360� Burns From Whistle Blowing

360° Burns From Whistle Blowing

Judy Olian

(Judy Olian is Dean of Penn State's Smeal College of Business and a leading expert in strategic human resources management.)

Douglas Schafer, a Washington State lawyer, was suspended from practice for six months by the Washington State Supreme Court. Why? In a 6-3 decision, the Court ruled that his whistle blowing was based on privileged information obtained from a client, threatening the essential purpose of lawyer-client privilege.

Schafer had reported on a corrupt judge who was profiting inappropriately as a trustee of a deceased person's estate. Schafer learned of the judge's actions in conversation with a client, and reported the judge's violation to the authorities. The judge was removed from the bench and later convicted.

Is Schafer a case of hero getting blamed? More on that particular incident later. However, Schafer is an example of the many whistle blowers whose actions come back to burn them. Even Hollywood is fascinated with the tragic stories of whistle blowers. Take Jeffrey Wigand, the tobacco executive at Brown & Williamson showcased in The Insider , who committed professional and personal hara kiri after reporting on fraud and misrepresentation at the tobacco company. Or the protagonists of Silkwood and China Syndrome who warned of potential environmental disasters, and paid with their lives.

A study by Joyce Rothschild and Terrance Miethe reported on the dire personal consequences to whistle-blowers when they raise a red flag. Many suffered retaliatory behavior from their employers. They lost their jobs or were forced to retire (69 percent of study respondents), received negative job performance evaluations (64 percent), were monitored more closely by their supervisors (68 percent), criticized or avoided by co-workers (69 percent), or black listed from getting another job in their field (64 percent). These retaliatory consequences were more severe if the whistle blower reported company violations to an external rather than internal authority.

The new Sarbanes-Oxley Corporate Reform Law includes significant requirements for publicly traded corporations to protect whistle blowers. It's illegal to "discharge, demote, suspend, threaten, harass or in any way discriminate against" the whistle blower. If executives retaliate against whistle blowers, they can be levied up to $500,000 in fines or jailed for up to 10 years. Board audit committees must publicize direct and insulated communication channels for use by whistle blowers. The Department of Labor can order companies to rehire a whistle blower, bypassing the courts, and whistle blowers can request immediate jury trials to accelerate resolution of their cases.

Sarbanes-Oxley won't protect whistle blowers in private corporations, and it won't provide adequate compensation for the years of emotional turmoil, job harassment, and social isolation that many experience. The National Whistle Blowers Center in Washington asserts that about 50 percent of whistle blowers are fired after making allegations against their company.

And yet, employees have come forward at huge personal costs in companies from Rite Aid to Enron, WorldCom to Morton Thiokol. They've been willing to risk their careers, financial stability and family well-being to report on fraud, financial misconduct or environmental infractions committed by the organization that funds their paycheck. Sarbanes-Oxley will now provide a degree of cover and encouragement to some employees observing corporate misconduct to come forward, and by example will likely embolden others not covered by the Act to do the same.

Company executives obsess over the motives of whistle blowers. Are they do-gooders driven by strong personal or religious beliefs, are they "green" environmentalists or community activists, are they disgruntled or bitter employees for whom whistle blowing is a convenient platform for complaint and revenge? Even if the whistle blower has questionable motivation, these motives are irrelevant if the case has substance. Corporate efforts to discredit or harass the whistle blower will become costly delay tactics and diversion from necessary attention to, and correction of, the essential problem.

Of course, the best antidote to whistle blower is a corporate culture that is ethical to the core. But the next best thing to ferret out ongoing and undetected corporate misdeeds is a confidential reporting channel accessible to all employees, under the auspices of an independent, internal ombudsperson who has the clout to react rapidly and unilaterally to the concerns. The ombudsman should have direct reporting lines to independent directors on the corporate board. But if it isn't a serious reporting channel where concerns are heard with respect and investigated in earnest, and if it doesn't protect the informers, whistle blowers will dismiss the internal channel as a farce and will turn to outside authorities. That's when the fires take hold and can lurch out of control, ballooning into corruption or cover-up scandals that can topple firms.

And what about Douglas Schafer? He became a whistle blower and informed authorities of the judge's misconduct a full three years after he learned of it from his client, only after the judge sanctioned him for filing a frivolous lawsuit. And that's the other half of the story. The lesson to whistle-blowers is to make sure your own ducks are in order before you blow, otherwise the burn could come full circle.