Whistleblower Actions Reward Companies and Individuals
Whistleblowers consistently appear in compliance news for reporting wrongdoing to regulators like the US Securities and Exchange Commission (SEC), reaping big rewards for their actions. For example, the FCPA Blog reports that the SEC has awarded about $153 million to 43 whistleblowers for reporting wrongdoing such as improper records under the Foreign Corrupt Practices Act (FCPA) and securities fraud. More than just a settlement payment to a former employee, whistleblower actions also damage a company’s reputation, erode public trust of companies, and chill other employees from coming forward to report wrongdoing.
A forthcoming article in the Harvard Journal on Legislation by Professor Yehonatan Givati evaluates the appropriate reward for whistleblowers. The article proposes three factors to do that: the personal cost to the whistleblower, the resulting prosecution by government agencies, and the opportunity for false claims. Ironically, these factors can also help us understand the cost of unethical cultures and ineffective compliance programs that deter employees from speaking up.
Cost to the Whistleblower (and Company)
The article addresses many personal costs to employees as a result of whistleblower actions. Social ostracism is one, where managers retaliate against and colleagues shun the whistleblower. Other effects are professional suicide (the professional reputation of the whistleblower is besmirched), and negative physical and psychological health effects for the person. Workplace retaliation for reporting potential discrimination and harassment has very similar effects on the whistleblower.
A company has an ethical and legal obligation to ensure that its workplace is safe for employees. By not doing so, such as letting well-meaning whistleblowers suffer personal consequences, companies are promoting an unethical culture. And they can lose more. My colleague Chris Day argues that employers “should encourage their employees to report concerns internally and should protect them when they do.” When they don’t, there are immense losses to the employee, the company, and promoting an ethical climate. This is why companies should protect internal whistleblowers.
No Reward in Sight?
Sometimes, whistleblower actions do not result in an investigation or prosecution. “The agencies may not be convinced by the information provided by the whistleblower, or cases may not be pursued because of case overload or simple laziness,” states Givati. As a result, the whistleblower who takes great risk to reporting wrongdoing gets nothing in the end, at least under the law.
As a result, some companies may feel vindicated, or tell themselves there was no wrongdoing to be concerned about. They would be wrong. Because regardless of the legal constructs, there are considerable ethical underpinnings. Most companies have a code of conduct that addresses expected behavior and company values in addition to purely legal protections. Depending on how high a standard a company wants to make, otherwise legal actions may nonetheless violate company policy. A conflict of interest is a common example of mostly legal, but unethical, conduct.
Research shows that companies create an unethical culture when they allow employees to commit wrongdoing that violates formal policies and informal procedures. Even if an internal complaint does not rise to a legal violation, it should be handled just as seriously. Companies should also develop and implement and effective code of conduct to reinforce sound, ethical behavior above and beyond what the law, and regulators, require. Doing so can incentivize whistleblowers to address problems sooner.
False Reports, False Ethics
Finally, Givati states that policymakers, defense lawyers, and scholars warn that whistleblowers may fake a report to a regulator. The argument goes that high rewards for whistleblowing will incentivize employees to falsify claims just to get money. Apparently this happens, but one has to wonder how much the company values honesty and integrity, badges of an ethical culture. A company that doesn’t value these things cannot completely blame the scrupulous employee. Indeed, at least one court has used culture as evidence in a lawsuit.
In the same way that regulators incentive whistleblowing with money, companies should foster a climate where employees feel internally incentivized to report wrongdoing. At least one study shows that whistleblowing actually decreases wrongdoing after disclosure. “As the New York Times reported, the study ‘demonstrates for the first time that financial shenanigans at companies decrease markedly in the years after truth tellers come forward with information about wrongdoing inside their operations.’”
While it’s important to quantify the external incentive to come forward about company wrongdoing, companies should remember there would be little need for whistleblowers, much less external rewards, if employees felt comfortable reporting internally. A culture where employees feel safe disclosing and reporting their problems, whether legal violations, policy infractions, or even dings against their moral codes, is an ethical one. For more information on how to train all employees to make ethical decisions for your company before it amounts to a whistleblower claim, check out our ethics training white paper.
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