Research: Whistleblowers an indicator of company health

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It may seem counter-intuitive, but the results of a recent survey seem to show that higher levels of whistleblower system activity suggests a healthier workplace culture – or at least one that helps management identify concerns before they go public…

The report, entitled Evidence on the Use and Efficacy of Internal Whistleblowing Systems, says that there is a clear association between the presence of a internal hotline reporting system and overall improved business performance.

According to the research – conducted by George Washington University using data from software maker Navex Global – a company’s “increased use of their internal reporting hotline” is positively correlated with:

  • Greater profitability and workforce productivity (as measured by Return on Assets)
  • Fewer lawsuits brought against the company overall (and lower settlement costs if a lawsuit does occur)
  • Fewer external whistleblower reports to regulatory agencies and other authorities

Simply put, the healthy use of internal reporting tools seems to correlate with healthy company culture.

The report says that whereas external complaints, such as whistleblower disclosures to public bodies and media, often reflect a “failure of management to address issues internally”, higher levels of internal reporting seem to indicate more “open communication channels” between employees and management.

“The results are consistent with the idea that internal whistleblowing systems can be a tool within firms for discovering and resolving issues before they become increasingly severe and costly,” says the report.

“Specifically, the active use of internal whistleblower systems is associated with fewer lawsuits on issues ranging from financial reporting improprieties to sexual harassment. These favorable associations contrast sharply with negative outcomes associated with external whistleblowers.”

By providing employees a secure, anonymous means to report issues “an internal whistleblower system enables management to identify problems difficult to discover via traditional reporting and monitoring.”

Other findings from the report show that “the absence of hotline activity” is often associated with suspect corporate governance or financial reporting practices and that companies with lower levels of hotline activity rated more poorly on the Bebchuk Entrenchment Index (which reflects good governance practices such as staggered boards, limited shareholder rights, and golden parachute payments for senior executives – all of which correlate to lower firm valuations).

The implications of the report should be a call to action for boards and executives, say the researchers.

“Our conclusions are in many ways counterintuitive to how many executives manage complaints,” says researchers Stephen Stubben and Kyle Welch, writing for the Harvard Business Review“Many companies continue to ignore – or misuse – whistleblower hotlines, and most don’t know what make of the information that is provided through them.”

“Even when firms want to support whistleblowers, managers don’t know what to make of reported level of internal reports.”

“Report It Now’s whistleblowing hotline has provided our employees with a secure, independent system where they can report unethical behaviour. In an industry where fraudulent activity can occur, their service has saved us thousands of dollars over the years.”

Restaurant Brands NZ Limited

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