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Whistleblowing in the Post-Bailout Age Gets a Technological Boost

October 17, 2008
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Related Topics: Workplace Violence, Internet, Ethics, Safety and Workplace Violence, Featured Article
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The full effect of the $700 billion Wall Street bailout will take months to play out. But one result is already becoming clear: The current financial crisis is renewing scrutiny of corporations’ efforts—or in this case, lack of efforts—to take action on ethical lapses or business practices that violate companies’ stated policies.

    As a result, governance, risk and compliance industry experts expect to see an uptick in interest in corporate ethics reporting systems, once upon a time known as whistleblower hot lines.

    It doesn’t matter that executives at investment banks and mortgage lenders involved in the crisis haven’t yet been accused of violating finance industry or federal regulations. There’s going to be renewed focus on reporting wrongdoing no matter what, says Michael Rasmussen, president of Corporate Integrity, a Waterford, Wisconsin, compliance, risk and governance industry advisory firm.

    "A lot of where we’re at now is because people didn’t follow established policies," Rasmussen says. "Individuals were allowed to run wild and get around policies and get out loans they shouldn’t.

    Whistleblower hot lines have been around for decades. But today’s systems aren’t anything like the old days, when employees called a company-run telephone number to anonymously report a problem.

    Hot lines got a big boost during the early part of the decade, after the Sarbanes-Oxley Act ushered in stricter guidelines for public companies’ accounting practices and board responsibilities. Interest in hot lines climbed even higher after the U.S. Sentencing Commission passed revised guidelines in 2004 and again in 2007 stipulating that companies convicted of fraud or other wrongdoing in federal court could earn lighter sentences if they proved they had whistleblower hot lines and ethics training programs in place.

    Industry experts say two other developments are pushing companies to sign up for the services: a federal product-safety reform bill with stiffer whistleblower regulations that President Bush signed in August and new federal regulations covering defense contractors and subcontractors that takes effect in December.

    At the same time, the Internet has transformed whistleblower hot lines from the telephone-only systems of old. Today’s models are typically a combination of telephone and Web-based systems.

    The majority are run by outside vendors—such as EthicsPoint, Allegiance, Integrity Interactive and ClearView Strategic Partners—that run them with 24/7 call centers. They also promise complete anonymity to employees while providing HR managers or compliance officers sophisticated back-end databases that compile information from calls and Web site entries into reports that can identify problems or pinpoint potential trouble spots.

    In fact, the hot lines can provide such detailed information that some companies are going beyond their intended use and installing them as 21st century suggestion boxes, giving employees yet another channel to provide input on workplace issues, industry sources say.

Companies still offer the bare minimum
   For all the advancements, however, many businesses are content to get by with the bare minimum, according to industry sources. In fact, regardless of regulations, many don’t do anything at all—until they run into trouble, says Roy Snell, CEO of the Society of Corporate Compliance and Ethics, a Minneapolis-based association that represents more than 1,300 corporate compliance professionals. "Most aren’t going out of their way to find these issues," Snell says.

    Compliance industry veterans like Snell aren’t entirely convinced that hot lines, no matter how many bells and whistles they have, are the best way for a company to find out about illegal activities or other problems. Some employees won’t ever log on to a Web site or pick up the phone no matter how easy or anonymous the system is, says Snell, who was a longtime university compliance officer before running the SCCE.

    Instead, Snell recommends the "belt and suspenders" method, giving employees every available opportunity to discuss their concerns. In addition to hot lines, put boxes in the hallways, ask about fraud during annual reviews and bring it up during employees’ exit interviews, he says. "It’s a sensitive issue and everyone is different with regards to what methodology they’re comfortable with reporting an issue," Snell says.

    Another skeptic is Louis Clark, president of the Government Accountability Project, a Washington-based nonprofit that represents employees in whistleblower lawsuits and helped get whistleblower provisions included in the Sarbanes-Oxley Act.

    Clark agrees that whistleblower hot lines are best run by third parties so they’re independent of company executives’ influence. But even the anonymity of a Web-based hot line run by an outside vendor can’t keep companies from tracking a report back to the individual who filed it, Clark says. Very often, whistleblowers are in safety or quality assurance positions anyway, so if they report wrongdoings, it’ll be obvious where the information came from, he says.

    "Much of whistleblowing has to do with people saying, ‘There’s a safety problem here. I know that because I’m the safety officer,’ " Clark says.

    No whistleblower system will ever be perfect, says Rasmussen, the compliance industry analyst. But it beats the alternative, which is having no reporting mechanism at all, he says. And, "If a company takes action against someone for reporting misconduct, the book should be thrown at them," Rasmussen says.

