PARTNER EXPERIENCE A NEW ERA FOR WHISTLEBLOWING BUT WHY IS IT INCREASINGLY IMPORTANT?

Anamaria DIACONESCU Marketing Director www. tgs-romania.com

Executive Summary

There is a saying “What you don’t know won’t hurt you”. In the game of risk management, what you don’t know is your greatest vulnerability.

Whistleblowing is growing in importance as a corporate governance mechanism, while it is increasingly recognized as a key internal control mechanism. Whistleblowing is a term used to describe an act whereby wrongdoing is exposed. It gained impetus following the collapse of Enron in 2001 arising from financial reporting fraud, which culminated in Time magazine selecting three whistleblowers as its Person of the Year in 2002.

The proper management of corporate whistleblowing is an increasingly important issue globally, so much so that the European Union has adopted a directive to make such systems mandatory.

For now, companies with more than 250 employees must apply the rules in the first round, while companies with 50250 employees have until December 2023 to comply with the legislation. The Directive, transposed in the Romanian legislation under the Law 361/2022, requires common minimum standards to be set for whistleblowers, specifies the precise scope of application, the persons to whom, the matters to be covered and the circumstances in which whistleblowing, even anonymous whistleblowing, should be provided, and requires that whistleblowers are protected by ensuring that appropriate whistleblowing channels are in place and operated.

On the face of it, this is another challenge for companies, but it is in everyone’s interest to have a properly functioning mechanism for reporting wrongdoing that can reduce the damage caused by unpleasant incidents.

Questions remain as to the efficacy of whistleblowing: Is it a substantive or symbolic mechanism of governance?

For being a meaningful component of corporate governance and not just a tick in the box, whistleblowing should:

• Meet the benefits of a correct implementation.

• Be properly defined in the Policy and Procedures of the company.

• Be constantly promoted by the management, with the right tone of voice and consistent training on all levels, starting with the awareness phase and continuing with the implementation per se.

Why is whistleblowing beneficial for an organization?

Helps combat fraud

When fraud flourishes within an organization, it will be damaging, with businesses struggling to recover from the financial and reputational effects it creates. By encouraging whistleblowing, the company can find out about it happening before it gets out of hand. This will help it maintain good relationships with suppliers, clients and shareholders and limit any fallout.

In the recent case of a German pharmacy, for example, the owner was diluting doses of cancer medicine and reclassifying expired drugs. It transpired that he had committed fraud in at least 60,000 cases, leading to him overcharging health insurance companies by €17 million. In addition, he endangered the lives of patients, with more than 4,000 said to have experienced harm.

Two whistleblowers were too afraid to report the incident internally, so they spent time gathering evidence to report externally. Had the culture at the pharmacy welcomed whistleblowing, the case could have been resolved much earlier.

Reduces the risk of reputational damage

A good reputation is essential to a business. It can make the difference between winning and losing contracts, gaining and losing investors and affect whether customers want to buy from your company or from the competition.

When an issue is raised through internal channels, it allows the department in charge to tackle it appropriately as well as discreetly. More crucially, an anonymous system helps someone who doesn’t feel safe or confident sharing information with their employer to come forward.

If there isn’t an internal solution, they may choose to take the information elsewhere or disclose it publicly, potentially damaging the company’s reputation.

A French care home company came under scrutiny over the treatment of its residents only when a journalist exposed failings brought about by the business cutting corners, even though it was in receipt of public funding.

If the company had fostered an effective speak-up culture, it might have been able to address the shortcomings before they became public and caused a sharp drop in the company’s share price.

Reduces the risk of legal prosecution

Where individuals and businesses seek to undertake criminal behavior, there is the chance of legal proceedings occurring. In particular, directors can be held liable for offences carried out by the organization if they consented or connived in an illegal activity or caused it through neglect of their duties. Having a whistleblowing system in place within the company can significantly reduce this risk.

In the case of a German car company, the CEO was charged with fraud and conspiracy after it emerged that the company had purposefully fixed the results of emissions tests in order to seem like they met regulatory requirements, even though they did not. This might have been avoided with an early warning from a whistleblower.

Reduces losses

Early detection of misconduct can reduce the impact it has on the organization financially. The company can stop it before it costs regulatory fines, downtime and lost business.

