussions not only to the company but also to the employee who reports it. The traditional channels for individuals to report a wrongdoing are their supervisors, human resources, securities commission, or judicially (some employees may send letters to CEO, among other practices). However, most of the options, with the exception potentially of the securities commission, involves foregoing one’s anonymity. A lack of anonymity may serve as a deterrent to legitimate whistleblowers, since they may become concerned about the repercussions, they will suffer should they report, rather than simply worrying whether it is the “right” thing to do. Further, according to the OECD, if given the option, employees tend to report the issue internally first, despite domestic whistleblower protection laws. Allowing the company to address the issue internally without media attention that could potentially negatively impact the company’s reputation.
Therefore, it is important that a company provides an internal anonymous channel for possible wrongdoing to be reported on as such will increase the likelihood of employees coming forward with a complaint before it becomes public knowledge, potentially harming the organization’s reputation.
Early detection of wrongdoings may allow companies to deter malicious actions sooner, stopping fraudsters before losses get too large. Companies with a whistleblower program tend to experience frauds that are 41% less costly given early detection (ACFE). On another research, HBR reported that organizations with more active programs have a higher return on assets than organizations with less active programs. On average, the OECD reports that the most common types of corporate misconduct are fraud (42%), workplace safety and health (27%), and industrial relations and labour issues (24%). Out of all financial wrongdoings, foreign bribery was the top issue reported on (22%).
Asset misappropriation represents 85% of all fraud related reports with a median loss of $130,000 USD (ACFE). Anti-fraud controls such as whistleblowing programs tend to result in significantly lower losses as they are detected and possibly stopped much more quickly than they otherwise would.
Disgruntled employees may seek legal actions against the company if they feel that the company was negligent or that they have been improperly treated. A strong compliance department should deter unethical conduct, but it should also play a role in reducing company’s risk exposure to lawsuits in certain circumstances (Goldberg Kohn).
According to the Harvard Business Review, effective whistleblower programs, that are trusted and used by employees, can be correlated to fewer lawsuits faced by a company and smaller quantities paid out in settlements.
According to the OECD, measures to detect and disclose wrongdoing can contribute to an open organizational culture that is based on trust, reinforces positive working relationships and boosts employee morale. In turn, increased employee morale has proven to increase overall productivity by 21% according to Forbes. Further, increased employee morale coupled with a sense of fairness may also help to boost retention rates.
Contrary to popular belief, a higher volume of internal reports does not mean that the organization is facing severe or more frequent problems than others. It simply means that the company has established a good channel of communication between employees and management that is believed to be trustworthy (HBR).Furthermore, when complaints are taken externally, it can reflect on management’s inability to “clean” up their house or that they turn a blind eye to unethical behaviour.
Companies may mistakenly associate zero to no complaints with an ethical firm, when in reality, few complaints can simply be a sign of a non-trustworthy ethics program. It is important that business leaders understand that a well maintained and trustworthy whistleblower program can have several benefits to their employee’s morale and productivity, and to the company’s bottom line and risk exposure. Whistleblower complaints may not only help with early detection of wrongdoing but also prevents losses due to such behaviour from reaching otherwise exorbitant costs.