How to encourage the right kind of whistleblowers

June 15, 2011: 12:15 PM ET

Dodd-Frank critics argue that offering larger payouts for whistleblowers will cause an uptick in financially-motivated tips, but the concerns are misguided.

By Eleanor Bloxham, contributor

SEC headquarters in Washington, D.C.

SEC headquarters in Washington, D.C.

FORTUNE -- Following in the footsteps of other agencies with successful bounty programs like the IRS, the Dodd-Frank Act has required the SEC to implement protections for whistleblowers and payments of what could be large sums for valuable information related to corporate fraud. While the SEC has been offering these protections and rewards since the Dodd-Frank Act's passage, on May 25, the SEC established rules that will govern these procedures going forward.

Today, most companies have internal mechanisms that allow employees to blow the whistle. For these systems to work, however, companies need to understand what motivates employees to report wrongdoing internally. And because of the SEC's new whistle blower program, this is needed now more than ever before.

In response to the new whistleblower requirements, the Greek chorus of Dodd-Frank naysayers stepped forward to lament, "The sky is falling," as is so often the case with each new Dodd-Frank rule requirement.

"Employees will go for the money" the chorus says. "The bounties provide too much of an incentive. Instead of using corporate whistle blower programs, they'll go to the SEC. Employees should be forced to use internal channels first."

Responding to these concerns, the SEC's new procedures will offer individuals even greater sums if they go through internal corporate channels first and lesser sums if they do not, providing added encouragement for internal reporting as a first step.

But is the Greek chorus right? Has the offer of large payouts lead to a big uptick in reports to the SEC?

Since Dodd-Frank's passage, John Nester, SEC spokesperson says the rate of new tips hasn't increased from "the 100 a day the SEC has always received." The quality of the information SEC is receiving, however, has changed for the better, Nester says.

Higher quality information could mean that tips may be coming from individuals with more access to the details of potential wrongdoing, and perhaps people in higher positions of authority within a given company.

Is money the motive? While the Greek chorus may be correct that bounties have an impact, a closer look reveals that this motivation does not apply equally to all whistleblowers.

Recent research by University of San Diego law professor Orly Lobel shows that protections to the whistleblower can be just as, if not more, important than monetary rewards to some employees. Lobel says that, on average, women are more likely to the blow the whistle than men, and for women, small monetary payments will actually "crowd out" their desire to report wrongdoing.

What women do care about (and more than men) are protections if they do decide to blow the whistle; they seek social support, Lobel says. In addition, women prefer to not confront the offender or offenders directly. In other words, safety is an important factor for women considering whether and how to blow the whistle.

For corporations reassessing their internal programs with an eye to making them the first-choice destination for those with relevant information, it is important to understand the range of motivations in detail rather than make blanket assumptions about the impact of monetary rewards.

The new procedures for the whistle blowing program provide a number of assists in encouraging employees to choose internal whistle blowing first, in addition to the added monetary benefits. "The whistleblower who had first reported internally will be considered the first whistleblower who came to the Commission," as long as they subsequently report to the SEC within 120 days, the new rules state. By reporting internally, whistleblowers increase their odds of receiving an award.

All of this is a real win for corporations who want employees to use internal mechanisms to report wrongdoing.

Still, corporations and boards will need to consider the impact of lack of job mobility and worker dissatisfaction in addressing this complex issue.

Regarding SEC matters, the more boards can establish a culture of accountability, particularly at the top, the less employees will view reporting to the SEC as their only alternative to correct the wrongs. (Corporate fraud, the purview of the SEC, often involves actions by individuals at the very top of organizations.)

If there is real, ongoing concern at corporations, watch and see what innovations companies and boards will be making in their corporate cultures from top to bottom. If this is an issue of real concern, corporations will be renewing efforts to do all they can to prevent situations that require whistle blowing in the first place. And they'll be taking actions to ensure that, should a real problem arise, that they know first, can move quickly to address issues, and can self-report to the SEC rather than create incentives for employees to report solely to the SEC instead.

If the Greek chorus' lament is simply talk, expect no action at all.

Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (http://thevaluealliance.com), a board advisory firm.

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About This Author
Eleanor Bloxham
Eleanor Bloxham
Contributor, Fortune

Eleanor Bloxham, an authority on governance and valuation, is CEO of The Value Alliance and Corporate Governance Alliance, an independent board and executive educational and advisory firm she founded in 1999. She is author of the books Value Led Organizations and Economic Value Management: Applications and Techniques, and publisher of the Corporate Governance Alliance Digest and her blog The Bloxham Voice.

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