Business tycoon Warren Buffet once said of whistleblowing channels “on occasion, I have learned of important problems at our subsidiaries that I otherwise would have missed. The issues raised are usually not of a type discoverable by audit but relate instead to personnel and business practices. Berkshire would be more valuable today if I had put in a whistleblower line decades ago.”

Improves ESG rating and organizational culture

A whistleblowing system can help with environmental, social and governance (ESG) ratings. By embedding a speak-up culture in the workplace through a whistleblowing system, the management is showing employees that they are valued and that their safety and security are the company’s priorities. This is a key element of the social aspect of ESG. In addition, it helps companies improve compliance and risk management in terms of governance too.

When people fail to report wrongdoing, the main reason is often not the fear of retaliation but the suspicion that nothing will be done about it, based on poor organizational culture. Companies often see whistleblowers as motivated by revenge or greed. But studies consistently show (source: The Economist “The age of the whistleblower) that most are driven to right a wrong. That is why more than 90% of them sound the alarm internally first, rather than running straight to the authorities or newspapers. Given the choice, they would rather warn than accuse.

Makes the company healthier: More reports is better than fewer reports

A recent study performed by the Harvard Business Review published under the title “Throw Out Your Assumptions About Whistleblowing” found that companies that have more complaints from whistleblower hotlines actually have fewer lawsuits, smaller bills from legal settlements, and fewer fines. Moreover, companies with more internal reports have more positive attributes (e.g., they are more profitable and have better governance practices).

On the surface, most people would assume that companies with more issues being reported are more troubled, but the number of internal reports seems to reflect a positive feedback culture more than the extent of problems occurring within the company. All companies have their share of concerns, but not all companies have a culture where employees feel secure and valued when sharing feedback. The conclusion was that, on balance, more reports are a good thing, reflecting greater trust in management by employees and a greater flow of information to management about potential problems.

How to embed a whistleblowing culture within your organization?

A robust whistleblowing regime should be an integral part of governance best practice for all companies. The first step in achieving it is by introducing a standalone, dedicated Whistleblowing Policy demonstrating the company’s compliance with the law and providing clear guidance to potential whistleblowers.

Reference to this Policy should still be made in the Integrity Policy and other documents, such as Code of Ethics and the Suppliers Code of Conduct, or any other similar documents.

The Policy and procedures document should be easily accessible and cover in a concise manner the following:

• Purpose/Scope

• Definitions

• Types of wrongdoing

• Reporting channels

• Guidelines for submitting reports

• Competences of the receiver of the complaint

• Protection of reporting person/ Protection from retaliation

• Incident investigation

• Responsibilities of investigator and supervision

• Corrective acts and legal actions

• Information and training

Training, training and… training!

Recent research performed by Harvard Business Review “Business ethics: Whistleblowers Are a Sign of Healthy Companies”, shows that from the discussions with compliance officers at firms, many executive leadership teams stated a “goal” to have zero reports. This is not hard to accomplish if the company doesn’t make its employees aware of the policy & procedures, of the reporting channels or comfortable using them.

Here comes the importance of regular and consistent training.

Designing a comprehensive training program for whistleblowing engagement based on the provisions of the Whistleblowing Policy is crucial to ensure that all employees are aware of their rights and responsibilities regarding reporting unethical or illegal activities within the organization and understand the procedures they should follow.

Each organization should have in place training programs on two levels:

Training Program Whistleblowing Engagement for Employees

The objective is to educate all employees about the importance of whistleblowing and of the Whistleblowing Policy, focusing on the process of reporting concerns and the protection available to whistleblowers.

Training Program Whistleblowing Essentials for Designated Person(s) and case managers

The objective is to offer specialized training for providing the essential skills and expert knowledge to the designated persons that have been tasked to receive, handle, and investigate complaints.

As a closing remark, the success and overall efficiency of the training will highly depend on the quality of the trainers, that should be qualified speakers with expertise in whistleblower frameworks. The trainers should use a variety of teaching methods to engage participants and ensure that they understand the key concepts.

Sources:

• Harvard Business Review

• The Economist

• Financial Times

• Forbes

• The Oxford Research Magazine

• Bloomberg

• Time