(The following post originally appeared on ONSecurities, a top Minnesota legal blog founded by Martin Rosenbaum to address securities, governance and compensation issues facing public companies.)
Under the SEC’s whistleblower rules (302-page PDF), adopted in May under the Dodd-Frank Act and described in this prior post, whistleblowers are not required to report perceived misconduct internally before going to the SEC. However, the SEC intended the rules to encourage internal reporting. There is evidence that most companies are still considering whether, and how, to maximize the chances that an employee will report internally first.
Broc Romanek, in TheCorporateCounsel.net Blog, recently published the results of a survey on whistleblower policies, with 33 companies responding. A majority of the respondents reported that they either intend to change their policies in response to the rules or have not yet decided. Further, a majority have not yet decided whether to provide incentives to report internally first, and a majority have not yet decided whether to create a system to alert employees of the benefits of reporting internally.
Obviously, the jury is out on the best way to incentivize internal reporting. Last month, RAND Corporation released “For Whom the Whistle Blows: Advancing Corporate Integrity and Compliance Efforts in the Era of Dodd-Frank” (free download available here), a report summarizing the conclusions and discussions of a recent symposium. The symposium featured speakers with widely varying views, and the 78-page report makes interesting reading. Some of the key points:
- The speakers emphasized the important roles of the chief ethics and compliance officer and boards of directors.
- It is critical to create a culture in which internal reporting is valued, whistleblowers are clearly and obviously protected, and employees have trust in the internal reporting system.
- Companies can consider financial and non-financial incentives to make internal corporate reporting mechanisms more effective.
On the last point, some companies have considered paying their own bounties to whistleblowers to report internally first, as a way to combat the bounty to be paid by the SEC in successful external reporting cases. This is a controversial practice, and I have not yet heard of companies implementing such direct payments. The participants in the symposium also discussed providing non-financial incentives, such as acknowledgement by the CEO or recognition by the company. Others believe internal reporting can be enhanced through the management compensation system:
One suggestion offered to help reinforce internal reporting was that corporate compensation schemes could be tweaked to include a set of ethical leadership criteria for management, thereby supporting a culture in which internal whistleblowers are supported and valued. . . . [O]ne participant noted that the CEO and key senior executives could receive contingent compensation based on a range of performance metrics tied to ethical leadership, support of the compliance function, and successful efforts to contribute to ethical culture.
Another frequently discussed method of encouraging internal reporting, not discussed in the Report, is based on a compliance certification. Employees would be required to certify periodically to the effect that they have reported, or will report, any instances of certain types of wrongdoing to the company. In a recent webcast on TheCorporateCounsel.net (available by subscription), Sean McKessy, the Chief of the SEC’s Office of the Whistleblower, Division of Enforcement, engaged in a discussion of such certifications with several practitioners. McKessy expressed the concern that such a certification, if not properly worded, could conflict with an employee’s statutory right to report to regulators.
The bottom line is that there are a lot of methods to consider in encouraging internal reporting by whistleblowers. And most companies are still doing just that – considering what is the best approach among the alternatives.