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Blowing the whistle…for a price

Thursday 22 March 2018

Long Read 

In the whistleblowing panel at the 2018 ASIC Forum, one of the major themes addressed was that of compensation.
But what does compensation mean in the context of the whistleblowing? Is there a compensation element in the Australian framework, and how might it impact the Securities and Exchange Commission?
The event opened with Jordan Thomas, Partner at US-based law firm, Labaton Sucharow, who gave an overlay of the US regime and highlighted the fact that some Australian whistleblowers have actually reported to the SEC.
According to Thomas, one question raised by the global financial crisis was that of how to get individuals to speak out when they see wrong-doing.
“Coming out of that process, we landed on three key pillars that form the basis of our new whistleblower program,” he said. “The first is to report anonymously; the second is robust whistleblower protections; and the last is the potential for monetary rewards.”
Before Dodd-Frank, there were two other programs:

  • The False Claims Act
  • The IRS Whistle Blowing Program
The SEC whistleblowing program has been one of the success stories of the Dodd-Frank Act.
“Since whistleblowers were first rewarded in 2012, the SEC has awarded over US$262 million (Approximately AUD341 million) to 53 whistleblowers. Over 4400 tips have been received and more than 12 percent of tips last year came from foreign submitters,” Thomas said.
He added that Australia is amongst the top three countries that provide tips to the US. To-date, the largest award given is US$83 million (approximately AUD108 million) to a group of whistleblowers who reported the wrong-doing at Merrill Lynch.

Principle or price?
Also speaking at the panel event, Marie Macdonald, Non-Executive Director for a number of organisations, noted she does not believe whistleblower awards are the ideal approach. For Macdonald, whistle-blowing is just one of the many ways in which management and the board can understand what is happening in their company.
For Macdonald, the risk lies in having the regulator give out rewards that may in turn discourage businesses from dealing with their challenges internally.
“From a social and an economic perspective, if the whistleblower works with the company, and the company deals with the situation…well, there are two big ‘ifs’ there. However, if that happens, it’s a better use of resources if the company deals with its resources itself.”
All agreed there needs to be legislative underpinnings to give employees the confidence to speak up internally. Legislative approach, however, should only be a part of the equation.
“It really is up to companies to provide a system and whistleblower process that encourages people to come to them, and to do so with the confidence to know they are valued,” said Macdonald. “What they are doing is really a worthwhile activity to help their company—thus, it is incumbent on the company to repay that loyalty and trust.”
Macdonald said she was not in favour of the US system because it distorts the balance of an individual going to the company or the regulator. Under the US regime, she suggested, people are paid per the value of their information—that is, they are either over-compensated or under-compensated as a result of their whistleblowing.
“I think a preferable system to encourage companies would be one where the policy-setting and the underlying principles work for both big and small whistleblowers,” Macdonald said. “We should put our efforts into compensation that really protects people and also into a regime that makes compensation unnecessary when we have the right sort of processes—processes that mean, when people do come forward, they feel like they are being heard and that the company makes them feel like they are doing the right thing.”
For Macdonald, it is about organisations recognising this as something with which they need to comply, while understanding that having a strong framework is beneficial.

The benefit of the compensation system
 Marcia Miceli, Professor of Management, The McDonough School of Business, Georgetown University, and Professor AJ Brown, Professor of Public Policy and Law, told the panel audience that compensation was less about rewarding the whistleblower for coming forward than an encouragement to companies to fix their problems to avoid fines and awards for whistleblowers.
“This was a reaction to the financial crisis in 2008/2009 that did not hit Australia,” said Miceli. “There was a lot fraud in the financial system, a lot of things people knew about but did not tell anybody about, and as a result, a huge problem arose with people losing their homes and life savings.”
She added that compensation is designed to reach companies that might not be as ‘high-minded’ as they should be or that are not concerned about the consequences if they fail to do the right thing.
Monetary rewards also help compensate those who do experience repercussions as a result of speaking up about corporate wrong-doing.
Still Reporting Internally
Jordan Thomas said that, in the American context, there has been no reduction in reporting within organisations as a result of the schemes.
“What happens is that corporate secrets don’t stop internally. If they are not addressed appropriately, they get outside,” Thomas emphasised.
Thomas stated that, in fact, the majority of reports actually still happen internally; however, it is those companies that fail to handle complaints in an effective manner, or that leave the employee with the sense that their complaint has not been heard, that end up being reported to the external regulator.
“As much as we wish companies would do the right thing, they don’t do it often enough,” he said. “And even if the company has the right mind-set and the right programs, one of the powerful things I discovered in our due diligence process is that there is still a fundamental breakdown of trust between employees and employers.”
It is this breakdown in trust that silences people, Thomas believes.
Additionally, behind the compensation scheme in the US is a relatively high level of distrust of the government, by whistleblowers. As a result, many who could have done so did not participate in the previous discretionary whistleblower program.