Whistleblowing and Employee Loyalty

Abstract

Concepts about the relationship between whistleblowing and employee loyalty have evolved in the literature over the course of several decades. The article also examines whistleblowing within the context of business ethics and employee and public views on whistleblowing. Additionally, the article looks at national laws and significant court cases and identifies some individuals who have been important to the evolving process of whistleblowing.

Overview

The term whistleblowing is believed to have originated in nineteenth century England in response to British policemen blowing their whistles to call attention to the fact that a crime was being committed. Over time, the practice was taken up by referees, umpires, coaches, and others to bring attention to infractions of rules. In the corporate and political arenas, whistleblowers are insiders who make public misbehavior that has been institutionally condoned. The actions of some whistleblowers have been so important that they have changed the course of history.

In the late 1960s, Daniel Ellsberg, a former White House consultant and an avid antiwar activist leaked classified documents detailing U.S. strategies in Vietnam to The New York Times. In New York Times v. United States (403 U.S. 713, 1971), the Supreme Court held that within the context of the case, the government had not justified the use of prior restraint, which could have been used to prevent newspapers from publishing the Pentagon Papers. That same year, another whistleblower named Mark Felt, an associate director at the Federal Bureau of Investigation (FBI) known at the time only as Deep Throat, began revealing details about illegal activity conducted by members of the Nixon administration to Washington Post reporters Bob Woodward and Carl Bernstein. These exposures ultimately led to the resignation of President Richard Nixon on August 22, 1974. In both cases, whistleblowers determined that loyalty to the public and their own beliefs were stronger than any loyalty owed to their employers.

Traditional theories dealing with whistleblowing and employee loyalty have tended to focus on moral choices facing employees when deciding whether to "blow the whistle" on an employer. According to one view, employee loyalty dictates that employees have an inherent responsibility to protect employers from going public with damaging information (Larmer, 1992). Since the general public as well as national and state governments have a major stake in ensuring that businesses do not engage in unethical and illegal behavior, whistleblowers have come to be viewed as important actors in ongoing efforts to uncover business misconduct. Since 2011, the Securities and Exchange Commission (SEC) has earmarked from 10 to 30 percent of fines collected in such cases for incentive awards on the grounds that it encourages ethical behavior in business and protects the public interest.

Misbehavior reported by whistleblowers covers a range of behavior. Improper behavior may involve a single individual, as is frequently the case when charges of sexual harassment, discrimination, or substance abuse are brought. The wrongdoing may be also be companywide, involving such conduct as misuse of company resources, failing to oversee the quality of products, or ignoring environmental laws. Business misconduct may also include engaging in practices that are designed to mislead customers or the public about a company's products. The Association of Certified Fraud Examiners reported in 2014 that business fraud globally amounted to as much as $3.7 trillion. In the United States, it was estimated that the median amount lost to more than six hundred fraud cases in 2014 alone was $100,000 (Association of Certified Fraud Examiners, 2014). Despite the rise in business misconduct, the tendency is for employees to avoid whistleblowing whenever possible because of charges of employee disloyalty and backlash within the company.

Experts generally agree that whistleblowing should be initiated through internal channels whenever possible unless it involves immediate danger to the whistleblower or someone else or gives the employer the opportunity to remove or cover up damaging evidence (Larmer, 1992). The deciding factors in deciding to blow the whistle are generally based on doing what the employee considers right according to his or her own conscience and believing that such actions are in the public interest. Whistleblowing employees have typically been labeled disloyal by their employers and often by other employees, and it is seen as in the employer's interest to ensure the perpetuation of that image (Pittroff, 2014).

Applications

The first research on whistleblowing appeared in the 1970s when scholars began examining what was then a new phenomenon. Kenneth Walters (1975) notes that most whistblowers were labeled "muckrakers from within." The term "muckrakers" had become popular during the Progressive Era in reference to journalists and writers such as Upton Sinclair, Jacob Riis, and Ida Tarbell who had exposed corruption in the meatpacking industry, the housing industry, and the oil industry, respectively. The literature on whistleblowing received a major boost in 1972 with the publication of three major books on the subject. Whistle Blowing, edited by consumer advocate Ralph Nader, Peter Potkas, and Kate Blaikwell, gave new legitimacy to the concept of whistleblowing. The High Priests of Waste (1972) by A. Ernest Fitzgerald, a cost specialist, exposed overspending at the Pentagon. Government whistleblowing was also the subject of Charles Peters and Taylor Branch's Blowing the Whistle: Dissent in the Public Interest.

Whistleblowing continued to be of major interest to researchers in the 1980s, but the focus shifted to examining the relationship between employee loyalty and whistleblowing. Early researchers attempted to explain who whistleblowers were and why they chose to act. The concept that employees and former employees were blowing the whistle in the hopes that they could protect the public from illegal acts became common (Pitroff, 2014). That view of whistleblowing has persisted in the literature as it has in the minds of government agencies, legislators, and the public.

