About the Author
Kyle Welch is an assistant professor of accountancy at The George Washington University School of Business.
April 16, 2020
Despite its negative connotations, whistleblowing is simply reporting a problem. But it’s increasingly clear that strong internal systems that allow and encourage employees to report internally are integral to root out problems, create strong cultures and protect employees. If such a system is not in place, or if it’s underused, problems will go unaddressed – prompting employees to then report their problems externally. That can ruin reputations, end careers and topple businesses.
Additionally, we’re learning that information organizations receive from secondhand reporters is more valuable – and more credible – than we thought in the past.
Debunking Conventional Whistleblowing Thinking
These conclusions were derived from data from NAVEX Global, the world’s largest provider of internal whistleblower systems. University of Utah Professor Stephen Stubben and I were granted limited, secure access to the company’s EthicsPoint Incident Management system, allowing analysis of anonymized hotline reports from between 2004 and 2017 of roughly 5,000 public companies, more than half of which were of the Fortune 500. In addition, the Corporate Research Project of Good Jobs First provided us access to data on government fines.
We found that higher hotline volume correlated with greater profitability and workforce productivity as measured by Return on Assets (ROA); fewer material lawsuits brought against the company overall and lower settlement costs if a lawsuit does occur; and fewer external whistleblower reports to regulatory agencies and other authorities.
This sets conventional wisdom – that more reports meant more problems – on its head. A more active hotline is actually a sign of employees who feel comfortable coming forward and trust their concerns will be addressed because of their organization’s strong culture.
Why Higher Hotline Use is a Good Thing
Internal hotline systems provide employees a confidential way to flag issues, which allows for management to take care of problems that are difficult to root out in traditional monitoring. This also allows issues to be resolved before they become more expensive or known outside of the organization.
As noted here, there are also productivity issues at play. Using ROA as measurement, we found that companies that more actively used their hotline systems (i.e., reviewed reports more frequently) had small but significant improvement increase in ROA as opposed to companies with lower utilization.
Further, healthy companies are comprised of happy employees, which is achieved when managers can access important concerns through internal reports. Dissatisfied employees and internal strife, on the other hand, can quickly lead to lawsuits and negative press, deteriorating the overall health of any business.
Hotlines’ Correlation with Headlines and Lawsuits
We also studied the connection between hotline volume and the number of material lawsuits filed against companies. Companies whose management fully utilized its internal reporting systems to address reported issues (such as financial reporting improprieties, harassment of employees or workplace safety) had fewer lawsuits. In fact, companies with higher levels of reporting were subject to 6.9-percent fewer pending material lawsuits in the subsequent three years than companies with lower levels of hotline use. And, in the event of lawsuit being brought against a company, those with higher hotline usage faced 20.4-percent less in total settlement amounts.
Companies with increased hotline usage were also shown to have fewer external whistleblower reports to the Occupation Health & Safety Administration. And there was also a connection between hotline usage and media coverage. We compared hotline data with reporting in the financial and business press, finding that firms that actively used their hotlines received on average, 46-percent fewer negative news stories than businesses with low or less frequent internal reporting use.
We went a step further and looked at instances where regulatory action came in response to the media attention driven by a whistleblower report. There was a clear negative association between more hotline usage and the fines imposed by federal and state regulators. The data also showed that even a modest increase in internal reporting activity could result in up to $8 million in savings.
Debunking Conventional Whistleblowing Thinking (Again)
As we continued our research, we unearthed something else that rejected conventional thinking – this time regarding the comparative value of first and secondhand reports.
Of the two, it had typically been assumed that secondhand information was less reliable. But after analyzing more than two million reports in NAVEX Global’s data, we found that secondhand reports are 47.7-percent more likely than firsthand reports to be substantiated by management. In other words, secondhand reports were more credible than firsthand reports.
In addition to flying in the face of conventional wisdom, this was in direct contradiction to some scientific thinking (from psychology labs). We reached out to some smart chief compliance officers for help interpreting this data, and they weren’t surprised. They pointed to two primary reasons for the credibility of secondhand reports as compared to firsthand.
Firsthand reports are more likely to be frivolous and occasionally personally motivated. Secondhand reporters who decide to come forward usually do so after doing a sort of first round of vetting of the situation themselves. Additionally, many valid firsthand reports are never made because those affected sometimes fear retaliation or blowback. This is less of a concern for secondhand reporters.
More about the Value of Secondhand Reports
Higher volume of secondhand reports from employees negatively correspond to fewer lawsuits and lower legal settlements in the following year. And secondhand reports from individuals outside the organization are negatively associated with the number and dollar amounts of government fines in subsequent years.
We didn’t find the same correlation with firsthand reports. But none of this is to say that firsthand reports aren’t also valuable. It should be noted that firsthand accounts in a vacuum (i.e., two reports about the same event) are likely more accurate about the specific event. But the social dynamics that prompt someone to report to a company’s whistleblower hotline – or what discourages them from doing so – means that whistleblowing is an entirely different animal.
No Doubt about the Value of Hotline Reporting
Whether it’s about how higher hotline volume helps companies or how we should re-evaluate the value of secondhand reporting, one thing’s clear based on our research: Companies with fully implemented, actively advertised and widely used internal reporting systems benefit from a direct line of communication with their employees in more ways than one, positioning them to more quickly identify and rectify problems before they become larger and more costly.
The results of the analyses we’ve conducted provide compliance officers and corporate leaders with compelling further evidence of why a healthy, well-designed hotline system is paramount for the wellbeing and longevity of any multifaceted organization. Amid an always-evolving compliance landscape, these are lessons organizations need to take to heart.