From Enron to Lehman Bros.: What Can We Learn From These Corporate Governance Failures? (Introduction)
04/24/2013 | by Lipman, Frederick D.
Lessons for Boards From Recent Corporate Governance Failures
The internal whistleblower policy of organizations is an important internal control. In order for boards to fulfill their oversight obligations, they should have information provided to them by lower-level personnel, in addition to the normal board packages received from the CEO and CFO. Moreover, the CEO and CFO need to establish an effective whistleblower system in order to properly perform their jobs. Nothing is more embarrassing for a CEO than to have a surprise government investigation which might have been avoided with a robust internal whistleblower system.
Most hotlines are ineffective for a variety of reasons which are discussed in full in my article entitled "From Enron to Lehman Brothers: Lesson for Boards from Recent Corporate Governance Failures" and my book entitled "Whitleblowers: Incentives, Disincentives and Protection Strategies", John Wiley & Sons, Inc. (2012).
For example, according to a report by Network, Inc., "2012 Corporate Governance and Compliance Hotline Benchmarking Report", dated July 24, 2012, 48% of whistleblower calls were anonymous, a fact that suggests that many employees fear retaliation. The presence of such a high percentage of anonymous complaints means that the organization has not established a culture which encourages internal whistleblowing. The net result is that employees fear becoming a pariah and either will not provide valuable information to the board or the CEO or will do so only anonymously.
A study of audit committees by James E. Hunton and Jacob M. Rose, "Effects of Anonymous Whistle-Blowing and Perceived Reputation Threats on Investigations of Whistle-Blowing Allegations by Audit Committee Members", 2010, provide fewer resources to investigating anonymous complaints. It is difficult to ask follow-up question to an anonymous source.
According to the 2011 National Business Ethics Survey, only 6% of employees surveyed would use a hotline to report employee misconduct. Most will just report the misconduct to their immediate supervisor, if they report at all. Since a supervisor or the persons the supervisor reports to may be involved in the illegal activity, in many situations the report may never reach the independent directors or the CEO.CATEGORY: Internal Whistleblowing