As whistleblowers continue to receive rewards for disclosing wrongdoing by their company, it behooves large companies to understand what motivates employees to come forward. By so doing, corporations will be able to establish more effective internal compliance programs and possibly reduce the likelihood of employees reporting misconduct to the government.
This article by TELG managing principal R. Scott Oswald was published by Labor Law Reports: Insight on July 25, 2012.
Originally published in:
Labor Law Reports: Insight
Ten years ago, you could count the big whistleblowers on one hand.
Today is a different story. The False Claims Act has recovered more than $30 billion for the federal government. The U.S. Securities Exchange Commission (SEC) and the U.S. Commodity Futures Trading Commission (CFTC) have sparkling new whistleblower reward programs. The IRS whistleblower program was overhauled in 2006. These are just of a few of the major developments.
The result has been that whistleblowers are routinely grabbing headlines — and big rewards.
Pharmaceutical giant GlaxoSmithKline (GSK) recently settled a qui tam claim for $3 billion. One of the whistleblowers in the case stands to receive a relator’s share worth hundreds of millions. In another case, our firm was involved in settling a Medicare fraud suit against 21st Century Oncology for $34.7 million.
Those big numbers make it no wonder that private sector employers share a common fear: that big rewards will entice employees to go to the government with problems that employers would address if just given a chance — all at a devastating cost to the business.
But whistleblower counsel in the GSK case characterized the company’s internal investigation as one of the most ex- pensive in history. That is because GSK management ignored evidence of misconduct that the investigation produced. As a result, the company missed an opportunity to save millions, if not billions of dollars.
The opportunity to avoid costly liabilities undergirds employers’ arguments that whistleblowers should be required to first disclose internally. And under the right circumstances, whistleblowers have an ethical duty to just that.
But that ethical duty evaporates when the corporation fails to have an effective, adequate internal reporting mechanism. The question of moral obligation is not merely academic. Time after time, whistleblowers come forward because they perceive a wrong. And whistleblowers find the strength to press on through often shattered careers. They do so because they believe they are doing right, not because of the promise of hitting the jackpot.
That is not to say that monetary incentives are not relevant; rather it is to say that the professional morality of whistleblowing is relevant, as well.
It is this understanding that should bring about a renewed emphasis on creating the right corporate culture. If employers are willing to make a serious commitment to a culture of compliance, they very well may avoid becoming the next headline.
Corporations are legal fictions, not metaphysical entities. Corporations have some characteristics in common with real people: They enter into contracts, they can sue or be sued, and they even benefit from constitutional protections. But despite what the U.S. Supreme Court may have you believe, corporations are not real people.
Corporations are nothing more than groups of people coming to together to provide services and products. Using semantic shorthand does not grant license to forget that when referring to a corporation, the true reference is to hundreds or thousands of individuals.
A lone employee battling a monolithic corporation is compelling, but it can be a dangerous concept. Often, one or a few well-placed people perpetrate fraud and retaliation. They might be able to wield the company’s resources for some time, but most employees and investors are completely unaware of the fraud.
When society strikes out at corporations involved in fraud, it is not doing so against a single wrongdoer. Rather, the government and the markets sweep in the innocent employees and investors to punish sometimes just a few wrongdoers who were betraying those employees and investors as much, if not more, than the public at large.
Take Enron, for example. The shareholders, many of whom were low-level employees, did nothing wrong. Nonetheless, these victims’ investments were wiped out by mere association because of a few top executives who planned and initiated the fraud. Any hope of recouping some of that investment disappeared as the ensuing prosecutions sounded Enron’s death knell. In short, conceptualizing a unified corporate entity perpetrating fraud on those outside the corporate penumbra is a dangerously incomplete view.
An employee owes his employer a legal duty of loyalty. This article assumes that duty to be equally robust in an ethical context.
Concisely, the duty of loyalty requires that an employee act solely for the employer’s benefit when engaging in any conduct that relates to the employment. The word “benefit” is important because investors are to receive the benefits of the company.
Thus, when we begin breaking down the corporate fiction to see how the duty of loyalty plays out, we start with the shareholders. But we must also look at the whole corporate body. Managers, employees, customers, affiliates, and even the local community inform what a corporation is in the real world. Blowing the whistle is a logical extension of an employee’s duty of loyalty. Whistleblowing is the act of an employee (or former employee) disclosing what he believes to be unethical or illegal behavior to higher management, to an external authority, or to the public.
When any employee acts contrary to the interests of the stakeholders, particularly the shareholders, she breaches her duty of loyalty. She is no longer an extension of the corporation, i.e., the employer.
