Business and Organisational Ethics Essay

Tue, 24 Apr 2018

This is an essay submitted for Business and Organisational Ethics, for my MSc in Philosophy of the Social Sciences.

Adam Waytz argues that offering monetary rewards to whistleblowers is potentially problematic. He suggests that for one thing, “the mere mention of a whistleblower receiving money [might alter] public perceptions of them from heroes to gold-diggers” (Waytz, 2016, p. 3). Should whistleblowing be encouraged through financial rewards? How else might whistleblowing be appropriately encouraged? Discuss this question by employing at least one moral framework that was introduced in the context of this course.

1. Introduction

In their course of employment, individuals may discover wrongs performed by their company, and will be forced to consider whether to whistleblow, that is, to announce their discovery to the public or government officials.  In this essay, I will consider how whistleblowing should most appropriately be encouraged, and in particular, whether financial rewards should be used. I believe that to answer this question, we must first consider the circumstances under which whistleblowing is ethically appropriate.

In section 2 I will outline an ethical framework and use it to define a corporate wrong.  I will then argue that whistleblowing is necessary when, and only permissible when, an individual is aware of a wrongdoing and does not believe the company will voluntarily stop and remedy the wrong.  In section 3 I will argue that proposals to offer financial rewards to whistleblowers are inappropriate, as they lead whistleblowing to be viewed as a choice rather than a duty. In section 4 I will suggest other policies that will more appropriately encourage whistleblowing when it is required.

2. The ethics of whistleblowing

In this section I will begin by providing an ethical framework, which allows us to evaluate company and individual action.  I will then use this framework to define the concept of a corporate wrong, which we will depend on throughout this essay. I will then consider employees’ competing duties: to loyalty and confidentiality on one hand, and to not facilitating corporate wrongdoing on the other hand.  Based on these, I will argue that employees have a duty to prevent wrongdoing and ensure remedy, if necessary, by whistleblowing.

The ethical framework I am proposing is deontological, that is, based on rules or obligations, in which individuals and companies are constrained by laws and ethical custom, but otherwise free to act as they please.  This framework draws support from Mill’s On Liberty (1859), and in a business context, Friedman’s Capitalism and Freedom (1982).  I believe that many people would intuitively support such a framework, though there would be likely disagreement on the scope of law and ethical customs that should constrain individuals and companies, for example, how small their environmental footprint must be.  Democratically legitimate laws may be a useful benchmark, but most people would agree that even some actions that are legal would still be unacceptable based on ethical custom. I refer to corporate activities that are illegal or clearly outside most people’s ethical custom, with the term ‘wrongdoings’.  

Throughout this essay I am focussing on cases that are clearly illegal or outside most people’s ethical custom.  In practice, I know that there will often be uncertainty. Employees may not be fully aware of what the company has done, or how it has affected others.  Likewise, employees may not know whether the activity would be illegal or clearly unacceptable to most people. Some things that do not reach the threshold of a ‘wrong’ according to this definition may still be undesirable, for example wasting a bit of paper or a manager losing their temper.  The question of how employees should act in these more uncertain situations is important and difficult, but has intentionally been excluded from the scope of this essay: I am focussing on the question of employee duty in the case of clear wrongdoing.

Employees are subject to two potentially conflicting obligations.  Firstly, they are often bound to confidentiality by a legally enforceable contract.  Even where not bound by contract, ethical custom dictates a duty of confidentiality and loyalty to their employer.  Secondly, employees are prevented by ethical custom, and potentially by law, from engaging in or facilitating wrongdoing.  Importantly, in many cases being aware and not reporting wrongdoing would be considered facilitation, and also wrong. One might argue against this view, that it is unfair to blame a single individual for not reporting a wrongdoing, at significant cost to themself, when others were also aware of it.  While I agree that it is unfair to blame one and not the others, I argue that society is better served by giving all a duty to speak up, especially for more significant wrongdoing, and this is reflected in the existence of laws and professional ethical standards that require reporting any known wrongdoing.        

