At some point in a company’s lifespan, a handful of employees may engage in unethical behavior—ranging from financial misconduct to sexual harassment. In the past, companies discouraged employees from bringing such concerns forward, often ignoring their complaints. However, a new study finds that by encouraging workers to report wrongdoing, employers spend less time and money fighting legal battles than those that don’t.
The study—Evidence on the Use and Efficacy of Internal Whistleblowing Systems—was based on records of employee complaints between 2004 and 2016 from 936 publicly traded U.S. employers. Stephen Stubben, an associate professor of accounting at the University of Utah, co-authored the analysis with Kyle Welch, an assistant professor of accountancy at George Washington University. Stubben says these records were obtained from NAVEX Global, an ethics and compliance software and services company.
The authors conclude that more profitable companies tend to use stronger internal-reporting systems and experience fewer bad outcomes. More specifically, they have 6.9 percent fewer material lawsuits filed against them and pay 20.4 percent less in settlement amounts.
Unfortunately, he says, perceptions of whistleblowing vary. Some believe that employee complaints signal poor internal controls and weak corporate governance while others see a workplace culture built on trust.
“If you’re viewing whistleblowing through the lens of big failure, it’s going to be seen as something negative that you want to avoid,” Stubben says. “But the way to look at internal whistleblowing is that it’s valuable information that managers can use to prevent problems from getting big.”
Some organizations, however, may have a difficult time encouraging their employees to come forward with information about financial misdeeds. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, Stubben says, the Securities and Exchange Commission is offering financial rewards to some whistleblowers for contacting them versus someone in-house. Apparently, the SEC’s faith in corporate America to appropriately handle fiscal offenses may have vanished.
Still, self-regulation can work.
“It’s important to encourage and promote the use of your whistleblower system,” Stubben says. “Widely advertise it to employees and create a culture where employees are encouraged to speak up when they see something that could be an issue and encourage management to follow up on these reports.”
While such systems must be available to the entire workforce, whistleblower policies also need to address realistic concerns regarding employee revenge.
“Set the boundaries by saying in the policy that all legitimate issues will be investigated and there should not be fear of retaliation,” says Jerry Glass, president at F&H Solutions Group, a global-management-consulting firm that specializes in HR and labor relations. “The company’s goal is to get to the root cause of the problem, not to place blame on individuals. That’s a big cultural shift for many companies.”
Other changes involve thanking employees for coming forward, he says, and informing them that investigations can take a long time and that they’ll be contacted about the outcome. Likewise, he says, it’s important to educate managers on how to handle complaints and train all employees—regardless of job level or function—about the reporting process and types of issues to report.
If an employee reports a minor infraction, HR is obligated to update the worker about the end result but should not share the information with the entire workforce, Glass says.
“You’ll make a bigger issue out of it than it is,” he says, adding that every complaint must be investigated even if it’s reported by “serial” complainers. “Listen to them and take them seriously,” he says. “You never know where it’s going to lead.”
Meanwhile, experts advise establishing different paths for employees, even high-level executives, to safely or anonymously present complaints. Not everyone feels comfortable talking to their supervisor or HR representative, says Tim Singhel, a labor and employment attorney who is also a senior consultant at Permanent Solutions Labor Consultants.
HR can set up an anonymous hotline, he says, or else dedicate someone internally or hire an external agency to manage complaints and ensure that investigations are properly documented. It’s essential that managers and supervisors understand and value this process, he says, since it helps build a more positive workplace culture, keeps issues in-house and avoids public train wrecks.
Yet, despite the #MeToo movement and a long history of U.S. corporate corruption, he says, some managers still believe that complaints come from disgruntled workers who simply want to take down managers or co-workers they dislike.
“Help them understand their rights and obligations—that this is a good thing,” says Singhel. “Even if what employees say isn’t true or accurate, the fact that you try to squelch that disclosure probably creates as big a problem as what they were complaining about in the first place.”
It’s up to all employees to make sure everyone is paddling in the same direction, he adds.
“Once the train wreck has happened,” Singhel says, “it will probably be quite difficult for the situation to remain in-house.”