ISSN: 1391 - 0531
Sunday November 18, 2007
Vol. 42 - No 25
Financial Times  

Whistle-blowing – A failure of organisational culture?

By J.A.A.S.Ranasinghe

“Corporate Governance” became a favourite buzzword after the infamous Enron episode where thousand of employees lost their employment, retirement benefits and saving plans while corporate officers ran off with the company wealth, making an ugly dent in the history of the Corporate Sector in USA.

One positive outcome of this corporate scandal was the sweeping reforms to the corporate governance, which provided whistleblower protection to employees of public companies. The Securities and Exchange Commission of Sri Lanka (SEC) too emphasises the need of “whistle-blowing” as a mandatory requirement in the listed companies, as a means of entertaining anonymous complaints by the audit committees.

When employees discover unethical, immoral, illegal transactions or potentially damaging information for the well being of the workplace in which they are employed, they are expected to disclose this sensitive information to an authority in the hierarchy through a formal/informal mechanism, which in common parlance is called “Whistle-blowing”

The good and bad effects of whistle-blowing have been debated at various forums. However, the whistleblowing mechanism as a means of eliciting vital information is being extensively practised in few public listed companies in Sri Lanka. A leading ceramic Company where the writer worked earlier formally adopted the implementation of whistle-blowing policy and encouraged employees and trade unions to resort to whistle-blowing. The Company went to the extent of displaying the whistleblowing procedure in the Company Notice Board as a permanent notice in order to encourage whistleblowing, which displays the genuineness of the management to good governance and transparency.

A cardinal point attributed in favour of whistleblowing is that it can lead to an end in unethical business practices and save the lives of the employees and much valued customers. The collapse of Pramuka Bank is a case in point. Had a whistle-blower exposed the unethical business transactions well in advance, the lives of the 15,500 depositors out of which 3,500 had saving accounts amounting to LKR 350 million could have been saved, leave aside the livelihood of the employees of the Bank.

There are many lessons in the history that actions of the whistle-blowers have been potentially beneficial to society. In the recent past, there was a case where a severe damage to the environment has been stopped by the action of whistle-blowers who had the audacity to blow the whistle on an unethical employer. Take for instance the unauthorized sand mining at Deduru Oya where lives of the community have been saved and severe damages to the environment averted because of the persistence of whistle-blowers.
It has to be equally understood that the consequences of whistleblowing are extreme and include possible firing, civil action or even imprisonment.

Enron Accountant Watkins had to resign after inaction by CEO Kenneth Lay as a consequence of exposure of large scale accounting irregularities and she was demoted 33 floors from her mahogany executive suite to a “shanky Office” with a rickety metal desk and a pile of make-work projects. Enron subsequently collapsed amid claims of regulatory indifference and complicity by auditors. Enron Founder Kenneth Lay died of a heart failure, in the fourth month of trial and its CEO Jeffrey Skilling was sentenced to 24 years in prison in one of the biggest corporate scandals in US history. The disgraced CEO forfeited 45 million worth of in assets including his house as a result of a mountain of shady deals.

In the absence of a whistle-blowing policy, what generally happens is that the management very often plays into the hands of trade unions, business rivals and rumour mongers who are capable of setting the company blaze through grapevine? The predilection of the trade unions and the workers especially at the operational and manual cadres for misinterpretation of facts and exaggeration of issues appear to be a professional malady and they are quite adept at making mountains out of molehills placing the company in an embarrassing and awkward position.

My familiarity with the subject of whistleblowing at the industrial/company level has proved the fact that the mere installation of the whistle-blowing policy has not been effective and has not yielded with tangible results. It is a myth that concerns of the internal customers will be automatically flowing in, once the whistle-blowing procedures are set in motion. There are certain pre-requisites to be adhered to in order to reap the full effectiveness of the whistle-blowing procedure. It is incumbent upon the management to train the executives, employees and trade unions with regard to the following aspects, if the whistle-blowing policy is to achieve the intended purposes.

*Magnitude of Consequences:- An employee should ask himself/herself how much harm has been done or might be done to victims as a result of the unethical behaviour. If one person will be harmed, it is very unlikely to be a situation that warrants whistle-blowing, unless the magnitude of the unethical action is enormous in character. Employees should further take cognisance of the fact will the victims really be the “beneficiaries” as a result of whistle-blowing. If a third party is going to be benefited at the cost of whistle-blowing without any credible gain to the company, employees, customers or the society at large, it is very likely that the efforts of whistle-blowing have a meaningful effect. It is not uncommon that employees carry political ideologies and trade union rivalries at the workplace and disgruntled employees, trade unions or the political parties should not be the ultimate beneficiaries as a result of the whistle-blowing.

