Time & Attendance
By Susan Ladika
Apr. 2, 2012
As a vice president in the consumer lending division at Citigroup, Richard Bowen III knew something was seriously amiss with the quality of many mortgages his company was buying from other lenders.
Bowen had been promoted to his new position in 2006 and immediately started raising the red flag to superiors, highlighting the problem in emails, weekly reports and presentations. Instead of anyone taking action, “it got worse; it didn’t get better,” he recalls.
He sent an email detailing his concerns to the board of directors. “That was my hail Mary attempt.”
Shortly afterward, his job duties were curtailed, and “I really wasn’t with the organization physically much longer after that,” he says.
Bowen’s experience isn’t uncommon for those who blow the whistle on corporate wrongdoing. In the 2011 National Business Ethics Survey, conducted by the not-for-profit Ethics Resource Center, nearly one-quarter of whistle-blowers reported that they had experienced retaliation—a percentage that has increased over the years.
While many organizations say they’re very worried about whistle-blowers, they also admit they aren’t adequately prepared to deal with them.
And that should be a major concern as whistle-blower protections are extended to encompass more industries, and a new rule allows employees to collect a healthy financial reward if they report certain infractions to the U.S. Securities and Exchange Commission and the claims are substantiated.
The financial incentives in the Dodd-Frank Wall Street Reform and Consumer Protection Act, which took effect last year, “could have huge consequences to businesses,” says Earl “Chip” Jones, a shareholder in the corporate ethics and compliance and whistle-blowing and retaliation practices of the national law firm Littler Mendelson.
Under the act, if sanctions against a corporation top $1 million, the whistle-blower can receive between 10 and 30 percent of the money collected in actions brought by the SEC, and from related actions brought by law enforcement or other regulatory agencies.
The act also prohibits employers from retaliating against employees who provide information to the SEC’s Office of the Whistleblower about possible violations.
Along with the financial and legal ramifications, allowing whistle-blower complaints to percolate in public—rather than handling them in-house—can damage a company’s reputation, alienate current and prospective employees, and chase away customers, says Christina Stovall, director of the Human Resource Service Center for the human resources outsourcing firm Odyssey One Source Inc., in Euless, Texas.
Experts say it comes down to creating a culture where employees feel safe to come forward when they witness illegal or unethical behavior, and making sure they’re treated like heroes rather than outcasts.
If that doesn’t happen, workers may take their concerns outside the organization, which can result in a thunderstorm of bad publicity and government scrutiny.
In fact, in just seven weeks last year—between Aug. 12, when the Dodd-Frank Act took effect, and the Sept. 30 end of the federal government’s fiscal year, the Office of the Whistleblower received 334 whistle-blower tips.
Market manipulation, corporate disclosures and financial statements, and offering fraud, each generated more than 15 percent of the complaints.
When a whistle-blower goes outside the organization, “it usually means there’s a pretty hostile” corporate culture, says David Gebler, president of the Skout Group, based in Sharon, Massachusetts, which helps companies manage their organizational culture.
Whistle-blower laws first applied to those working for the federal government, but have been expanded over the years. The Sarbanes-Oxley Act broadened whistle-blower protections in 2002 to include those who work for publicly traded companies, their contractors, subcontractors, agents or subsidiaries, as well as companies that are required to file certain SEC reports.
Sarbanes-Oxley was amended in 2010 with the Dodd-Frank Wall Street Reform and Consumer Protection Act. That expanded whistle-blower protections to include “nationally recognized statistical rating organizations,” which the SEC describes as credit rating agencies.
The law also provides the new financial incentives for whistle-blowers, and the amount can be higher if an employee reported the violation both internally and to the Office of the Whistleblower.
The Occupational Safety & Health Administration now oversees the whistle-blower protection provisions of 21 statutes, covering such fields as consumer products, the environment, food safety, health care reform and securities laws.
