Whistleblowing and Corruption

Whistleblowing and Corruption

Sam Choon Yin (October 2003)

 

Introduction

Two issues are explored in this essay, whistleblowing and corruption. They are related. Whistleblowing can be regarded as a useful tool to lower the incidence of corruption. In Singapore for instance, whistleblowers gave tip-offs and detailed accounts of firms’ wrongdoings to the Corrupt Practices Investigation Bureau (CPIB). A total of 540 cases of corruption were reported in the first ten months of 2003.  About 40 percent of the whistleblowers wanted to remain anonymous. So far, they had succeeded in putting 15 people behind bars for corruption. Despite this, the trend for reporting misbehaviours in the city-state appears to have declined over the years. In 1999, a total of 1,128 cases were reported of which 777 cases were investigated. In 2000, 991 cases were reported of which 515 cases were investigated. In 2001, the figures were 812 and 497 respectively. In 2002, they were 780 cases reported and 371 cases investigated. It is not surprising therefore to hear more calls by institutions like the Association of Chartered Certified Accountants in Singapore and Corporate Social Responsibility to provide legal protection for whistleblowers (The Straits Times, 7 October 2003).

 

Whistleblowing

Who are the whistleblowers? Whistleblowers are current and former employees of an organization who disclose what they think as wrongdoings made by the organization. Generally, whistleblowing is justified when organisations engage in activities that can cause unnecessary harm to third parties, in violation of human rights and going against the organizations’ defined purpose. Employees are qualified to be labelled as whistleblowers if the objective for expressing their grievances is moral-driven, and not due to personal reasons.

Usually, the employees choose to whistleblow as the last resort. This is in recognition of the potential costs that are associated with whistleblowing. Some of these costs include loss of jobs, difficulty in getting a new job and loss of faith in others such as the government or the judicial system. Some may experience name-calling like traitors and troublemakers. Whistle-blower may face heavy financial burden as a result of loss of job or they may have to bear the legal cost if whistleblowing is unsuccessful. The employees thus should consider and exhaust all internal procedures and possibilities within the firm first before going public. Talk to the top managers and even the board of directors if they need to. I am sure they are very much willing to listen and take corrective actions to rectify the situation. Also, because of the high associated costs with whistleblowing, whistleblowers are often advised to do the necessary homework to enhance their chances of success. Hard and soft evidences should be gathered and safeguarded.

One may ask, given these costs, why would one be interested to whistleblow in the first place. Whistleblowing is justified on moral grounds. All employees have the moral duty to the public safety that must supersede loyalty to their organization.  They should voice out their concerns for the sake of fellow employees in terms of safety and health considerations,            for the sake of stockholders and for the sake of the company wishing to maintain its public image and do the right thing. Whistleblowing is often justified to champion the right to have freedom of speech, to champion public’s right to information and to recognize public’s right to participate in important decisions concerning public interest. Some have argued that whistleblowing is unethical. They argue that employees have absolute obligation to confidentiality and loyalty to their employers. Whistleblowing violates this duty. However, the argument misses the point that corporations have a legal and moral responsibility to do good to the society. If corporations are immoral, the society has the right to punish them. The corporations’ employees, with their inside information, are the best people to highlight corporations’ wrongdoings. The corporations should not fear to hear the complaints if they are innocent.

Some of the popular and recent whistleblowers are Matthew Whitley (about Coca Cola’s attempt to rig a marketing test of a slush drink test at Burger King in Virginia in 2002); Brian Jones (a senior government intelligence official who accused the UK government of over-egging the threat posed by Saddam Hussein leading to a much disputed war against Iraq in March 2003); Sherron Watkins (an ex-employee of Enron Corp who wrote a letter to the company’s Chairman Kenneth Lay about improper accounting practices that the company adopted); Coleen Rowley (an FBI staff who in May 2002 wrote a letter about how FBI had failed to investigate a suspect prior to the 911 incident in 2002) and Cynthia Cooper (whom in June 2002 informed the WorldCom board of directors that the company had covered up US$4.8 billion worth of losses through creative accounting techniques).

