A recent poll indicates that more than a third of Americans say they have firsthand knowledge of misconduct at their workplaces.
So why aren't they reporting it? The same poll says that most of them would, but only under certain circumstances. According to the survey conducted by law firm Labaton Sucharow of 1,007 adults, 78 percent of the respondents said they would report wrongdoing if it could be done anonymously, without retaliation, and would result in a monetary reward.
That could be bad news for compliance departments for several reasons. First, since the only monetary award available to most employees for blowing the whistle is from the Securities and Exchange Commission's whistleblower office— which began offering rewards for tips that lead to penalties of more than $1 million when it opened its doors last July—it could point to an increase in employees bypassing internal hotlines for the SEC. Companies fear that when employees bring their concerns straight to the SEC, it deprives them of the chance to investigate them internally first, and potentially fix the problems before they grow larger. Worse still, it puts them in a position of having to demonstrate to the SEC why a claim may not have merit.
Second, the survey results suggest that a large portion of compliance and ethics problems go unreported. “The relatively large percentage of participants, at least according to the survey, who said they have firsthand information of misconduct in the workplace is alarming,” says John Walsh, a partner at law firm Sutherland Asbill & Brennan and a former acting director at the SEC's Office of Compliance Inspections and Examinations. “This is a compliance professional's nightmare. It is a fairly scary result.”
The survey suggests that many employees remain tight-lipped on misconduct, says Jordan Thomas, a partner and chair of Labaton Sucharow's whistleblower representation practice.
Thomas says if organizations want to increase internal reporting, they would be wise to incorporate or emphasize these aspects of their programs. “Failure to do so will likely result in their employees reporting possible securities violations externally to the SEC,” he adds.
That is, if they knew about the SEC's whistleblower program, and, according to the survey, most don't. More than two-thirds of respondents said they were unaware of the SEC's whistleblower program launched last year.
Lawyers specializing in the whistleblower practice agree that the survey can only lead to one likely conclusion: We can expect more Whistleblower cases to be filed with the SEC as employees become more familiar with the Commission's protection and bounty program offered to tipsters.
Some say that will happen once headlines start surfacing of large payouts by the SEC to whistleblowers. “The SEC's Whistleblower Program is young, and the SEC is continuing to make efforts to raise awareness of its function and capacity. I expect the numbers of individuals who are aware of the program to increase quite a bit when bounties are issued; bounties should garner media and other attention,” says Steven Pearlman, partner and co-chair of the Sarbanes-Oxley Act whistleblower team at law firm Seyfarth Shaw.
“Many corporations should reconsider their policies and practices regarding communicating with those who reported misconducts to them. Failure to do so may lead to unnecessary whistleblower submissions to the SEC.”
—Jordan Thomas,
Partner,
Labaton Sucharow
As of Jan. 6, the SEC's Office of the Whistleblower had published a total of 202 covered action notices, which can potentially lead to monetary awards for tipsters. Thomas warns that compliance officers have to realize that the window to establish an effective and trustworthy internal reporting system is going to close if their employees do not trust the existing system and they become familiar with the SEC's whistleblower program. “If companies have an effective and trustworthy reporting system, the majority of their employees will report internally. If they don't, their employees will report externally,” he says.
Pearlman says compliance officers need to realize that the SEC has substantial resources available to them to handle the influx of tips obtained from whistleblowers once the program gains traction. “The SEC is poised and equipped to deal with the influx of tips,” he says. He adds companies should start evaluating and identifying shortcomings in their internal whistleblower programs in anticipation of what is to come.
If you look at the number of tips the SEC has reported receiving, almost 48 a week, and you compare it to the number of people in the survey who said they have witnessed wrongdoing, to the extent the survey is valid, there are a lot of issues out there to be reported, says Walsh. “Compliance officers should be concerned,” he adds.
Haves and Have-Nots
When analyzing the state of current internal whistleblower programs already implemented by companies, lawyers say there are two typical groups of companies that they have observed.
Walsh says at the high end of the spectrum, some companies are taking their whistleblower programs seriously. These are the companies that undertake creative steps to make employees aware of and utilize the hotlines provided while creating the culture to encourage employees to speak up if they know of wrongdoings taking place within a company. These companies generally deliver on the promise that employees will remain anonymous and will not be retaliated against, two of the three conditions reported in the survey.
KEY FINDINGS
The following excerpt highlights key findings of Labaton Sucharow's Ethics and Action Survey:
A significant number of Americans have observed or had firsthand knowledge of wrongdoing in the workplace.
More than one-third of Americans surveyed (34 percent) reported that they have observed or had firsthand knowledge of misconduct in the workplace.
Where respondents reside had a notable impact on their observation of wrongdoing at work. For
instance, 29 percent of Americans living in the Northeast have observed or have direct knowledge of
misconduct in their workplace, whereas that number increases to 37 percent for those living in the Western
US. Along similar lines, 41 percent of respondents living in non-metro areas, compared to 32 percent in metro
areas, had knowledge of misconduct at work.
Concerning income, 49 percent of respondents with annual household income1 between $75,000-$100,000 reported that had observed, or had knowledge of, misconduct at work. Interestingly, this percentage dropped to 29 percent for those respondents with a household income above $100,000.
37 percent of White/Caucasian respondents said they have observed or had knowledge of wrongdoing in the workplace, while that figure dropped to 33 percent for Black/African-American respondents and 22 percent of Hispanic respondents.
Respondents' level of education also factored into their knowledge of workplace wrongdoing. While
29 percent of high school graduates had knowledge of wrongdoing, that figure jumped to 42 percent for those Americans who had some level of college education.
Source: Labaton Sucharow.
“Simply saying you have a hotline and doing nothing more would be at the low end,” he says Walsh.
Pearlman says the most widespread shortfall he has observed within companies' whistleblower programs is the lack of processes in place to handle whistleblower complaints. “Most companies have sophisticated internal compliance programs, but they are not equipped with processes that will account for certain dynamics or risks in dealing with these complaints,” he says.
Whistleblower lawyers say it's important for companies to do a better job of coordinating across departments when handling whistleblower tips. “You have to make the whistleblower be aware that all divisions are working to handle the reported case appropriately,” says Pearlman.
They also urge companies to reevaluate their policies and practices when communicating with whistleblowers. “Many corporations should reconsider their policies and practices regarding communicating with those who reported misconducts to them. Failure to do so may lead to unnecessary whistleblower submissions to the SEC,” says Thomas.
Unlike the SEC's program, companies generally do not offer monetary awards to employees who choose to file complaints internally first. While many continue to debate the pros and cons of adding the bounty feature to internal compliance programs, lawyers say there are other methods to circumvent the negative impacts tied to writing checks to whistleblowers.
Thomas says companies should start thinking of awards in a different light. “Awards don't have to be large or monetary in nature. They can be positive recognition in any manner,” he says. A “thank you” call from a senior executive, a mention in the monthly newsletter (for employees who don't wish to remain anonymous, of course), or an end-of-year award are all effective methods to strengthen employee confidence in their compliance programs.
To encourage employees to report wrongdoings internally, employers have to understand that they need to give some form of assurance to employees that they are protected. “Treat whistleblowers like assets who have helped you. Give them some form of recognition like a letter, and be transparent with the employees by telling them that investigations are being carried out based on their complaints,” says Pearlman. He adds that compliance officer should ensure that all employees know that the compliance department is a safe haven for whistleblowers.
Realize that an effective compliance program is more than just policies and procedures. “It goes to the ethical culture of the organization. If an organization can establish a sense of stewardship and personal accountability, their employees will be less likely to engage in misconduct and wrongdoing will be reported,” says Thomas.
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