If senior leaders in your organization think of your internal hotline system as a dreaded chore, they need to think again. Analysis of nearly two million internal reports by two university professors found a significant correlation: An effective whistleblower system is good for the bottom line.
The study — Evidence on the Use and Efficacy of Internal Whistleblowing Systems (PDF) — examined reports submitted to more than 1,000 publicly traded U.S. firms. Specifically, the study found that when employees are comfortable using whistleblower systems and when management is responsive to those reports, firms are typically more profitable.
While it may seem counterintuitive, higher reporting volume is also associated with fewer and lower government fines. In successful firms, internal whistleblower reports are seen as a resource, a deterrent for inappropriate behavior, and a means to help management identify and address concerns before they become costly.
According to George Washington University's Kyle Welch and University of Utah's Stephen Stubben:
Firms experiencing rapid growth, with evidence of earnings management, with weaker corporate governance, and with weaker internal controls are less likely to actively use their internal WB [whistleblower] systems. Further, we find that more active use of internal WB systems is associated with fewer material lawsuits being filed against the firm and smaller settlement amounts.
In essence, an effective anonymous reporting system is not only fundamental to a positive organizational culture, it also has a positive impact direct to the bottom line. Additionally, by providing employees a secure, anonymous means to report issues, an internal whistleblower system can serve as an early warning system and enable management to identify problems difficult to discover via traditional methods.
Whistleblower systems have been required for publicly traded firms in the U.S. since the Sarbanes-Oxley Act of 2002 was enacted, but it has not been known if systems were created on paper only, frequently used, or if they only dealt with Sarbanes-Oxley issues. The study revealed substantial variation in their use.
An effective whistleblower system also can go a long way toward mitigating penalties if things do go wrong. In April, the U.S. Department of Justice Criminal Division released guidance to help prosecutors decide on the effectiveness of a corporation's compliance system.
One of the hallmarks of a well-designed system, according to the guidance, is "the existence of an efficient and trusted mechanism by which employees can anonymously or confidentially report allegations of a breach of the company's code of conduct, company policies, or suspected or actual misconduct." Prosecutors should assess if the complaint-handling process is proactive to eliminate fear of retaliation and protect whistleblowers, the document goes on to say.
This is further evidence that internal audit must wholeheartedly support anonymous whistleblower systems. Seize the opportunity to educate management and the board so they understand the importance and value of a whistleblower system. Then, work with management and the board to set up a system based on established best practices.
Other studies have clearly shown the many reasons hotlines aren't effective — complaints are not taken seriously, investigations are poorly executed, and/or management doesn't make changes to address the underlying root causes. For example, hotline calls too often are dismissed because the person calling is classified as "clearly disgruntled." Isn't the fact that an employee is willing to call the hotline a red flag that something is not right?
Take steps to make your hotline succeed. Help your organization set the right tone at the top, promote an ethical culture, provide ongoing training to employees, and assure sound policies and procedures are in place — particularly a strong anti-retaliation policy.
Mostly, be an advocate for those courageous enough to call the hotline. Don't let them get brushed off as "disgruntled." Instead, recognize the value, both culturally and ultimately financially, that each call represents. The time you spend setting up and operating a whistleblower system may seem like extra work, especially the commitment necessary to perform proper investigations, but it will pay off — literally.
That's my point of view. I'd be happy to hear yours.