 

Corruption

The key concern in this essay is to address whistleblowers’ ability to lower the incidence of corruption. It is generally accepted that corruption exists in all nations. Only its severity differs among the nations. Singapore is often touted by international rating agencies as one of the least corrupt countries in the world. The problem exists albeit irregularly. One of the most recent cases involved a senior housing board officer. Low Kim Ching, aged 51, was the unit head in the Housing Development Board (HDB) Building Projects Management Department responsible for supervising upgrading projects in the eastern area. Lim was charged for asking for bribes from two sub-contractors in the form of free renovation works to his house at Jalan Eunos (The Straits Times, 28 August 2003).

Corruption refers to the act of bribing and extorting another party to do things that are beneficial to one party and at the expense of others. For example, government officials receive bribes from businessmen to allow their ‘illegal’ businesses to run. In societies where the probability of getting caught and penalty costs are low, the tendency for government officials to receive bribes is likely to be higher. Lack of transparency in government services and strong regulations too increase the chance for government officials to be bribed. Private corporations may decide to offer them money and gifts to get things done faster.

It is often perceived that corruption involves public officers at all times. This is not true. Corruption exists within private corporations as well. That is, besides being the bribers, employees in private organizations can commit acts of corruption involving other members in the private sector. For example, managers can seek opportunities to expropriate company’s funds to pay higher salaries to themselves, furnish their officers with all kinds of gadgets and facilities and travel excessively in business trips. More managers are trying to put company’s money into their own pockets through creative or illegal accounting. Also, some members of the private firms may provide employment opportunities to their relatives and friends. Proper screening process is not carried out. They can also offer exclusive contracts to relatives or friends without going through the proper procedures. Such questionable related-parties transactions are carried out at the expense of the shareholders interests. Such phenomenon is commonly known as cronyism and nepotism.

While corruption in public and private sectors takes place, the distinction between corrupting a public officer and a private person is deemed less relevant. There are several reasons. First, both events incur social costs. In a corrupt society, people are generally not treated fairly. Resources are misallocated to please certain persons at the expense of others. Second, the reason why people are corrupt is essentially the same whether the ‘bribed’ is paid to a private or public sector person. The rational principal can be applied. A person is said to the rational if he/she assesses all options that are available to him/her when making a decision. The options’ respective benefits and costs are computed. A rational person then chooses the option that provides him/her with the highest net benefit. A person chooses to corrupt therefore because the net benefit for doing so outweighs the option of being clean. Third, being corrupt effectively violates the persons’ social responsibility. This is true for individuals working in the private sector and public sector. The public official owes to the public at large. He/she has the responsibility to maximize the social welfare of the nation he/she serves. Accepting bribes violates such a duty. The same applies to private sector employees. By accepting (or offering) bribes, they effectively violate their responsibility to maximize the shareholders value as well as interest of other stakeholders. If they are caught, the companies’ reputation and survivorship are at stake. They are playing with the shareholders’ funds. This is morally incorrect. 

 

Does whistleblowing reduces acts of corruption?

            Protecting whistleblowers can be considered as the next big step towards raising the standards of corporate and public sector governance. Since the outbreak of the East Asian crisis, many countries around the world (particularly in the East Asian region and transitional countries) have established their respective codes of corporate governance. The codes are meant to provide private corporations with guidelines as to what constitutes best practices in governing their corporations. Setting up independent board of directors, having separate persons to occupy positions of Chief Executive Officer and Chairman of the Board and be more transparent so that investors and policy makers can assess companies’ risks more timely, are some common recommendations.