OSHA considers such measures as firing or laying off an employee, demotion, withholding a promotion, intimidation, a reduction in pay and a host of other actions as retaliation.
Because of whistle-blower laws, it’s incumbent upon employers to have a “robust and responsive internal compliance program,” says R. Scott Oswald, a managing principal of the Employee Law Group law firm in Washington, D.C. Oswald says he has handled dozens of whistle-blower cases.
“Employees don’t want to become whistle-blowers. They have families to support, careers to maintain,” Oswald says. They typically turn to a lawyer when they feel like their concerns are being ignored or they’ve suffered retaliation, he says.
The percentage of employees reporting that they witnessed misconduct at work fell to 45 percent last year, the Business Ethics Survey found. That’s down from 49 percent in 2009 and 55 percent in 2007 in the biennial survey. Nearly 4,700 employees in the for-profit sector were interviewed. On the flip side, reported retaliation against whistle-blowers jumped to 22 percent, compared with 15 percent in 2009 and 12 percent in 2007.
Jones of Littler Mendelson says ethical misconduct tends to track the economy, so there’s more bad behavior when times are good, and less bad behavior when things are tough. In a down economy, “there’s not as much reward for taking risks.”
In some cases, illegal behavior is ingrained in a corporation. Janet Near, chair of the Department of Management and Entrepreneurship at Indiana University’s Kelley School of Business in Bloomington holds Enron Corp. up as an example. In such cases, an organization “can’t afford to change things. It needs the wrongdoing. It could be critical for the firm’s survival.”
Julie Ragatz, an assistant professor of ethics at the American College in Bryn Mawr, Pennsylvania, is also director of the college’s Center for Ethics in Financial Services—the country’s only academic ethics center focused solely on the financial services industry. Her students work at major financial firms, and ethical issues receive much attention in the classroom. Ragatz has found that whether employees blow the whistle to outside authorities depends on how bad the situation is, the harm the infraction can cause and whether they believe it will be addressed internally.
The story of former Citigroup executive Bowen, who is now senior lecturer in accounting and finance in the School of Management at the University of Texas at Dallas, is a prime case in point. He was still working with Citigroup when he turned over more than 1,000 pages of documents to the SEC. He later was asked to testify at the congressional Financial Crisis Inquiry Commission in 2010.
While many corporations have policies against discrimination and harassment because of age, race and gender, they are less likely to have ethics policies, Odyssey One Source’s Stovall says. If they have a policy, they “need to follow it or it’s not worth the paper it’s written on.”
In a survey last year of more than 50 senior legal, compliance and HR executives at publicly traded or highly regulated companies, Littler Mendelson found that 96 percent of respondents were very or moderately concerned about potential whistle-blower claims.
Yet only 65 percent said their companies were moderately prepared to deal with whistle-blower claims, and a little more than half said management understood the concept of unlawful retaliation. A majority planned to hold training sessions on the topic.
Nancy Florey, associate vice president for human resources at Elizabethtown (Pennsylvania) College, says the college developed a whistle-blower policy about two years ago at the advice of its lawyers. The college had standards of conduct, but decided to draw up a specific policy addressing whistle-blowers. A session is in the works to train employees on the standards of conduct and whistle-blower policies.
The college wanted a policy that would address business and financial misconduct, such as theft, falsification of records and kickbacks, she says, and is designed “to create a safe environment for whistle-blowers to come forth.”
The school has about 700 full- and part-time employees, and any complaints are funneled to Florey or the college president for investigation.
Because the college is based on the values of peace, social justice and nonviolence, “it’s what we try to live by day-to-day in the work environment,” Florey says.
Along with having strong policies in place, an organization must embrace whistle-blowers. If employees “see intolerance for people who come forward, that will spread throughout the organization like wildfire,” Jones says.
An organization should respond swiftly, maintain the employee’s confidentiality while investigating the complaint, explain to the whistle-blower whatever decision is made, and the remediation that will occur, Oswald says.