Ronald Duska (1985) contends that employers have no right to demand loyalty from employees because it is impossible to be either loyal or disloyal to a company since no reciprocity is involved in an employee/employer relationship. According to this view, the employer is interested only in turning a profit and in building up the company's reputation while an employee is only interested in making money and advancing his/her career. Neither has a responsibility to be loyal to the other. Robert Larmer (1992), insists that such theories of whistleblowing and employee loyalty have failed to account for the fact that the two concepts are compatible with one another instead of being diametrically opposed to one another. He argues that whistleblowing can be said to be in the employer's best interest because it serves as a deterrent to wrongdoing and ultimately protects the employer's reputation as well as his/her business.

While it is generally agreed that whistleblowing is damaging to employers' reputations and opens businesses up to criminal charges for illegal behavior, some researchers believe that whistleblowing is a necessary component of business ethics. They point out that effective internal whistleblowing systems may encourage loyalty and prevent employees from going public with reports of misdeeds (Pitroff, 2014). In order to be considered beneficial, whistleblowing must not derive from opportunistic motives on the part of the whistleblower, and it must involve punishment for anyone making false claims of misdeeds as well as punishment for anyone who attempts to retaliate against a whistleblower (Pitroff, 2014). The bottom line according to some research is that employers who consistently treat their employees fairly are more likely to create an environment in which employees feel comfortable in reporting perceived wrongdoing internally rather than reporting it to outside sources.

Despite decades of discussion on the relationship between whistleblowing and employee loyalty, twenty-first century researchers continue to disagree about the legitimacy of the relationship. Some researchers question the morality behind whistleblowing. Within the field of business ethics, the debate still focuses to some extent on whether loyalty to a company is possible, but ethicists are also exploring the issue of whether the two concepts are compatible (Verelius, 2009). Cross-disciplinary studies have also been common, and researchers are examining whistleblowing and employee loyalty from economical, psychological, accounting, and human resource management perspectives.

Issues

The courts began dealing with the issue of whistleblowing in the late 1960s. They examined the practice within the context of the First Amendment's right to freedom of speech. The Supreme Court established a precedent for whistleblowing as a First Amendment right in Pickering v. Board of Education (391 U.S. 563, 1968), holding that a high school teacher had a constitutional right to criticize his board of education on the subject of how athletic funds were allocated. Two years later in Muller v. Conlisk (429 F 2nd 900), the Chicago Police Department was ordered to reinstate a police officer who had been fired for going public with information about stealing among fellow officers after his superiors had failed to act when he reported the behavior. In 1973 in Rafferty v. Philadelphia Psychiatric Center (356 F Supp 500), the First Amendment rights of a psychiatric nurse were upheld after she went public with concerns about the way that patients were being treated. The courts have traditionally looked at whistleblower motives in determining whether or not their actions are protected by the First Amendment. In 1970, in Kelly v. Florida (238 So 2d 565), the Florida Supreme Court refused to uphold the First Amendment right of a district judge to blow the whistle on colleagues who refused to carry out reform measures, determining that the whistleblower was motivated by vanity and political ambition (Walters, 1975).

Federal laws dealing with whistleblowing have been in effect since 1978 when Congress added a whistleblowing provision to the Civil Service Reform Act. A decade later as business fraud began to garner wider attention and whistleblowing became more common, Congress passed the Whistleblowing Protection Act as a means of protecting government whistleblowers from reprisal. Most states have also passed their own whistleblowing laws as a means of uncovering behavior that violates state laws.

In 2002 in the wake of several major business scandals, Congress passed the Sarbanes-Oxley Act (SOX) establishing procedures for dealing with whistleblowing and protecting whistleblowers from retaliation. As a means of preventing fraud and protecting the legitimacy of peer-reporting systems, SOX identifies a company that is unlikely to engage in illegal behaviors as one in which an ethical environment exists, where fairness and cooperation are encouraged, and where communication is open across all levels of the organization. Recognizing that many whistleblowers, before going public, first report unethical or illegal behavior to their superiors, who then fail to act, SOX includes provisions for making individuals who monitor behavior legally responsible for acting on information uncovered or reported to them by others.

A global financial crisis occurred in 2007–8, and the United States was plunged into a major recession. Curbing business fraud took on new urgency in the wake of the financial crisis, and Congress responded by passing the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 at the urging of the Obama administration. In Section 21F, Congress set up an incentive program for individuals who came forward to provide the SEC with original information about individuals or companies acting in violation of federal securities law and established protections for whistleblowers.

