When people hear the word “whistle-blower,” they think of a lone person doing the right thing in a company, firm or institution where there’s some sort of rampant corruption going on that only a sheriff in a white hat can fix.
But it doesn’t have to be that way. What if whistle-blowers were embraced as part of a prudent compliance culture in a company that is actually well run?
That’s the kind of company studied by researchers at George Washington University.
Their effor resulted in a report called “Evidence on the Use and Efficacy of Internal Whistle-blowing Systems,” which details a positive relationship between internal reporting and business performance.
According to Kyle Welch, the lead researcher on the study and an assistant professor of accountancy at George Washington University, companies that have systems in place to let individuals raise red flags have more responsive managements and are better at dealing with problems that may arise.
On the contrary, when the whistle-blowers are reaching outside the company for help, said Welch, it’s a sign that a company has more problems coming down the pike.
“Internal whistle-blowing is a completely different concept,” Welch says, in which “reports are made directly to people most capable of fixing the problem—and, instead of indicating future problems, it really means that management is more actively seeking feedback from employees.”
Welch pointed to the collapse of Lehman Brothers at the onset of the global financial crisis in 2008 as an example of a failed internal reporting system.
“They had a whistle-blower system, but material was being withheld from the board of directors,” said Welch. “They had a source of exogenous information in their Ernst & Young audits, but there were issues with the way those audits were conducted. The person who reported the issues was fired and the directors weren’t able to respond to the issues he had raised.”
The study suggests that there’s more at stake than running afoul of regulators. Companies with more active whistle-blower hotlines can reap competitive benefits as well: greater productivity and profitability in return on assets. It may be that strong, successful companies encourage their internal dissenters. Well-run companies, especially larger ones, likely already have a process in place encouraging employees to speak up more, Welch said.