The thing to note here is that the codes of corporate governance are merely guidelines. They are not mandatory for companies to follow. This is the case in Singapore as well as in Malaysia. The hybrid system is adopted. Companies are provided with the guidelines and it is really up to them whether they want to follow the principles or not. Of course, the companies are expected and encouraged to adopt the principles but it is not illegal if they do otherwise.

There are at least three reasons why companies are not required to follow the code in a strict sense. First, the regulatory agencies recognize that companies are different. Establishing a one size fit all code of corporate governance is difficult if not impossible. Giving the companies flexibility in implementing the code generates benefits that potentially outweigh the costs. Second, the regulatory agencies recognize that high costs are likely to incurred by them should they make it mandatory for companies to follow the codes. Obviously, if the codes are made mandatory, checks must be conducted to see that the code is followed through. Otherwise, making it mandatory seems meaningless. Monitoring the companies to make sure that the principles are followed is costly.

Third, the regulatory agencies perceive that companies will follow the codes to a very great extent even if following them is not mandatory. The market will ensure that this is so. To attract investors and enhance their reputations, the companies must be seen as abiding to the guidelines. While this is true, the intended objective of having the code of corporate governance in the first place may not be attained. Why is this so? The reason being that the companies may merely be following the form but not the substance imbibed in the code. Being rational individuals, managers will still be committing unethical practices like offering or receiving bribes if the benefits of doing so outweigh the costs. I see a strong role employees can play. Employees can be regarded as ‘sheriffs’ to monitor managers’ actions. This measure can supplement (not replace) whatever existing measures which are currently in placed. The presence of potential whistleblowers raises the costs for managers to act inappropriately. Potential offenders may think twice in committing acts of corruption if they learn that there is high possibility that their acts are known and revealed by their colleagues. The point is, managers perceive that there are additional risks involved in committing wrongdoings.

 

How to encourage more employees to whistleblow?

            Whistleblowing can be treated as a useful internal tool to control against corruption. It should supplement the external measures like regulation, competition, litigation and shaming of offenders through media exposures. This question now is how do we encourage more people to whistleblow?

            It takes courage to whistleblow. As was mentioned earlier, costs are involved when one blows the whistle. Unless the whistleblower is protected, it is difficult to get him/her to speak up. Some may prefer to be free riders. They may think, ‘let others monitor the companies and let them blow the whistle’. Such thinking is common among individuals who perceive that the chance of success in bringing the offenders to justice is next to nothing. This is a real problem that needs to be addressed. Essentially, employees have to place the society above them. What if the managers’ actions put the society’s interest at stake? What if the public’s health and safety are at stake? Blowing the whistle should be carried out for moral reasons. To encourage employees to speak up against immoral organizations and managers, the law must protect them. For example, whistleblowers must be able to resume their career after blowing the whistle. They must be confident that follow-up actions will be taken against the potential offenders.

            It is generally true that whistleblowing is more accepted in western countries. It is part of their culture to speak up. They demand greater freedom of speech. In Asian countries, employees are loyal to their paymasters. Any unhappiness are expressed in closed-doors rather than declaring them openly in the public domain. Many Asians are followers of Confucianism principle, which advocates harmony and respect for leaders. These principles go more or less against the idea of whistleblowing. What is the implication? To guard against any wrongdoings from managers, internal controls must be erected. Even if employees remain quiet, at least, with the internal controls, some forms of monitoring are present. The key is to let managers know that their actions are being monitored. Boards role is essential. Besides thinking about long-term strategies for their corporations, board of directors must participate actively in nominating board members and top managers. They must audit the companies’ financial statements to make sure they are fairly and accurately presented. They must be willing to listen to employees. Feedback mechanisms like hotlines and staff suggestion schemes can be set-up to encourage employees to voice their concerns internally. Employees must be given the option to remain anonymous when they contribute. The board should get the managers involved to address the genuine concerns for the organizations’ overall betterment.