Keeping employees loyal at Yamaha
   While some companies are content with the bare minimum, Yamaha Motor Corp. is among the minority whose executives are counting on a new ethics reporting system to enhance employee loyalty and productivity.

    As the U.S. subsidiary of a Japanese corporation, the Cypress, California, wholesaler of Yamaha-made motorcycles, watercraft and marine engines isn’t obliged to provide a whistleblower system by Sarbanes-Oxley or by a similar regulation for Japanese public companies that recently passed in that country, nicknamed "J-SOX."

    However, Yamaha Motor executives say they’re taking the step anyway to help employees be more engaged on the job. In mid-September, the company signed a deal to use a Web-based ethics reporting system called SilentWhistle from Allegiance Inc. for its 1,000 workers, including 400 professional and administrative employees in California and 600 other workers spread throughout the country.

    Yamaha Motor already has a good relationship with employees, whose average tenure is three times longer than the national average, according to Chris Stehman, the division’s human resources manager. To build on that, the company is introducing SilentWhistle not as a hot line but as a "continuous improvement line," Stehman says.

    Any reports filed through SilentWhistle on financial or HR issues will be filtered to Stehman in the HR department, while suggestions for improvements will go to the company’s internal communications manager. In coming weeks, Stehman says he’s running 14 sessions at three company locations to walk employees through the system. The hot line’s cost, which is priced according to how many employees are covered and what options are included, was "reasonable," although Stehman wouldn’t go into specifics. Other sources put the cost of a Web- and phone-based hot line at about $1 a year per employee, with a minimum of $2,000 for a company with fewer than 500 employees.

    The main reason companies like Yamaha buy into ethics reporting systems is the bottom line, say Chris Cottle, Allegiance’s corporate marketing vice president.

    "You get a 21 percent increase in performance when you move employees from low engagement to high engagement, and things like hot lines and reporting mechanisms increase employee engagement and trust," Cottle says.

    Still, many companies don’t implement ethics reporting systems until they have to.

    That’s what happened at Buca Inc., the publicly traded parent company of Buca di Beppo, a chain of 91 Italian restaurants headquartered in Minneapolis. In September 2007, Buca settled Securities and Exchange Commission charges that it violated securities regulations stemming from irregular accounting practices undertaken by a previous management team before 2004. As part of the settlement, the company’s new management team instituted a variety of changes, including working with the Center for Ethical Business Cultures and installing an ethics reporting system open to employees and vendors.

    "Going through something like this is tough," Buca general counsel Rich Erstad says in a case study published about its ethics reporting system by EthicsPoint. "There are a lot of good people at Buca Inc. and they deserve to move forward in a positive culture that is morally and ethically responsible. We are all very open to communicating our story so that others can learn from it."

    In August, Buca agreed to be acquired by Planet Hollywood International Inc. Attempts to reach the company for comment in this article were not successful.

    For Buca and other companies that use ethics reporting systems, the number of reports received through the system in a given year generally amounts to 0.5 to 1 percent of their total employee base, according to Tom O’Keefe, executive vice president of Portland, Oregon-based EthicsPoint, which has about 1,700 customers, including Buca.

    Which department oversees running an ethics reporting system varies from company to company, say O’Keefe and other sources. Many of the largest businesses have compliance departments that take on the job. Others run it through legal or audit departments.

    But inevitably, HR is involved at some level, says Kevin Crimmins, a vice president at Integrity Interactive, a Waltham, Massachusetts-based ethics training and systems vendor. HR "can be very influential. They’re accessible to everyone and they’re generally trusted and trustworthy individuals," Crimmins says. That trust is important, he says, because "part of the challenge of any ethics program is to establish that level of trust and ensure there’s no retaliation if someone buys into the company’s program."

Expanding reporting
   In the future, corporate ethics experts say companies could expand how they’re using ethics hot lines even more. One trend that Rasmussen, the ethics industry analyst, sees developing is that companies could open hot lines to their business partners, especially suppliers and contract manufacturers. One of his clients, a large food chain, is already looking into how employees in its suppliers’ factories could report misconduct, Rasmussen says.

    Companies are also starting to use hot lines to self-monitor corporate social responsibility programs, Rasmussen says. While 98 out of the Fortune Global 100 companies have corporate responsibility programs, many aren’t validated or audited by any outside parties. Using hot lines could "put more meat into what they’re doing," he says.

    In the short term, however, look for the Wall Street meltdown to be the most significant influence driving companies to ethics reporting systems, says Cottle, the Allegiance vice president. The events of recent weeks "may be a clarion call to other companies to be a cause for change," he says.

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