A company's best defence

CEOs should think of whistle-blowers as friends, not foes — it just might save them from prosecution

CREDIT: Aaron Lynett for National Post

Joanna Gualtieri, a lawyer and founder of Federal Accountability Initiative for Reform in Ottawa, says new accountability rules in the United States are making disclosure the cornerstone of every company.

Philip Quinn, Financial Post
Wednesday, April 19, 2006

Enron whistle-blower Sherron
Watkins wrote letters
to former Enron CEO
Kenneth Lay concerning
questionable accounting
practices.

Senior executives in Canada should encourage whistle-blowers -- employees who are prepared to stick out their necks when they spot a wrong -- because they just might help executives save their necks from prosecution and civil action.

"With Kenneth Lay and Jeffrey Skilling [Enron's former chief executives], their defence is going to be that they didn't know [about the illegal accounting practices taking place]," says Joanna Gualtieri, a lawyer and the founder of Federal Accountability Initiative for Reform in Ottawa.

Complicating their defence is the fact former Enron executive Sherron Watkins did warn Lay about the company hiding financial losses in so-called Raptor hedges but he dismissed her concerns.

"The obvious question becomes 'well why didn't you listen more closely when you were warned and if they are truly innocent that becomes a sort of hallmark case.' "

A whistle-blower can not only help a company prevent financial losses from theft and fraud but also protect senior executives from prosecution and civil action.

"Yes it [whistle-blowing] assists the company but I'm also suggesting something even more fundamental is that it's going to assist you the CEO or CFO and save you from possible prosecution," Ms. Gualtieri says.

"I tell people that because of these new accountability rules, you want to know what is going on. In other words, disclosure is really the cornerstone of your organization. You want to simply reduce the possibility you as the CFO or CEO will be blindsided by these risks being taken way down the line."

Corporate meltdowns at major U.S. firms such as Enron and WorldCom led to the Sarbanes-Oxley Act -- legislative reform that puts increased responsibility on a company's board of directors to prevent corporate malfeasance.

In Canada, there is both a legislative and corporate lag to making the changes that would help whistle-blowers step forward without fear of suffering job loss or marginalization if they remain at the company.

"Even in the U.S., the whistle-blower still has a hell of a ride," says Ms. Gualtieri, who exposed the excessive costs for diplomatic accommodations at the Department of Foreign Affairs in the 1980s. "Really credible reports are that 85% of whistle-blowers will suffer serious repercussions. In Canada, it's probably higher. I would say closer to 95%. I've never spoken to anybody who has stepped up who hasn't suffered."

It is in the interest of the bottom line to find out about fraud or misappropriation of goods. One of the key ways to do that is to encourage employees to step forward without fear they will end up being victimized.

"If they [the employees] notice that management is serious, it sends a strong message," says Ray Haywood, Investigations and Forensic Services, PricewaterhouseCoopers.

"We [executives] are not looking for people to tell tales on the person working next to them but if it's a thing that affects the integrity or the brand or the bottom line of our company, we'd like to know about it and we'll react to it."

Canadian companies often incorporate whistle-blower policies into a larger loss prevention package.

"I think they are much more interested when we talk about this [whistle-blowing] in a much more holistic or expanded sense," Mr. Haywood says. "That it fits in to their whole approach to preventing theft and fraud and other things that impact negatively on the company."

Companies have tried various approaches to handling whistle-blower complaints, such as setting up a corporate ombudsman to deal directly with the issue or allowing employees to file anonymous complaints via the phone or e-mail. Usually, anonymous red flags are handled by third parties who then funnel the information to a company executive or HR department.

Anonymity will most likely be sacrificed as the claim moves forward especially if it involves complex issues. Employees have to feel there is something in place to protect them beyond just words in a policy statement.

"Enron had an ethics professor on their board; Enron had a wonderful code of ethics and a number of the trappings of an integrity program," says David Nitkin, president of EthicScan Canada.  "The problem was it didn't have protection for the whistle-blower and the woman who did come forward didn't have her activities acted on."

He says there were at least 50 Enron employees who would put on a show every time Wall Street analysts toured the company to make them believe they were making millions selling energy futures.

"Don't tell me people didn't know, that's my experience whether it's a secretary, whether it's a co-worker or a spouse, somebody knows or suspects."

That fear of how they will be treated often turns potential whistle-blowers silent.

"I think we do need to see more actual examples of people who blow the whistle and are protected by their company," says Mark Schwartz, assistant professor, Atkinson School of Administrative Studies at York University in Toronto.

"Firms still focused on the bottom line continue to abuse and punish their whistle-blowers even if they claim to protect them."

There is the obligation, on the part of the whistle-blower, to report the matter internally before running to the media. They should only go outside the company if there is the chance they will be severely punished and the matter not acted on. In turn, whistle-blowers should be able to expect they will be treated with respect and protected.

"[They need to know] they will be protected from harassment if they do blow the whistle, says Prof. Schwartz. "It's not just a question of putting it on paper. You need to have managers that are constantly reminding employees about all of this right up to the CEO. There are examples of some CEOs saying, 'if you see a problem you should actually feel comfortable contacting me'. Warren Buffett did that right after the whole Salomon Brothers incident, sent out a memo to all employees and gave everyone his home phone number."

There is also enormous pressure on a company's board of directors (of particular concern to Canadian companies trading on U.S. markets) because of Sarbanes-Oxley to stay completely informed about what is occurring at their company, either through a channel a whistle-blower can use to contact them directly or at least making sure the CEO keeps them fully aware.

"I would put the elementary obligation on the independent member of the board," Mr. Schwartz says. "He or she is the final gate keeper and when someone like Sherron Watkins blows the whistle to Ken Lay, he should have presented it to the board of directors and he didn't."

© National Post 2006