Retaliation against Whistle-Blowers: No Good Deed Goes Unpunished

No good deed goes unpunished. This phrase came to mind after reading the results of a 2011 National Business Ethics Survey titled “Retaliation: When Whistleblowers Become Victims.” The report contains some shocking statistics:

• 45% of US workers observed wrongdoing;
• 65% of those who witnessed wrongdoing reported it;
• 22% of those who reported wrongdoing said they experienced retaliation (an increase of 46% from 2009); and
• 46% of those who observed wrongdoing but chose not to report it, cited fear of retaliation as the reason.

Employees who “blow the whistle” or report wrongdoing should be lauded, not vilified. A study conducted by the Association of Certified Fraud Examiners (ACFE) estimates that fraud costs a typical company about 5% of its revenues and that whistle-blowing is the single most common method of fraud detection. Another study shows that “18.3% of the corporate fraud cases in large US companies between 1996 and 2004 were detected and brought forward by employees.” In Europe, the Middle East, and Africa, an analysis by KPMG found that 25% of fraud cases were brought forward by employees and that anonymous tipping was the primary source of detection.

Employees represent a valuable resource to companies who want to minimize fraud or wrongdoing. They should be encouraged to “say something, if they see something,” and then praised or rewarded for speaking up instead of being victimized. It wasn’t too long ago when whistle-blowers were viewed as heroes. Remember the movies Silkwood and Erin Brockovich? Time magazine declared 2002 "The Year of the Whistle-Blowers," and featured three whistle-blowers on the cover of its 30 December 2002 issue: Sherron Watkins (Enron), Cynthia Cooper (WorldCom) and Coleen Rowley (FBI).

In the United States, the Whistleblower Protection Act of 1989 was enacted to protect federal workers who report misconduct in the government. Section 806 of the Sarbanes-Oxley Act of 2002 provides protection for employees of public companies who provide evidence of fraud, and the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act required the SEC to establish a whistle-blower program that rewards “individuals who offer high-quality original information that leads to an SEC enforcement action in which more than $1 million in sanctions is ordered.” Globally, a large number of countries have passed legislation to protect whistle-blowers, including Australia, New Zealand, the United Kingdom, South Africa, Japan, the Netherlands, Ireland, Canada, India, Germany, Switzerland, and Belgium.

Why Do Employees Become Whistle-Blowers?

Are whistle-blowers just a bunch of "crackpots” or disgruntled employees? Far from it! Researchers who have studied whistle-blowers find that most:

• have positive feelings about their jobs;
• have good job performance;
• hold professional positions;
• are highly educated;
• hold higher-level or supervisory positions;
• have worked for the company for a long time;
• work as part of a large group within the organization;
• believe that the company will be responsive to their complaints; and
• view whistle-blowing as integral to their role in the organization.

Why would people who have positive feelings about their jobs, who have good performance records, etc., risk the potential negative consequences — physical harm, online harassment, harassment at home, a demotion, a pay cut, and/or a job transfer — by reporting misconduct? It is simply because whistle-blowing, is not an act of disloyalty, but the ultimate manifestation of employee loyalty to the organization.

Loyalty in this context, does not mean allegiance to top management; instead it means allegiance to the organization’s mission, its goals, its value statement, and its code of conduct. In other words, whistle-blowers are acting in the best ethical interests of their organization, the public, clients, or capital markets . According to Standard IV(A) of the Standards of Practice Handbook:

A member’s or candidate’s personal interests, as well as the interests of his or her employer, are secondary to protecting the integrity of capital markets and the interests of clients. Therefore, circumstances may arise (e.g., when an employer is engaged in illegal or unethical activity) in which members and candidates must act contrary to their employer’s interests in order to comply with their duties to the market and clients. In such instances, activities that would normally violate a member’s or candidate’s duty to his or her employer (such as contradicting employer instructions, violating certain policies and procedures, or preserving a record by copying employer records) may be justified. Such action would be permitted only if the intent is clearly aimed at protecting clients or the integrity of the market, not for personal gain.

