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Incentives for whistle-blowers: Weigh up the options carefully

By in Business, Economy, Finance on August 29, 2016

Offering rewards for whistleblowing can yield results, but should not replace the creation of an ethical culture.

By  Liezl Groenewald, Manager: Organisational Ethics Development – The Ethics Institute

Canada’s Ontario Securities Commission recently announced that it would begin paying incentives to whistle-blowers. The scheme allows for payments of up to $1.5 million, or more if high amounts are collected. The US Securities and Exchange Commission (SEC) is the flag-bearer for this approach, paying famously high rewards to those uncovering corporate wrongdoing.

Should South Africa, with its high levels of corruption, be considering a similar approach?
This approach has generated results for the United States. Complex frauds have been uncovered, and the pay-outs help to compensate whistle-blowers for the fact that many lose their jobs or find their careers in free-fall after coming forward. For example, former Enron Vice-President Sherron Watkins, who helped uncover accounting irregularities at the company 14 years ago, has been unable to obtain a corporate job since.

However, British regulators decided not to go this route. They argue that only a small number of whistle-blowers—perhaps as low as 1 percent—actually qualify for a pay-out; no such protection is afforded to those whose information does not result in a concrete outcome, but who may still suffer negative consequences. The introduction of financial incentives has not only created the need for complex and expensive governance frameworks, but it could also undermine existing corporate whistle-blowing mechanisms.

Exemplary protection
South Africa is generally credited with an exemplary protection framework for whistle-blowers, anchored by the Protected Disclosures Act. However, The Ethics Institute’s South African Business Ethics Survey 2016 shows a decline in the number of South African employees who report observed misconduct. In 2016, only 48 percent of those who observed misconduct reported it, down from 64 percent in 2013 and 66 percent in 2009. The most prominent reasons for not reporting misconduct are a fear of victimisation at work (36 percent) and a belief that the company would take no action (32 percent).

Locally, there have been a number of high-profile instances where whistle-blowers have suffered severe consequences or even death. One such was Moss Phakoe, a councillor in Rustenburg who was gunned down after giving evidence of municipal corruption. Another is Mpumalanga politician Jimmy Mohlala, who was shot dead after blowing the whistle on corruption linked to the building of a 2010 Fifa World Cup Soccer venue, the Mbombela stadium in Nelspruit.

Another factor for the decline in reporting misconduct could be that the profile of perpetrators has shifted, with 41 percent categorised as senior managers, up from 17 percent in 2009, according to PwC. It seems that employees are less willing to blow the whistle on their seniors, despite the protection afforded by internal whistle-blowing policies and the Protected Disclosures Act, and the fact that most corporates have a hotline run by a third party where reports can be made anonymously.

This could be justification for considering some sort of incentive to encourage whistle-blowing. At the same time, though, care must be taken to craft the approach lest it undercut efforts to build an ethical culture in our businesses and more generally.

Changing the ethical culture
That said, an incentive scheme could play a valuable role in foregrounding ethical behaviour, and promoting the concept that ethical actions yield positive results. It may also help to reverse implicit cultures that prioritise loyalty to fellow workers above loyalty to the organisation.

Based on international experience as well as the requirements of the Protected Disclosures Act, it’s important to emphasise that whistle-blowers should only be allowed to contact regulators, other authorities or the media after having exhausted internal reporting avenues. Not only could it strengthen the ethical culture within corporates, but employees will be protected by the Act. As important, companies should make concerted efforts to praise those who act ethically by blowing the whistle, and should be meticulous about reporting on what actions they have taken on each reported misconduct.

The key to halting corruption is to create a situation in which acting ethically is the default behaviour pattern. Clearly, as a business community and a nation, we are far from reaching that goal—some form of incentive for whistle-blowers might therefore have a role to play.