In this podcast series, I interviewed Dr. Kyle Welch, Assistant Professor at George Washington University (GWU), on his recently released paper, co-authored with Stephen Stubben, Associate Professor from The University of Utah, entitled “Evidence on the Use and Efficacy of Internal Whistleblowing Systems” (Report). In this paper, Welch and Stubben reviewed some 15 years of anonymized data from NAVEX Global, Inc., the sponsor of this podcast series. This data was from the company’s hotline reporting systems. Some of the key findings included that companies with a robust whistleblower and reporting system had greater profitability and workforce productivity as measured by Return on Assets (ROA) and there were fewer material lawsuits brought against the company overall and there were lower settlement costs if a lawsuit did occur. Finally, there were fewer external whistleblower reports to regulatory agencies and other authorities. This podcast series takes a deep dive into the Report.

Whistleblowing based upon law in the US goes back to the Civil War and the creation of qui tamlawsuits to help the US government fight fraud, waste and abuse in government procurement and contracting. Readers of my blog will recall that whistleblowing has been used by governments as far back as the Republic of Venice. In the modern era, Sarbanes Oxley (SOX) was seminal in legislation recognizing the role whistleblowers play in uncovering illegal, unethical and harmful conduct in the corporate sector. SOX also brought whistleblower anti-retaliation protection to internal reporters. These concepts were extended in the Dodd-Frank Whistleblower bounty program, although the US Supreme Court cut back on anti-retaliation protection for internal reporters in 2018. Dodd-Frank also instituted a bounty program which has been extraordinarily successful for the Securities and Exchange Commission (SEC).

The change in Dodd-Frank interpretation of anti-retaliation protection by the Supreme Court highlighted the difference between internal and external whistleblowers. Internal reporting is employees using whistleblowing systems, to go in and report what they observe and that report goes directly to management at the firm. It allows the organization to deal directly with the problem. Dr. Welch contrasted this with external reporting which is a whistleblower going to a government official or agency, such as the SEC, to report a problem.

Dr. Welch said that most academic research in the past had focused on external whistleblowers because this information is publicly available. This research has demonstrated the negative economic impacts and reputational damage for companies where illegal, unethical or similar conduct is reported to authorities and made public. Conversely, there is a paucity of academic research into internal reporting as such information was not available publicly. However, the data made available for study by NAVEX allowed the research into this unexplored area.

Moreover, even at the SEC there is a clear recognition that most whistleblowers report internally before they report externally to regulators. This reinforces a key point by Dr. Welch that humans are a key component for any company to uncover fraud, waste, illegal or unethical acts. It is the next step which can then lead to greater or lesser economic costs for such companies. Dr. Welch stated, first, when external reporting happens, this “is where more bad things follow the first report that comes out externally via news or via a regulator. Second, there are almost always more problems that come after that initial release of information to the organization.” Contrast these two points with the notion that that humans are a key factor in identifying and solving this problem and you begin to see that information from a company’s employees is “a huge part of identifying  and solving problems internally”. And so as great as big data is this is a story where humans are needed to be able to uncover and find problems.

All of these issues present numerous lessons to be considered by the compliance professional, regulators and corporate governance experts. Obviously internal reporting is preferable for an organization in order to stop the illegal or unethical conduct and then remediate the situation as quickly as possible. For regulators, the Report can help regulators make decisions on how and where to incentivize such internal reporters. For Boards of Directors, it can provide a much clearer and more robust picture of what the employees on the front line are seeing and observing.

Join us for the next episode, where Dr. Welch details what he expected to find when he began this research.

This 5-part podcast series is sponsored by NAVEX Global, Inc.