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January 14, 2020
From: Harvard Business Review By Kyle Welch and Stephen Stubben

Whistleblowing stories are all over the news. Some observers have attributed this to a systemic change in society. There are more stories about whistleblowing, the argument goes, because there are more crimes to report.

However, rather than an increase in criminal activity, we may instead be observing an increase in the willingness of employees to speak up. Consider the dramatic increase in claims of sexual harassment in 2017 as the #MeToo movement gained momentum. Was this a sudden increase in harassment, or an increased willingness to speak up about problems that have been ongoing for years?

Our research on employee whistleblowing, using previously unavailable data, shows for the first time that we may be in the golden age of accountability systems. In 2018, NAVEX Global, the leading provider of employee hotline and incident management systems, provided us secure, anonymized access to more than 2 million internal reports made by employees of more than 1,000 publicly traded U.S. companies.

Our study of the data led us to two important findings: First, whistleblowers are crucial to keeping firms healthy. The average manager seems to take these reports seriously and uses them to learn of and address issues early, before they evolve into larger, more costly problems. We also found that second hand reports are more credible and more valuable, on average, than firsthand reports.

Based on our research we’ve identified three lessons for leaders on effectively managing whistleblower systems.

Lesson 1: More issues reported is a good thing.

Which company would you rather lead — one with more issues reported through internal whistleblowing systems, or one with fewer issues reported?

Our first study found that companies that have more complaints from whistleblower hotlines actually have fewer lawsuits, smaller bills from legal settlements, and fewer fines. Moreover, companies with more internal reports have more positive attributes (e.g. they are more profitable and have better governance practices).

On the surface, most people would assume that companies with more issues being reported are more troubled, but the number of internal reports seems to reflect a positive feedback culture more than the extent of problems occurring within the company. All companies have their share of concerns, but not all companies have a culture where employees feel secure and valued when sharing feedback. We found that on the balance, more reports are a good thing, reflecting greater trust in management by employees and a greater flow of information to management about potential problems.

Internal whistleblowing systems are a tool to see what you otherwise wouldn’t. Not all problems are observable in operations metrics and accounting reports. Daniel Garen, principal at Pivot Point Compliance Management and a former compliance officer at Danaher and Siemens, notes, “Employee hotlines have been the single greatest source for uncovering problems at the organizations I have worked with.”

Those who view a higher number of internal reports as a bad thing have been known to take actions like changing the hotline’s phone number, ignoring reports or retaliating against employees who speak up. “Nothing will destroy a hotline and the culture of compliance in an organization faster than retaliation against good-faith whistleblowers,” Garen explains. Managers who seek to have fewer reports submitted should know that companies with fewer reports actually tend to have worse outcomes in terms of litigation and fines.

The question directors and managers need to ask is not how to lower the number of whistleblowing reports. Instead, savvy managers and directors look at an increased volume of reports and ask, “Does our compliance team have enough resources to investigate these reports?”

Lesson 2: Secondhand reports are more credible and valuable.

Which internal report would you trust more — one submitted by an employee with firsthand information or one submitted by an employee based on secondhand information?

Compliance officers seeking to allocate resources efficiently have developed assumptions about managing and investigating reports. One is to discount secondhand reports. While this might make intuitive sense, our research suggests otherwise. We find that reports based on secondhand information are not only credible, but also more likely to provide information that helps prevent litigation and government fines.

Garen explains this counterintuitive finding, noting, “Secondhand reports are often the most valuable because there is less emotion and bias associated. Even when the claim is not entirely validated, these reports often alert you to issues before they become more serious.”

While a firsthand account of any single event will usually be more reliable, when it comes to internal whistleblowing reports, the types of issues reported firsthand differ from those reported secondhand. Firsthand reports are more likely to identify minor, self-serving claims, such as “My thermostat is broken.” Secondhand reports are more likely to identify critical issues that implicate other employees, such as “I think a co-worker may be embezzling company funds.”

Guidance provided in compliance training manuals is often misinterpreted by those investigating internal reports. For example, guidance from the Society of Corporate Compliance and Ethics (SCCE), the largest and most active compliance officer association, states: “The basis of the witness’ knowledge is always important. You must determine whether the witness is speaking from personal knowledge or just relying on the hearsay statements of others.” Likewise, the form used within the U.S. intelligence community to make internal whistleblowing reports to the Inspector General of the Intelligence Community (ICIG) had stated (through August 2019): “In order to find an urgent concern ‘credible,’ the ICIG must be in possession of reliable, first-hand information.

To be clear, we do not recommend taking decisive action based solely on a secondhand report. When investigating claims, it is important to seek out witnesses and material evidence. However, a secondhand report can be the starting point for an investigation and subsequent response that could not have happened otherwise. Managers who view secondhand reports as not credible tend to under-allocate resources toward investigating these claims, which our empirical results suggest can result in significant consequences.

Lesson 3: Reports with few details can be the starting point for something more

Which internal report is more useful — one with more details provided or one with fewer details?

Finally, a surprising aspect of our second study is that the reports submitted with only a few details end up being particularly useful in avoiding litigation and government fines. Conversations with chief compliance officers revealed that this is something they frequently see. These reports are from employees who want to have a conversation about what they observed but don’t want to submit a document with details. These employees are in effect reaching out to see who will show up and talk to them. When they finally have a personal conversation, they then unload the information.

“There have been cases where a reporter has concerns about their manager, another co-worker or a toxic work environment but their initial report is very scant in details,” explains Kimberly Kaminski, chief ethics officer at BAE Systems Inc. “The reporter is looking for someone they can trust, and when they find that person, they provide a treasure trove of information.”

A manager who focuses resources on investigating reports with the greatest amount of detail may miss out on some of the most important and, ironically, detailed information available.

The key insight is that not all employees utilize internal whistleblowing systems in the same way. Some want to include all they know in the initial report, while others prefer to have a conversion in person. The initial report is just a starting point.

For the 71.5% of reporters who disclose their identity, it is the eventual follow up and conversation that engenders trust, improves communication lines, and provides actionable information to prevent minor issues from becoming larger, most costly problems.

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