Researchers have found that whistle-blowing is a dynamic and complex process. First the potential whistle-blower must determine whether the observed activity is wrong (i.e., unethical, illegal, or against company policy). Then, the potential whistle-blower has to decide whether to report what he/she has observed. This is the most difficult part of the process because the following questions have to be addressed:

• How serious is the wrongdoing?
• Is reporting the wrongdoing the only the way to stop it?
• Who should the wrongdoing be reported to?
• What will be the emotional and financial costs associated with reporting the wrongdoing?
• Will there be emotional and financial support after the wrongdoing has been reported?

A recent study titled "The Effects of Contextual and Wrongdoing Attributes on Organizational Employees’ Whistleblowing Intentions Following Fraud" found that employees are less likely to report fraud when: it's financial statement fraud rather than theft; the wrongdoer is aware that the potential whistle-blower has knowledge of the fraud; and others are not aware of the fraud.

How Should Companies Respond to Whistle-Blowers?

Once the whistle-blower has decided to report the wrongdoer to a supervisor or upper management, then the organization becomes involved. It is the organization’s (management’s) reaction to both the wrongdoing and whistle-blower that can have far-reaching and long-lasting consequences.

First the organization must decide what to do about the alleged wrongdoing (i.e., stop it or allow it to continue). Then the organization must decide what to do about the whistle-blower — ignore them, silence them, discredit them or the allegations being made, retaliate against them, or laud them. This is one of the most critical steps in the process, because employees take cues about the consequences of whistle-blowing from the experiences of others. If employees believe that whistle-blowers are retaliated against, they will refrain from coming forward when they observe misconduct. As a result, any future misconduct will likely continue, because employees will be reluctant to inform management about it.

So, what is the motivation behind “shooting the messenger”? Many people mistakenly believe that whistle-blowing is an act of disloyalty. Supervisors or superiors may think the whistle-blower is questioning their ability, integrity, and conduct.

How Can Employers Encourage Whistle-Blowers and Prevent Retailiation?

Retaliation is so appalling because it represents a second form of misconduct, in which the whistle-blower, who reported the initial misconduct, now becomes the victim. And, as a recent article in Risk Management points out, retaliation against whistle-blowers is on the rise:

• In 2011, 31% of whistle-blowers experienced physical attacks on their property, versus only 4% in 2009.
• Although whistle-blowing has only increased by 12% over the past five years, retaliation has increased by 83%, which will probably drive down future reporting rates.
• In 2011, for the first time in the history of the National Business Ethics Survey, managers are not more likely to experience retaliation than nonmanagement employees, and the biggest jump in retaliation of all employee levels occurred among senior management.

There are a number of preventive as well as responsive actions that organizations can take to not only encourage whistle-blowing but also eliminate, or at least minimize, retaliation. First and foremost they need to establish a comprehensive ethics and compliance program that includes:

• written standards on workplace ethical conduct;
• training on these standards;
• resources (such as an ombudsman) that employees can draw upon when they need advice about ethical issues; and
• an in-house complaint process and a confidential and anonymous means to report misconduct.

Only 2% of whistle-blowers experience retaliation in companies with these types of programs. Retaliation also decreases when employees are prepared to handle situations that could lead to violations of company ethics standards, policy, or the law, which highlights the importance of training.

It is also crucial that top as well as middle management make ethics a top priority and exhibit ethical behavior. They should communicate openly with employees not only about reporting misconduct, but also about the protections afforded to those who do report. In addition, they should be educated about retaliation and trained to recognize and address it when or if it occurs. When a report of misconduct is made, managers need to take it seriously and quickly investigate and respond to it. If the whistle-blower’s claims are substantiated, the wrongdoer should be punished appropriately and the whistle-blower positively acknowledged.

Failing to encourage whistle-blowing or to prevent retaliation can be financially as well as culturally damaging to organization.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author's employer.

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