Whistleblowers are often hailed as heroes to taxpayers and investors, and now new studies show that they are valuable to their employers and the corporate world in general as well.

One study, conducted by researchers from George Washington University and the University of Utah, found that companies that provide employees with internal channels for whistleblowers to report unethical activity earn a substantially greater return on assets than companies with underdeveloped whistleblower programs.

The study, titled “Evidence on the Use and Efficacy of Internal Whistleblowing Systems,” analyzed a decade of records from NAVEX Global, which monitors whistleblowing and incident reporting for 8,500 companies, looking at fraudulent financial reporting, sexual harassment, workplace safety, and other complaints.

Whistleblowers improve corporate culture

The study’s authors found that while whistleblowers can be costly to companies and investors initially, they play a critical role in cleaning up a company’s corporate culture that pays off in the long term and helps them achieve profitability goals.

The data also showed that, conversely, companies with underdeveloped whistleblower platforms or no whistleblower assistance at all allow wrongdoing and other problems to fester and grow. Companies that have fallen victim to their own corrupt corporate culture and whistleblower suppression include Enron, WorldCom, Citigroup, Olympus, and HealthSouth – to name a few of the larger, more publicized cases.

Ignoring, mistreating whistleblowers can be devastating

Other corporations may have internal whistleblower channels, such as a whistleblower hotline, but may ignore, dismiss, or retaliate against employees who use those channels. For instance, Wells Fargo maintained an internal ethics hotline for its employees, but several whistleblowers who used it to report fraudulent business practices within the bank were allegedly fired.

Wells Fargo could have addressed whistleblower complaints and worked to rectify the problems. Instead, bank executives tried to silence whistleblowers until they found themselves facing massive government fines, consumer class actions, False Claims Act lawsuits, and other costly public relations disasters that seriously eroded shareholder value.

The study indicates companies that take whistleblower complaints seriously and address reported problems can avoid costly legal trouble. Data showed that more whistleblower reports necessitated more monitoring of whistleblower complaints, which meant more corporate response to problems, which translated to fewer lawsuits.

Internal whistleblowing channels

The passage of the Dodd-Frank Act in 2010 established better whistleblower incentives and protections, but there’s also an incentive for whistleblowers to use internal channels first, the study’s authors found.

“Whistleblowers, if they go to a regulator [externally], are given a better reward if they use the system internally first,” author Kyle Welch said, according to CNBC. He added that the Securities and Exchange Commission (SEC), for example, is more likely to take a whistleblower’s accusations seriously if they are first investigated by the company’s management and the whistleblower has tangible proof of the wrongdoing.

Many employees want to remain loyal to their company and resolve problems internally, but that approach may not be the ideal one in all circumstances. Studies have found that 30 to 40 percent of companies actively discourage whistleblowing.

Morality and altruism

Another whistleblower study, soon to be published by the international business school HEC Paris, reinforces some of the same points about the value whistleblowers bring to companies but underscores the “whistleblowers’ fragility, the risks they run and the lack of effective legislation protecting them.”

The 94-page study, which will run in a forthcoming issue of Contemporary Accounting Research, finds that corporate whistleblowers “are not self-interested actors” but guided by “a sense of morality and altruism” despite the “extreme difficulties they face.”

According to HEC Paris, the Global Business Ethics Survey published by the Ethics and Compliance Initiative determined that 53 percent of employees in the U.S. who report wrongdoing internally face retaliation in the workplace.

“Despite the obvious risks they take, whistleblowers continue to struggle to establish the legitimacy of their role in the eyes of society,” HEC Paris explained. “We conclude that managers, business leaders and policy-makers need to become more aware of the effectiveness of whistleblowers and how their actions can help business, not hinder it.”

Getting ready to blow the whistle?

Before you report suspected fraud or other wrongdoing – before you “blow the whistle” – it is important to make sure you have a valid claim and that you are prepared for what lies ahead. For more information about steps to take, visit the whistleblower section of our website. It is recommended that you talk to a lawyer before you take any public action. A whistleblower lawyer will be able to help you navigate a potential claim, and guide you through what is often a long process. You can contact us by filling out the form on this website, or call 800-898-2034 and ask to speak to a lawyer in our Consumer Fraud section.

Sources:

CNBC
CNN
Evidence on the Use and Efficacy of Internal Whistleblowing Systems,
HEC Paris Insights
Global Business Ethics Survey



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