The employee’s ethical duty of loyalty obligates her to act when she learns of a coworker’s fraud. Here, the bystander is guilty because important cultural controls depend on group pressure.4 As discussed below, without a culture of compliance, an employer loses its ethical grounds to ask employees to report internally first.
If an effective internal reporting mechanism exists, the employee should use it first over other means of blowing the whistle. The employee’s duty also imparts an obligation to inflict only that hardship on the corporation that is reasonably necessary to redress the fraud. The employee must use finesse, lest curing the fraud becomes worse for the corporation than the fraud itself.
Internal disclosure inflicts the least harm on a company when rooting out fraud because it allows the company to control the best remedy. For example, paying civil penalties makes innocent corporate stakeholders bear the negative externalities created by a few bad actors. Further, a company can act to correct its internal issues much more quickly than law enforcement agencies can.
Perhaps most importantly, dealing with misconduct internally allows the corporation to control how and exactly when the public receives news of the misconduct. Though no one hopes for such news, the corporation can at least mitigate the impact, and in some cases the markets may positively receive a corporation that is serious about correcting its own errors.
If internal measures fail, then an employee should report to law enforcement, the public, or both.
Though the duty of loyalty and its attendant whistleblowing obligations are unwavering, an employee’s ethical imperative to report internally is circumstantial. In applying the duty of loyalty, the whistleblower must be sure that the internal reporting mechanism would be effective.
Federal law imposes quite a few requirements on corporations, especially with regard to establishing internal controls. That employers would want to maximize the benefit of these costly, mandatory programs is unremarkable.
What is puzzling is the routine failure of corporations to apply their well-developed policies and procedures to reporting internal misconduct. Extensive internal disclosure policies should do more than give wrongdoers more time to continue the fraud and more opportunity to cover it up.
Because of the nature of the employee’s duty of loyalty, it would be unethical for an employee to report wrongdoing through a substantively hollow process. The employee must act to minimize harm to the corporation. Though internal disclosure is optimal in the presence of a functioning mechanism, without meaningful application of those policies, external reporting in the first instance may be the ethical choice.
The elements of an effective internal reporting mechanism have been covered in depth elsewhere. Core features include:
Employers are in a unique position to incentivize whistleblowing in a way that is impossible for outsiders. This position gives employers the potential to maintain an ethical imperative to report internally even in the face of potentially overriding duties or rights.
Employees’ duties to their employers compete with the employees’ other interests. From a market perspective, employees act according to their own preferences and self-interest. From an ethical perspective, the employee has countervailing rights and obligations that may override his or her duty of loyalty. For example, an employee has the right to pursue a career, and she may have a duty to support her family.
When in direct conflict, those other interests may totally override the duty of loyalty, so that the employee no longer has the duty to blow the whistle.
In other instances, an employee may resolve the conflicting interests by choosing a different method of blowing the whistle. For instance, if an employee is concerned about her career because she must support her family, the SEC’s and CFTC’s whistleblower programs over employees the option of making anonymous disclosures. The whistleblower need not come forward until it is time to claim at least 10 percent of a million dollars, thereby meeting both the employee’s duty of loyalty and her obligation to provide for her family.
Sense of right and wrong
Though whistleblower rewards are consistent with whistleblowing ethics, many whistleblowers have motivations other than the shot at some faraway jackpot. This is a fundamental assumption about the motivations of whistleblowing because it informs why the ethics of whistleblowing matter in the first place. If whistleblowers in general are not driven at some level by a sense of right and wrong, ethics loses much of its practical appeal.
Further, many whistleblowers would be content merely to not be harmed by their disclosures. Despite this, whistleblowers are commonly reviled by corporate America.7 They often sacrifice their jobs, careers, health, finances, and marriages in their quest to right wrongs. Indeed, a whistleblower is defined by his or her suffering:8
One 1999 study found that two-thirds of whistle- blowers lost their jobs or were forced to retire and were blacklisted from getting another job in their field. Two- thirds of the whistleblowers also had severe financial problems. Eighty-four percent suffered from severe depression or anxiety and more than two-thirds of them also had declining physical health.
Whistleblowers are more akin to martyrs than saints.10 The federal government has decided to offset these costs and incentivize whistleblowing through monetary reward.
This is where corporations can create a unique solution by understanding the ethics of whistleblowing. By addressing the competing rights and duties of its employees,
employers can ensure that nothing detracts from an employee’s ethical obligation to report initially through internal channels. This will have the added consequence of also encouraging whistleblowing generally by removing barriers to taking action in the first place.
Employers should address potentially overriding rights and duties through cultural controls.