In order to balance these two obligations, I would suggest that the employee first consider whether the company is likely to prevent the wrong and remedy past wrongs without external pressure.  For example, the employee may believe the wrong to be an honest mistake. If so, the employee should first raise the issue internally. Where this is not likely, or the employee has already tried, I believe that they have a duty to report the wrong externally, either to the public or a regulator.  While I recognise that this will involve breaching confidentiality and loyalty to the company, I believe that this is permissible, as the company is acting outside its legitimate powers and cannot expect to have this its rights enforced. Indeed, some jurisdictions already recognise that requirements for confidentiality should not overrule the duty to report wrongdoing [FN, For example, the UK Government’s website advises that “A confidentiality clause or ‘gagging clause’ in a settlement agreement isn’t valid if you’re a whistleblower” (GOV.UK, 2018)]  

In this section I have established the concept of corporate wrongdoing, and argued that where an employee cannot stop and the wrong and ensure it is remedied internally, they have a duty to whistleblow.  Having now established the duty to whistleblow, in the next two sections I will consider appropriate policies to encourage whistleblowing where necessary.

3. The inappropriateness of financial rewards to encourage whistleblowing

In the US, bodies such as the Securities and Exchange Commission (SEC) offer financial rewards to whistleblowers (FCA, 2014).  These rewards aim to provide a positive incentive to potential whistleblowers, and pay between 10% and 30% of financial sanctions imposed on wrongdoing companies (Gaafar, 2016).  By basing the reward on the financial sanctions imposed, I believe these rewards are not merely compensating the whistleblower for their costs incurred. The UK Financial Conduct Authority (FCA) has considered introducing such awards but decided against it (FCA, 2014) and Australia’s parliament has recently proposed introducing financial rewards for whistleblowers (Khadem and Ferguson, 2017).

I believe that offering rewards for whistleblowers is inappropriate, as it changes the nature of the decision to whistleblow to one where the employee is permitted (by society) to decide what to do.  This stands against the argument in the previous section, that an employee has a duty to stop the wrongdoing, where possible without breaching confidentiality, and where not, by whistleblowing. By giving the employee a new (and likely powerful) reason to whistleblow, it distorts the employees motives, as well as public perception of the whistleblower as a “golddigger” (Waytz, 2016).  The employee may feel entitled, or even virtuous, for not whistleblowing, despite what I have argued may be a duty.

Some would argue that financial rewards are nonetheless justified if they lead to increased whistleblowing and therefore greater social good.  For example, one might believe that the employees that work for companies that are most likely to be committing serious wrongdoings are more likely to be incentivised by financial rewards than a sense of duty.  I would caution against this conclusion. I believe there are fairer ways to prevent wrongdoing by such companies than by rewarding employees who work in these companies. Whistleblowers motivated by rewards may also bring more opportunistic and unnecessary whistleblowing, in cases that would have been better dealt with internally (FCA, 2014, p3).  

I therefore would argue that financial rewards are an inappropriate way to encourage employees to carry out their duty to whistleblow where necessary.  In the next section I will propose a number of more appropriate policies to encourage whistleblowing.

4. Appropriate policies to encourage whistleblowing

The FCA argue that we should “create a culture ... where speaking up becomes normal business practice and people are more prepared to report concerns, which will help to improve behaviour in firms and ultimately improve outcomes“ (FCA, 2014, p2).  This supports my argument from section 2 that whistleblowing is a duty, in cases that internal reporting is unlikely to lead to the wrongdoing being stopped and remedied. In this section I will propose a number of policies that I believe are appropriate, individually and as a group, for building this culture and encouraging whistleblowing where necessary.

In the previous section I argued that financial rewards are not appropriate for encouraging whistleblowing, however I do believe society should aim to minimise the harmful consequences of employees carrying out their duty to whistleblow.  This can be done through a mix of legal protections against retaliation by their employer, and payments to the employee that are directly linked to their economic costs incurred. By ensuring that any payments are purely compensatory, they cannot be the reason for the whistleblowing, but we can reduce the disincentive and personal cost.

