Should Employers Incentivize Internal Whistleblowing? 9:26, May 11, 2017

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Should Employers Incentivize Internal Whistleblowing?

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Doing the right thing when it’s difficult, uncomfortable, or likely to cause social stigma takes moral courage. Our ethics training course, which focuses on overcoming barriers to acting ethically, calls moral courage “the courage to do the right thing in the face of risk and adversity.” Anyone who blows the whistle on suspected company wrongdoing is likely to face barriers to acting ethically. To overcome them takes moral courage. But what can employers do to lessen the barriers to acting ethically? Should they encourage — or even incentivize — internal whistleblowing?

From an employer’s perspective it’s tempting to think of internal reports as a nuisance, and it’s equally probable that workers who report may feel that they have a target on their back (or be dissuaded from reporting for fear of being targeted). But acting against employees for complaining is not just wrong. Retaliation commonly provokes unhealthy anger that can tear workplaces asunder. From a broader perspective, internal reports grant employers insight to help them do better; employees who report thus increase their value to the company.

If a company has built a culture of trust and has internal systems in place to encourage internal whistleblowing, the obstacles to ethical conduct are lessened, to the benefit of employer and employee alike. It shouldn’t take extraordinary moral courage to question company misconduct. Systems that encourage internal reporting can help make the process easier for everyone.

SEC Incentives

The federal government encourages whistleblowing and self-disclosure to facilitate corporate compliance and ethics. For example, the Securities and Exchange Commission (SEC) incentivizes whistleblowing by offering financial rewards (10 to 30 percent of sanctions over $1 million collected).  

Within a one-week period the SEC announced it awarded close to $4 million to one whistleblower for providing “detailed and specific information about serious misconduct” and, separately, over a half million dollars to another insider who blew the whistle on “well-hidden misconduct.” As of May 2, 2017, the SEC reported having awarded about $154 million to 44 whistleblowers. Because the law requires the SEC to protect the confidentiality of whistleblowers, the two announcements did not give out any specific information about the whistleblowers, the companies involved, or the wrongdoing uncovered because doing so might directly or indirectly reveal a whistleblower’s identity.

The SEC’s whistleblower award program is emblematic of the high value the government places on tips by insiders. Insiders are in the best place to discern risks and prevent misconduct; when prevention efforts fail, an insider’s view of what went wrong and why adds immeasurable value to internal remediation efforts.

Corporate leaders can learn from and apply the principles behind the SEC’s whistleblower program to internal reporting protocols. Of course, companies don’t (and probably shouldn’t) give out millions of dollars to encourage internal reporting of ethics or compliance violations. But the SEC’s program is food for thought. Rather than incentivize reporting for pecuniary gain, employers can do a lot to encourage internal whistleblowing.

Companies should also follow the SEC’s lead by affording internal whistleblowers confidentiality. Although it’s generally illegal to retaliate against workers who make good-faith complaints of legal or ethical violations, employees worry about it — and no wonder: the power balance between worker and company is highly lopsided. Workers who believe the company has acted wrongly in one area (the area the worker contemplates reporting) could reasonably fear that the employer will act wrongly in another area — by retaliating against the worker. Employees are less likely to worry about becoming targets when confidentiality is ensured.

Examining the Evidence

As government agencies are wont to do, the SEC touts the success of its whistleblower program. But is there independent evidence that whistleblowing positively impacts outcomes? The answer is yes. Soon-to-be-published research by a University of Iowa accounting professor shows that whistleblowing deters financial wrongdoing

There is also evidence that whistleblowing policies are not keeping up with the reality. A survey by international law firm Freshfields Bruckhaus Deringer revealed that while 1 in 10 employees would blow the whistle and nearly half have considered doing so, only “7% say whistleblowing is currently an important issue for their organization and . . . 44% say their companies either don’t have a whistleblowing policy or fail to publicise it if there is one.”

In her article, Whistleblower Hotlines Might Not Be Enough, my colleague Chris Day examined the relative effectiveness of several recommendations for companies seeking systematic ways to encourage internal reporting, including hotlines, helplines, and online reporting. As Day observed, a Santa Clara University report bolsters the idea that employers need robust policies that encourage internal whistleblowers; internal questioning can bring small problems to light before they grow and cause real damage, and such policies are more likely to motivate concerned employees not to report externally first. Robust policies can reinforce a culture of trust, but weak ones can foment mistrust. Employers should examine whether their whistleblower policies and protocols are well-thought-out.

More than Moral Courage

Moral courage is important, but systems should also be in place to help employees take the right action. A failure to institute systems to encourage internal whistleblowing can result in worker reluctance to question dubious corporate practices. This in turn can lead to a slow winnowing away of resistance to routinely cutting corners or outright harmful, deceptive, or unfair practices.  

Even when systems are in place to encourage reporting wrongdoing, it can take tremendous resolve for the average person to overcome ethical barriers and take advantage of such a system. Employees shouldn’t need to sum up vast reserves of moral courage to simply do the right thing at work. Organizational policy-makers should make it as easy as possible for employees to act ethically and to blow the whistle when necessary.

LawRoom (powered by EverFi) delivers online training to help your business meet compliance requirements both dynamically and scalably. In addition to our award-winning online courses, LawRoom delivers a robust, cloud-based learning management system to help you easily deploy and track our growing library of ethics, anti-harassment, data security and employee conduct courses.

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Steve Treagus
Stephen Treagus, JD's, previous practice as an attorney specializing in employment litigation exposed him to the rough-and-tumble world of employment relationships gone awry. Today, this experience informs his articles and courses, helping employers avoid costly litigation and get employment law right. Stephen earned his JD from John F. Kennedy University School of Law and his BA from Sonoma State University.

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