Whistle-blowers should be “treated as heroes, not pariahs,” says Luis Ramos, CEO of the Network Inc., based in Atlanta, which provides corporations with governance, risk and compliance solutions.
Otherwise, employees are more likely to turn to the government or the media, Ramos says.
The Dodd-Frank Act allows whistle-blowers to go directly to federal court if they believe they are suffering retaliation, Ramos says. Previously, they had to take their complaints to OSHA. And the time frame for filing a retaliation complaint has doubled, from 90 to 180 days.
If someone comes forward with a concern, it’s critical for managers to treat the individual as they always have, Jones says. There are occasions where an employee who has true performance issues will try to use whistle-blower protections to save his or her job, Jones says. “If they truly are bad performers, you suddenly can’t enforce policies you’ve ignored in the past.”
Indiana University’s Near, who has conducted extensive research on whistle-blowers for three decades, has found the vast majority report the problem internally first, then go outside the organization if nothing is done.
From interviewing whistle-blowers, Near says many “seem to be a little naive.” They often think their employer will be pleased that they reported misconduct. In reality, they “make the boss’ life more difficult.”
Many people that Near has interviewed have been victims of retaliation, and she cautions potential whistle-blowers to consult with a lawyer before taking action.
About 80 percent of those who turn to a lawyer have suffered retaliation and are seeking job protection, Oswald says. The others are motivated by the reward money.
Perhaps surprisingly, Bowen is no fan of the Dodd-Frank Act. He is concerned that employees are rewarded for circumventing internal reporting mechanisms. And for corporations, the act “doesn’t just raise the bar, it put it in the stratosphere, I think, to the detriment of industry in general.”
As knowledge about whistle-blower laws has spread, Oswald sees more people seeking legal advice. In some cases, employers have tried to lump whistle-blowers into legitimate decreases in their workforce in order to get rid of problem employees.
Despite legal protections, “more employers act with what is perceived as impunity,” he says.
Often, whistle-blower complaints stem from an organization’s culture. Employees need to have a sense of commitment and feel like they’re part of a team, Gebler says. If the focus is on meeting numbers and employees feel alienated and disengaged, there’s a greater risk they’ll go outside of the organization to complain.
Most want a transparent environment where they can speak up and raise concerns. “I’m amazed at how completely repressed people are,” says Skout Group’s Gebler.
The Network pioneered whistle-blower hot lines in the 1980s, and Ramos says hot lines let organizations “bypass malfeasance in the chain of command.”
Dana Gold, senior fellow at the not-for-profit Government Accountability Project, which supports whistle-blowers, says creating an environment where workers feel safe to speak up “is the best way to prevent problems.” But, in many cases, organizations find it “more expedient to shoot the messenger,” she says.
The “formal” corporate culture may deliver one message but the “informal” culture clues employees in to how things really are, American College’s Ragatz says, indicating what behaviors are encouraged or sanctioned.
Stories and narratives form a culture, and it helps if managers tell stories about their own experiences dealing with whistle-blowers. While they may not be able to disclose specifics of an incident, they can describe what happened and how it was handled, Ragatz says.
“Whistle-blowing is the ultimate culture issue,” she says. “It’s trust between workers and employees.”
Students in Bowen’s classes often have plenty of questions about whistle-blowing. He tells them: “There’s nothing wrong with raising your hand and asking the question” if something doesn’t seem right. “Many, many times the employee doesn’t have the whole picture.”
However, he says, “if you get the distinct impression your questions are not really welcome, this is where you really need to think about it.”
Bowen adds, “I have absolutely no regrets with regard to what I did.” He tells students, “You don’t have to throw yourself on that grenade. There certainly will be repercussions—on you, your family, even on your ability to make your mortgage payment. It can even have impacts on your health.”
Susan Ladika is a freelance writer based in Tampa, Florida. To comment, email firstname.lastname@example.org.
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