* Probability of the Effect:- The employee must have absolute proof that there will be dire consequences on the company, its employees and customers, environment etc as a result of the occurrence of the unethical transaction/dealing. The probability that the undesirable deal will actually take place resulting in a deleterious impact on the stakeholders must be considered. What generally happens in a work-environment is that correct information is not filtering to the lower layers of the organization giving grapevine a field day. Employees have a tendency to look at the management with a sense of suspicion and the slightest doubt will lead to the landing of anonymous petitions criticizing the management. This undesirable trend of suspicion can be nipped in the bud, if sensitive issues can be explained to the employees or to their trade union representatives on a routine basis.

* Temporal Immediacy:- An employee before blowing the whistle must consider the duration involved between the present and possibly harmful event. The more immediate the consequences of the potentially unethical practice, the stronger the case for whistle-blowing. For example, the effect of the closure of a plant where 1000 permanent employees are employed in a month’s time is more pressing than the discontinuation of a product in a assembly line next year where few employees are engaged on contract basis. Trade Unions and employees, it is seen, mix their priorities when grievances are made and in the process major grievances get submerged in the midst of other insignificant grievances.

*Proximity:-This question arises about matters of emotional proximity or situations in which the ethical question relates to a victim with some emotional attachment to the whistleblower. What is imperative here is the physical closeness of the potential victims is much more important than the victim’s living 100 kilo meters away. The explosion of a LP Gas Tank has an imminent threat on the lives of the village community living in the periphery of a plant rather than the employees living far away.

*Concentration of Effort:- Employees must always consider the degree of intensity of the unethical practice or behavior, before blowing the whistle. The question is how much intensity does the infringement carry and whether a minor infringement warrants a whistle-blowing. In an organization, there can be certain operational loopholes, which do not require the intervention of the management, as its impact is inevitably negligible. In such a situation, the effects of the whistleblowing are not meaningful and productive.

Moral Justification
Whistle-blowing should not be undertaken in a capricious manner. Whistleblower should bear in mind that his action to blow the whistle will have dire consequences on the Company and its officers and therefore a strong moral justification must exist for blwing the whistle. Hence, it is incumbent upon the Companies to train their employees in the matter of whisltblowing. The employees should be specifically advised that they should blow the whistle only on the fulfillment of the following conditions only as a last resort.

*The employee should satisfy himself/herself that a grave injustice or wrongdoing is occurring and it has not been resolved despite using all appropriate channels allowed by the Company.

*The Whistle-blower should morally justify that his/her course of action by appeals to ethical theories, principles and other relevant facts have not yielded desired results.

* The Whistle-blower is thoroughly convinced of the genuineness of the facts contained in the whistleblowing after investigation.

* The Whistle-blower understands that his/her primary loyalty is to the organization in which he/she is employed unless other compelling moral reasons override this loyalty.

*The Whistle-blower acts on a prima-facie that blowing the whistle will cause more good than harm to the Company.

*Finally, the Whistle-blower understands the seriousness of his/action is ready to assume responsibility for them.

Company Culture
Company culture plays a pivotal role in the promotion of whistleblowing across the board. Only a few listed Companies have established whistleblowing policies merely as compliance but in reality whistleblowing has not served the very purposes for which they have been established for, mainly because of the inability of the Companies to promote and instill the required corporate culture for its sustenance and development. It is extremely doubtful whether the desired objectives of the whistleblowing could be established in the absence of a conducive company culture where most of the employees will be silent employees, knowing the dire consequences that could face in today’s hostile business climate

What is more concerned is that the Colombo Stock Exchange (CSE) has made only a passing reference to “Whistle-blowing” stating that “Whistle-blowing employees should be assured of confidentiality by the Audit Committees”. It does not appear to have taken any other meaningful action to propagate this concept other than the mere reference. It should not be forgotten that CSE is duty bound to strengthen the ethical climate in the corporate sector so that the listed companies could take steps for the creation of an ethical environment that goes beyond mere voluntary compliance.

