Rewarding Whistleblowers: The Costs and Benefits of an Incentive-Based Compliance Strategy

Rewarding Whistleblowers: The Costs and Benefits of an Incentive-Based Compliance Strategy

Description

Canadians today are very much concerned about corporate crime and about corporations that do not comply with regulatory requirements, especially those related to the environment, securities law and occupational health and safety regulations. This increased concern has led to proposals to extend liability for illegal corporate conduct (by making directors personally liable for the actions of their companies, for example); it has also led to arguments in favour of greatly increasing the sanctions on corporations (and individual wrongdoers within those corporations) for wrongful conduct. The recent academic literature reflects a lively debate as to the effectiveness of such proposals in reducing illegal behavior in corporations and their consequences for the functioning of the corporation as an economic institution. With some notable exceptions, the focus of the debate on sanctions and liability rules has resulted in the relative neglect of an essential ingredient in effective deterrence; the capacity to monitor and detect wrongdoing within the corporation. The lack of attention to the potential for increased compliance through improved monitoring and detection is surprising for several reasons. First, as Jennifer Arlen notes, “[m]any corporate crimes—such as securities fraud, government procurement fraud, and some environmental crimes—cannot be readily detected by government”. Second, there is a significant body of literature on regulatory reform that relates to the effectiveness of many traditional “command and control” forms of regulations to the costs and difficulties which are inherent in government monitoring and detection of wrongdoing. Third, one of the most generally held tenets of contemporary criminology is that increasing the likelihood of detection and prosecution tends to be a more effective means of strengthening deterrence than making sanctions more severe. In other words, it is better to put another cop on the beat than to build more jail cells. This study is intended to help redress the inadequate emphasis on monitoring and detection in the current debate on corporate criminal and regulatory responsibility. Accepting the proposition that direct monitoring of corporate conduct by government as a means of detection is unlikely to be cost-effective, our concern is to identify agents within the corporation who can be enlisted in the cause of monitoring and detection, and to consider how public policies can provide stronger incentives, and make it easier, for these agents to identify and disclose wrongdoing within the corporation. In conducting this analysis, we begin by considering one such policy that has generated sustained public attention and controversy over the last decade: so-called “whistleblower protection.” Recognizing that agents within corporations (and government institutions) risk retaliation in the form of dismissal if they disclose corporate wrongdoing, many jurisdictions in North America have adopted legislation to protect employee whistleblowers, either by providing them with a private right of action when dismissed in retaliation for whistleblowing or through outright prohibition of dismissal or other disciplinary measures motivated by retaliation. It is not, however, these modest protective provisions that have captivated the public imagination, nor have these provisions contributed significantly to the disclosures of spectacular corporate frauds. Rather, it is the offer (or prospect) of substantial reward or bounties to whistleblowers, most notably under the False Claims Act, a federal U.S. stature (as amended in 1986), that has produced this result. Under the provisions of this statutes, an individual who discovers wrongdoing that has injured the U.S. federal government (fraud in defence procurement, for example) may launch a private lawsuit against the corporate wrongdoer. The government has the option to join the action or not, but the individual may nevertheless proceed even if the government declines to do so. If successful, the whistleblower may recover a bounty calculated to be between 25 percent and 30 percent of the total penalties or other damages assessed against the wrongdoer. In cases where the Justice Department joins the action, the minimum recovery is reduced to 15 percent. If unsuccessful, the whistleblower is responsible for her own legal costs but is not responsible for the legal costs of the defendant except where the court is convinced that the action is vexatious. The most spectacular whistleblower suits have centred on multi-million dollar frauds, particularly in the areas of defense and health-care procurement and have usually resulted in convictions. In these instances, whistleblowers have often received what appear to be very large payoffs, which, in effect, reflect the size of the scan uncovered and the enormous savings to government. Despite the arguable savings to the public from this type of action, under the False Claims Act the practice of providing bounties to whistleblowers has been controversial. First, there is the argument that much of the information divulged through actions under the False Claims Act would have been divulged even if much smaller bounties had been offered. Second, corporations are vulnerable to false claims made by opportunistic whistleblowers who may be motivated to force corporations into financial settlements in order to avoid the adverse reputational and related effects caused by highly public, albeit ill-founded, accusations. Third, it is sometimes argued that reward for external whistleblowing frustrate efforts at internal compliance, or act as disincentives to “internal” whistleblowing. For instance, an employee may be dissuaded from reporting a misconduct in a timely fashion within the corporation because of the prospect of receiving a large reward by disclosing corporate wrongdoing through litigation, thereby undermining internal efforts as corporate compliance (the importance of which is often stressed in a wide range of the relevant policy and legal literature). Fourth, it is often suggested that the calibration of the amount of the reward from whistleblowing directly to the amount of the penalty (and thereby to the degree of seriousness and extent of the wrongdoing) provides whistleblowers with an incentive to report wrongdoing later rather than earlier, and to do so only after the corruption has produced much more serious consequences, rather than disclosing evidence of corruption in the corporation immediately. Finally, some analysts worry that the practice of rewarding whistleblowing may have deleterious effects on trust and team spirit within corporations, ingredients seen by many as critical to the success of corporations as economic institutions. As is evident from the variety of pejorative colloquial expressions for whistleblowing (ratting, squealing, tattling, etc.), reporting co-workers, associates or superiors to the authorities often has negative moral connotations. These connotations have been powerfully reinforced in our time by the frequent use of “informers” by totalitarian regimes, both left and right, a practice often closely identified with the repellant nature of those regimes. This study draws primarily on analytical techniques and empirical studies from the literature of the law, economics and organizational behaviour. Since understanding the effects of rewarding whistleblowers depends on an understanding of their motivations and the effects of their actions on the essential ethical life of the corporation (as a human association), it is our hope that this study will also contribute to the more subtle and informed debate over the morality of whistleblowing.

Source Publication

Corporate Decision-Making in Canada

Source Editors/Authors

Ronald J. Daniels, Randall Morck

Publication Date

1995

Rewarding Whistleblowers: The Costs and Benefits of an Incentive-Based Compliance Strategy

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