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How a Transparent Culture Can Drive Whistleblowers to Report Internally First

The idea of cultural transparency isn’t just about increasing productivity, engagement and retention; it’s also about fraud prevention. No one wants to believe that their company could become the subject of a whistleblower complaint, but studies show most major companies report incidents of fraud every two or three years. Small businesses can be even more vulnerable because they often lack the internal controls that larger corporations have the resources to implement.

Achieving a transparent culture can improve company performance and mitigate risk. But building it can be tough, especially if you’re starting from the ground floor.

Why? Because open communication lies at the heart of a transparent culture and often, speaking openly requires employees and executives to engage in behavior that makes them uncomfortable. In a transparent culture, leaders have to admit openly to making mistakes. Subordinates must share unpleasant truths with their supervisors. These tendencies to avoid embarrassment, or to not rock the boat, are even harder to change in cultures that have long valued silence and groupthink as the status quo.

The difficulty that comes with instituting a transparent culture may cause senior leadership to balk at the idea, especially if the benefits can’t be expressed in a number.

Lucky for you, there is a number. Try $30 million on for size.

Whistleblower windfall

That’s the amount one whistleblower received after reporting fraudulent activity to the U.S. Securities and Exchange Commission. Under the Dodd-Frank Act’s “Mandatory Bounty” program, whistleblowers are rewarded financially when their tips lead to enforcement actions that result in sanctions in excess of $1 million. The $30 million bounty mentioned above represents between only 10 percent and 30 percent of the total monetary sanctions leveled against the offending employer.

In light of this, advocating a culture of transparency may seem absurd. Why increase the amount of open, free-flowing information to employees who are financially incentivized by the Dodd-Frank Act to report externally? This would be a valid question if tipsters were motivated by money. But they aren’t.

Cash isn’t king

Findings from the Ethics Resource Center (ERC)’s National Business Ethics Survey show that:

  • “56 percent of employees who witness dubious practices report internally first,
  • and only 5 percent of employees said that a monetary reward would encourage them to report misconduct to someone outside the company.”

This led the ERC to suggest that most employees initially report to management because they genuinely want to see problems fixed.

What really drives whistleblowers

The survey concluded that employees generally turn to outside sources when the violation is substantial and the company is slow to respond. But, was the company’s response time measured or perceived as slow? Did the company actually take a long time to address or resolve the issue? Or did it just appear that way to the employee who was left in the dark about where his or her information went, or how it led to organizational changes? The study doesn’t say for sure, but you can see how an employee who reports internally would be compelled to report externally if they didn’t see results.

How a transparent culture can help

Free-flowing communication quashes the sort of silence that can leave employees feeling like the company doesn’t share their concern for ethical or legal violations. In a transparent culture, when internal fraud is uncovered, leadership would openly address the incident and share information that reinforces the company’s commitment to responsible practices, from why the particular act was a violation to which new controls were put in place to deter similar behavior in the future.

In turn, employees would see that the company takes their concerns seriously and acts upon them. Not only would this further encourage employees to report internally, but it would also build a culture of trust that would extend to your customers and enhance your company’s reputation.

(This is the first of a two-part series.)