Improving the processes around reporting potential wrongdoing will help reduce the unintended harm that can result from public disclosure.  For example, public whistleblowing may lead to employees losing jobs or shareholders losing share value, where the wrongdoing is an honest mistake or perhaps merely a misunderstanding.  Where companies have procedures that allow individuals to report wrongdoing internally, and see that it is resolved satisfactorily, including with appropriate reporting and remedy, employees will have less need to whistleblow.  Similarly, ensuring regulators are trusted and have sufficient power to act will reduce the need for whistleblowing in more public forums where the harm may be greater.

We can also improve our narrative around whistleblowing.  I believe that at present, the media too often emphasise the whistleblowers as angry or greedy, rather than merely wanting to do the right thing.  Rather than second-guessing how the whistleblower should have handled things differently, we could take a more charitable interpretation of their actions.  Emphasising the extraordinary heroism of a whistleblower is better than criticism, but we should be working to portray whistleblowing as the right and normal thing to do.  The FCA are working towards this, with an annual report on all cases of whistleblowing, aiming to portray it as a relatively common activity that often leads to socially beneficial resolution (FCA, 2014, p2).  This has the added benefit of discouraging wrongdoing by companies.

Finally, if we want to promote whistleblowing as an obligation rather than a choice, I would argue that we should seek increased penalties against employees that do not prevent corporate wrongdoing where they have the chance.  This can be done through professional bodies and legal proceedings. Care must be given to recognise that employees face uncertainty in understanding whether wrongdoing has occurred and whether whistleblowing is necessary to prevent it.  Justice also requires care to ensure individuals are not scapegoated, particularly where other employees also knew about the wrongdoing. However, I do believe an appropriate part of ensuring that employees fulfil their obligations is to ensure that they will incur consequences if they do not.    
 

5. Conclusion

In this essay I have argued that some actions by a company are illegal or clearly outside ethical custom: I refer to these as wrongdoing.  When employees are aware of corporate wrongdoing, I have argued they have a duty to prevent it, where necessary, by whistleblowing. I have argued that providing financial rewards to whistleblowers is inappropriate, as it promotes the idea that whistleblowing is a choice rather than a duty.  I have instead proposed a number of alternative policies that are consistent with promoting whistleblowing as a duty: minimising economic harm to the whistleblower, improving reporting processes, reframing the public narrative around whistleblowing and penalising employees that do not observe their duty to whistleblow.

 

References

Friedman, Milton, 2002. “Capitalism and Freedom”, University of Chicago Press, Chicago

McConnell, Terrance, 2003, “Whistle-blowing”, in R.G. Frey and Christopher Heath Wellman., (2003) Companion to Applied Ethics, Cambridge, UK: Blackwell Publishing Ltd.

Mill, John Stuart, 2003. “On Liberty”, Yale University Press

Waytz, Adam, 2016.  "Whistleblowers are Motivated by Moral Reasons Above Monetary Ones", [online] ProMarket, The blog of the Stigler Center at the University of Chicago Booth School of Business, Available at: https://promarket.org/whistleblowers-motivated-moral-reasons-monetary-ones/, [Accessed 22 April 2018]

Gaafar, Leila, 2016.  “Money talks: should the UK introduce financial incentives for whistleblowers?” [online] WilmerHale, Available at: https://www.wilmerhale.com/blog/wireuk/post/?id=17179883237 [Accessed 22 Apr 2018]

Khadem, N. and Ferguson, A. 2017. “Bring in bounty rewards for whistleblowers, federal inquiry says”, [online] Sydney Morning Herald, Available at: https://www.smh.com.au/business/the-economy/bring-in-bounty-rewards-for-whistleblowers-federal-inquiry-says-20170913-gygmmg.html [Accessed 22 April 2018]

FCA, 2014.  “Financial Incentives for Whistleblowers”, [online] prepared by Bank of England / Financial Conduct Authority, Available at: https://www.fca.org.uk/publication/financial-incentives-for-whistleblowers.pdf [Accessed 22 April 2018]

GOV.UK, (2018), “Whistleblowing for employees”, [online] Available at: https://www.gov.uk/whistleblowing [Accessed 22 April 2018]