Why Whistleblowers Should Be Rewarded

The surprising truth about employee whistleblowers

In some ways, whistleblowers represent the ultimate fear within a company: an employee goes to a watchdog to report something unethical, illegal, or otherwise improper, and a legal and organizational battle begins that sucks away time and money, and damages a corporate reputation. To most companies, whistleblowers represent the ultimate lose-lose scenario. There is, however, a huge opportunity here for today’s compliance team member and leader.

First, some stats: In 2014 there were 3,620 tips that came into the SEC, a 20% rise over previous year. From that, the SEC awarded 8 people $38M in damages, a 10-30% payout of the fines leveraged against their parent company (the SEC doesn’t disclose exact figures).

That’s a tiny percentage – 8 people out of 3,620, only .2%. But 2013, whistleblowers led to the SEC leveraging $150 million in fines, and the SEC and DOJ have grown more aggressive in both their investigations and their leveraging of fines in 2015.

It’s tempting to put this in an “us versus them” mentality: the company versus the employee, and then the company versus a regulatory agency. But that misses an opportunity for growth and profit that is lying right under a company’s nose.

Why Ethical Employees Should Be Rewarded and Encouraged

Imagine: two years ago an engineer at Volkswagen goes to a well-functioning hotline, and reports cheating software that is affecting millions of cars. Imagine that hotline was run by a third-party, so that the information made it up to the General Counsel who, once he had the information, would be legally liable for it. VW gets ahead of the problem, brainstorms solutions, and comvw_service_qualitaet_685x325_rgbes clean on their own and on their own terms, before any regulatory watchdogs sink their teeth in.

How might that have affected their stock? Their reputation? What about the scope and severity of the fines they now face?

Good compliance isn’t as simple as preventing bad behavior. A corporate culture—in privately or publicly held companies—can develop that ends up feeding unethical behavior in ways that can be very hard to spot from the inside, but that will ultimately wreak havoc on profitability.

It’s like the story of a frog put into a pot of water on a stove. As the water gradually gets warmer, the frog doesn’t notice the change and ends up being boiled rather than just hopping out. (See the 5 Unintended Consequences of Growth-Minded Companies for more on this.)

The employee who thinks he or she sees something unethical going on just might be the person who saves the company millions, perhaps billions of dollars – who keeps it from boiling in its own water. If a whole department has grown accustomed to seeing non-compliance as the norm, the person who comes forth might be seen as a problem instead of an opportunity.

The Surprise: What Happens When Whistleblowers Come Forward

Steven Cohen, assistant director of the SEC, said that the overwhelming majority of whistleblowers that come to the SEC have already reported internally — and been ignored or retaliated against.

He admitted that most calls they receive do not warrant investigation, but of the ones they do investigate almost all have told a manager or compliance officer, or phoned into a hotline, and nothing has happened. (As an interesting side note, the SEC admitted concern that since most employees report inwardly, they believe the vast majority of potential fraud cases never reach them at all, and never get addressed internally.)

Why This Matters to the Board

“We are very mindful of the fact that compliance staff often aren’t listened to.”
—  Steven Cohen, Assistant Director, SEC

If a company has an anemic compliance department, where a board and executive team mostly pay lip-service to compliance in favor of aggressive growth, internal reports are likely to go nowhere. The right paperScreen Shot 2015-11-11 at 9.23.37 AMwork might get filed, the right boxes checked off, but if the Board and CEO are not interested, the information will likely never reach a GC or CCO.

We can see an example of this with a company like Valeant Pharmaceuticals, which has been accused of running an Enron-like business (and has cost them more than 70% of their stock value since October). While little has been released about the health and vibrancy of their internal compliance, we’d bet our bottom dollar it was sub-par — at best.

It’s also problematic if managers or other employees interpret the “tone from the top” to be against whistleblowing, and actually punish, harass, or terminate employees that dare to report problems without floating information up the ladder. That’s a fast route to major SEC or DOJ fines.

The Upside

In our Board Reporting eBook (Available Tuesday 11/17), we’ll explain how you can make the case for increasing compliance through showing hard data about how it drives profits, increases employee retention and loyalty, and makes companies more sustainable in the long run. We’ll also show you examples.

At the end of the day, the market and investors reward compliant companies because they are more predictable, have a more stable and talented pool of workers, use clearer internal communications, and most importantly learn from mistakes before they turn into profit-killing blunders.

And whistleblowers are a vital part of this — but only before they become SEC cases.

Convercent offers comprehensive and integrated compliance management, reporting, and defense for compliance departments who want to become best-in-breed.