Retaliation, for example, can make for a complex motivation. Retaliatory animus can stem from personal bias for the exposed wrongdoer or a perception of shared interests. Nonetheless, the negative perception of blowing the whistle is a baseline factor. The distorted view that whistleblowers are disloyal creates a group-think that derogates those who come forward in ways ranging from insisting on pure motives to punishing the whistleblower with harassment or termination. This is a case where stating the solution is simple but ap- plying it is difficult. Maintaining a culture of compliance will help align internal disclosure mechanisms with appropriate whistleblower incentives.
The Tread way Commission identified the concept in 1987 as “the tone at the top.”11 The commission’s re- port explained: The tone set by top management — the corporate environment or culture within which financial reporting occurs— is the most important factor contributing to the integrity of the financial reporting process. Notwithstanding an impressive set of written rules and procedures, if the tone set by management is lax, fraudulent financial reporting is more likely to occur.12
Though the commission created the tone at the top concept specifically for the financial reporting context, the underlying cultural control has broad applications throughout an organization. Tone at the top has also been characterized as the communication on what is right and what is wrong and how this is embedded in the organization.13 Some consider a whistleblowing policy to be a central aspect of the tone at the top.14 Whistleblower protections limiting the at-will doctrine are recent phenomena. Significant limitations on the at-will doctrine did not appear until the 1960s, and federal protections for private-sector whistleblowing unconnected to discrimination have for the most part developed in the past 25 years.
In practice, loyalty has been a primary principle in American employment for centuries. Because American employment is steeped in a culture of corporate loyalty, some view whistleblowers as “traitors.”
When discussing the termination of a whistleblower who identified cost overruns in a defense program, Nixon White House aide Alexander Butterfield wrote, “Fitzgerald is no doubt a top-notch expert, but he must be given very low marks on loyalty; and loyalty is the name of the game.”16
This view misunderstands to whom the duty of loyalty is owed. Managers’ remuneration is scrupulously negotiated, and it rarely includes subordinates’ fealty. Rather, the employee owes loyalty to the employer, i.e., the corporation in this context.
If senior corporate leadership takes a meaningful view that whistleblowing is to be encouraged as a demonstration of corporate loyalty, two interim effects should obtain. First, once whistleblowing becomes the cultural norm, the probability of retaliation for acting within the norm will be significantly reduced.
Second, transparency and the quality of the internal mechanism should increase. This brings a whistleblower back into the fold by ensuring her that — even if the resolution is not what she would choose — the issue has been meaningfully addressed. Of course setting the tone at the top is not sufficient by itself.
Like wrongdoers themselves, errant managers will arise. Cultural change will require resetting embedded views that exist independent of the organization. Good leadership and communication is necessary, and it must be consistent as leadership changes. The commitment to a culture of compliance requires vigilance.
IBM’s Open Door policy is illustrative both in terms of how to set the proper tone at the top and in the pitfalls that face even the most vaunted culture of compliance. Regardless of its effectiveness in recent years, the Open Door was really a trailblazer. In the 1920s, when the at-will doctrine was still in full force, IBM Chairman Thomas Watson Sr. implemented the program. No law required the policy, but nonetheless, Watson and his son waded through decades of grievances large and small. IBM formalized the Open Door policy during the 1950s.
By personally listening to these grievances, even when they could have been easily resolved at lower management levels, the Watsons set the right tone at the top.
IBM’s Open Door policy began to suffer chinks about 20 years ago. Employees brought a successful suit for age discrimination. The plaintiff’s attorney declared the policy to be a sham.17 That rhetoric may have been hyperbole, but as IBM had grown to hundreds of thousands of employees, meaningful review by the chairman was equally questionable.
A 2009 study showed that the Open Door policy meaning- fully increased procedural justice and equity within IBM. However, the culture of compliance had suffered significantly, thereby losing control of the ethical balance. Respondents in the study perceived that Open Door decision-makers sided with management and that using the Open Door policy hampered the employee’s career.
The study hypothesized that the disconnect in substance and culture resulted from a lack of proper communication between management and employees.
Employers have long argued that employees should first make disclosures of potential wrongdoing internally. They reiterated the argument recently when the U.S. Securities Exchange Commission was drafting rules to implement its new whistleblower program. Though the commission declined to impose the requirement, employers can create an ethical imperative to report internally by addressing employees’ competing interests and ensuring that the internal mechanism is effective. This ethical imperative has significant influence on employees who, as a class, are motivated by a sense of right and wrong.
The moral obligation to blow the whistle arises naturally from the employee’s duty of loyalty to the employer. However, to maintain it, an employer must have an effective internal reporting mechanism. An effective mechanism must not only actually investigate and resolve wrongdoing within the company, but it also must do so in a transparent way.
Additionally, employers can ensure that competing duties do not dictate a different manner of disclosure. Creating a culture of compliance will go far to properly address employees’ competing duties and align them with shareholder expectations.
Endnotes