While Asians are generally inactive whistleblowers, the trend appears to be changing. This is at least the case for Singapore. As was mentioned earlier, many whistleblowers are voicing out their concerns to CPIB, Singapore’s anti-corruption agency. Interestingly, 60 percent of those who spoke up did not wish to remain anonymous. They wanted their employers to know who they were.

Employees should be glad to know that shareholders in Singapore are becoming more concern with how companies are performing. They are more interested in knowing actions taken and decisions made by the boards. There is a growing mood of shareholder activism at annual general meetings in Singapore. A recent case involved the Singapore Exchange’s AGM where its board led by Chairman, J.Y. Pillay was criticised for the use of stock options. The case was brought up because of the huge payout made to a former employee. A total of SGD10.8 million was paid out to former SGX Chief Thomas Kloet when he exercised his options. This effectively diluted the value of the stakes of existing shareholders. With larger numbers of new shares issued, existing shareholders own proportionately smaller proportions. It was perhaps the fact the tension was so great on the board’s Chairman that Pillay eventually lost his temper and chided active shareholder Ramesh Sheth for asking too long questions! (The Straits Times, 23 and 24 October 2003). The point I want to make here is that shareholders in Singapore are becoming more active. They want their voices and concerns to be heard. The implication is that employees are likely to have stronger backings from shareholders should they whistleblow. Shareholders are interested to hear their concerns. Shareholders will offer the employees the necessary protections if the latter are ill-treated after whistleblowing. There are implications to managers as well. Managers should pay attention to employees’ grievances and address them appropriately. This is to avoid employees from blowing the whistle. Otherwise, they would have to answer to the shareholders.

Earlier, I made the comment that individuals are generally rational. Corrupt officials receive bribes because the net benefits accrued in doing so outweighs the net benefits for doing otherwise. This same principle can be applied to explain why some employees blow the whistle while others do not. Being rational individuals, the employees would have to assess the alternatives of blowing the whistle and doing otherwise. Benefits and costs of both alternatives are computed. The alternative with the higher net benefits will eventually be chosen. To encourage employees to blow the whistle (for moral reasons, not personal reasons), the option’s bet benefits must be raised. This involved raising the benefits for taking up the option and reducing its costs. Giving strong protection to whistleblowers is one way to raise the net benefit value. Others include allowing whistleblowers to remain anonymous, setting up a clear avenue for them to voice their concerns and ensuring employees that appropriate follow-up actions will be undertaken. Potential whistleblowers must be aware of the information so that they can be factored into the individuals’ net benefits calculation. Educating the public is thus essential. The role of media should not be underrated in this aspect.

 

Conclusion

            This essay highlights the issues on whistleblowing and corruption. Generally, employees should be encouraged to voice their concerns about employers’ wrongdoings. Misbehaviours will put the interests of shareholders and other stakeholders at stake. They should be stopped. Proponents of whistleblowing argue that employees should put the interests of the society above them. It is the moral responsibility of concerned employees to let others know about the companies’ wrongdoings so that appropriate actions can be taken against the culprits. It should be noted though that the main objective to blow the whistle is moral-driven and not for personal gains. If the latter dominates, then the action does not represent ‘whistleblowing’ in the manner defined by Business Ethics experts.

            With technology advancements, it has become easier for concerned employees to blow the whistle. Electronic mails for instance can be used to spread their concerns reaching many more people than before at a relatively short period of time. Messages can also be sent to appropriate watchdogs like the anti-corruption agency and consumer rights advocates. Shareholders are not likely to ignore such messages spreading around which concerns the companies that they have invested. Today, managers are closely monitored.

The point is, employees’ concerns should not be neglected. Their grievances should be heard. They should be encouraged to direct their concerns internally to managers and even the board of directors rather than letting the general public know about them. Of course, to prevent negative comments to reach the public, employees must see that the necessary persons in the company is making genuine efforts to address the concerns. Managers can take advantage of advancements in technology. Staff suggestions and hotline through the companies’ intranet system for instance can be set-up to hear the employees’ concerns.