Whistle-blowing policy must be grounded in an organizational culture based on mutual trust between the management and the employees in which individuals take the responsibility for communicating problems to management before those problems get out of hand. On the other hand managers take responsibility for honest investigation of allegations and for the proper treatment of informers. Essentially, the success of the whistleblowing to a very large extent depends on the receptivity of the top management and the good spirit with which its executives deal with the disclosures of the whistle-blowing to the advantage of the organisation. Having a plan for handling whistleblowing situations is a way of making sure that managers make the right decisions even under the inevitable pressure of ensuing crises.

For the first time in history, whistleblowers are being recognised as a powerful and positive force for change. In essence, the first decade of the 21st centaury could be safely characterized as a whistle-blower era, mainly because of this vulnerable segment and the magnitude of the corporate crimes. Hence, it is most opportune for the Companies to train its executives in order to deal with the whistleblowers. The organisation needs to create a culture in which bad news is welcomed, employees trust their leadership enough to speak openly and honestly about what they see and personal interest of executives take a back seat to the well-being of the company.

Are whistle-blowers mischievous?
Although whistle-blowers have been liberally labelled as disgruntled marginal employees, studies reveal that most whistleblowers are among the best employees of the organization. Many whistle-blowers have been in the employment for years and they are highlyrespected and are considered by their managers to be successful and loyal employees. It is precise this loyalty and the whistle-blower’s desire to do what is right that motivates them to divulge the information when they observe a situation that is illegal, unethical or potentially damaging to the company, employees, customers and the community. It would be interesting to note that only 30% of employees who discover wrongdoing or potentially dangerous conditions ever disclose them by way of whistleblowing. The other 70% become silent observers never revealing what they have gathered. Such inaction is possibly due to lack of empathy for the victims or to a fear of retaliation.

Helpful or Harmful
This is a debating issue and various theories can be supported for and against whistleblowing. One school of thought is that when employees are encouraged to blow the whistle internally, they do it in much faith that the management and the managers would seriously investigate a potentially damaging situation and take corrective measures, before they become a crises situation. This course of action is certainly commendable rather than taking issues to outside forums at which there could be an irreparable dent on the reputation of the company, if the unethical or illegal act is found to be correct. It also sends a powerful signal to other employees that it is safer for them to highlight the misdeeds for the greater well-being of the Company.

History has shown that employees have been compelled to take their concerns for external intervention based on the premise that do not have much faith in the management, where the ramifications arising out of the remedial measures would be far more damaging in character. The more-refreshing whistle-blowing that rocked the corporate sector in recent times was the grant of an unconscionable pay rise and promotion given to the girlfriend of Mr. Wolfowitz, former President of the World Bank by-passing all the standard norms and set-out procedures, which ultimately resulted in the termination of his much lucrative job.

Retaliation against whistle-blowers has become a standardised and common practice as seen from Enron’s case. Although, there are no reported cases in Sri Lanka, it is widely believed that a substantial number of employees have become victims as a result of whistle-blowing. The personal animosity and witch-hunting on the part of the employers against whistleblowers have been the bane for the propagation of this practice at the organization level.

According to Dworkin and Baucus, retaliation falls into four categories; nullification, in which managers seek to neutralize whistle-blowers and their information through intimidation. Isolation, in which access to information and resources is taken away from the whistle-blower. defamation , through which whistleblower’s reputation, qualifications, and even sanity are called into question and finally expulsion, when the employer forces the whistle-blower out through firing or forced resignation. In certain instances, whistle-blowers have been expelled from an entire industry through blacklisting. In Sri Lanka, the situation is much worse due to the limited expansion of the industry. If a whistle-blower earns a notorierity for blowing the whistle and receives the wrath of the employer, the chances of securing an employment elsewhere are extremely remote.

A good whistle-blowing plan necessarily must have two phases. The first “context” creates a culture of ethics, trust and responsibility that promotes internal employee disclosure. The second one is the established “process” that managers can follow when disclosures are made to them by employees. In my own experience and estimation – the context rather the culture as against the process is more forceful in galvanizing this whistleblowing concept across the board. In reality, most organizations have built-in mechanisms to suppress both the information and informers.

In such a situation, it is very unlikely that whistleblowing could deliver the intended results. On the other hand, promising employees a fair and safe hearing when they make disclosures and not to fulfill that promise is far more damaging to trust and loyalty reposed in by the employees in the long run than never to have made the promise.

By partnering with the whistle-blowers through the use of a good whistleblowing plan, management can discover a powerful ally in building trust and collaboration and in implementing change.

The writer is the Director, (Human Resources & Administration) Sumathi Global Consolidated (Pvt) Ltd.


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