In 2008, the question of employee loyalty versus the public good received international attention when Bradley Birkenfeld, an employee of the Swiss bank UBS AG, informed U.S. authorities about the bank's practice of sending emissaries to the United States expressly for the purpose of helping American businesses avoid paying taxes by placing their money in Swiss banks. After serving 30 months of a 40-month prison sentence, Birkenfeld was awarded $104 million for his whistleblowing efforts. It was the largest such award in American history. The bank ultimately paid fines of $780 million and admitted to tax evasion. Americans who had been involved in the fraud paid more than $6.5 billion to the U.S. government, and charges were filed against them as well as against offshore bankers, lawyers, and advisers involved in the scheme.

New provisions for dealing with whistleblowing were enacted with the passage of the Whistleblowing Protection Enhancement Act of 2012, which was designed to protect government whistleblowers who report on waste, fraud, abuse, public health or safety threats, or other illegal acts by government agencies. Despite all efforts, some researchers believe that national laws on whistleblowing have failed to provide clear definitions of boundaries that govern whistleblowing behavior and help potential whistleblowers decide on the proper course of action when facing company misconduct (Heumann & Milton, 2014). A number of national agencies have also become active participants in the whistleblowing process. Those organizations include the Government Accountability Project, the National Whistleblowing Center, the Project on Government Oversight, the Whistleblowing Protection Agency, the National Security Whistleblowers Coalition, Taxpayers against Fraud, and Public Employees for Environmental Responsibility.

In May 2016, the Defend Trade Secrets Act went into effect. This law, signed by President Barack Obama, includes an immunity provision for whistleblowers allowing them to disclose a company's trade secret confidentially to a government official or an attorney only for the purpose of reporting the suspected violation of a law by the company in question. While the provision also includes a stipulation permitting the company to recover damages and attorney's fees following such a disclosure, its ability to legally take this action hinges upon whether the company followed the requirement of informing all employees about the immunity provision.

Whistleblowing has become common in many countries of the world as a result of an ongoing pattern of business corruption. For instance, in the United Kingdom, Parliament passed the Public Interest Disclosures at Work Act in 1998 to protect whistleblowers. In 2011, the Ethics Resource Center reported that retaliation against whistleblowers had become a major problem. In one of every five cases of whistleblowing reported to the ERC, an employee had been fired in retaliation for taking action. Other cases had resulted in violence against whistleblowers (Tricker, 2014). International organizations that have a stake in protecting the public and ensuring accountability have also entered the fray. Both the European Union (EU) and the Organization for Economic Cooperation and Development (OECD) have promoted protections for whistleblowers among member states.

While whistleblowers continue to play a major role in uncovering violations of business ethics, there are also other players involved in protecting the public interest and ensuring that laws and regulations are not violated. In 2010 in a study of 2,100 class actions suits, Alexander Dyck of the University of Toronto and Adair Morse and Luigi Zingales of the University of Chicago looked at the ways in which illegal actions are brought to the attention of the public. While they accept the contention that company boards are charged with overseeing what goes on within a company, they found that in 216 cases, company boards uncovered only 64 incidences of misbehavior. Auditors uncovered another 16 of the remaining cases, and the Securities and Exchange Commission (SEC) identified 10 cases. Of the 152 incidents not discovered by company boards, 42 cases were revealed by analysts, rating agencies, and bankers. Overall, whistleblowers were responsible for identifying 37 percent of the 216 cases that were made public. Their conclusion was that detecting corporate fraud takes a village. In this case, the village is made up of non-traditional players such as employees, media, and industry regulators as well as investors, the SEC, and auditors (Dyck, Morse & Zingales, 2014).

Terms & Concepts

Dodd-Frank Wall Street Reform and Consumer Protection Act: Hailed as a major effort to reform Wall Street in the midst of a financial crisis, this 2008 act was designed to protect consumers from exploitation by everything from banks to local pay-day lenders.

Employee loyalty: Concept suggesting that employees have a responsibility to protect their employer from negative scrutiny or from revealing information that damages a company.

Muckraker: A derogatory term used in the Progressive Era to describe journalists and writers who had dedicated themselves to exposing corruption in the business world.

Peer-reporting systems: Internal whistleblowing procedures for reporting perceived misdeeds or illegal behavior. If effective, such systems may deal with minor infractions within an organization, bypassing the need to make the matter public.

Sarbanes-Oxley Act (SOX): Federal law passed in 2002 that was designed to enhance the reporting of corporate financial disclosures and prevent corporate fraud.

Securities and Exchange Commission (SEC): Federal agency established in 1934 to provide regulation and control of businesses engaged in buying and selling stock in order to prevent a recurrence of the 1929 stock market crash.

Whistleblowing: Practice by which employees or former employees report polices, practices, or actions that are considered immoral or illegal. Whistleblowers may report such acts through internal channels, or they may go public with information that is detrimental to an employer's reputation or financial legitimacy by reporting it to law enforcement, a government agency, or the media.

Bibliography

Association of Certified Fraud Examiners. (2014). Report to the nations on occupational fraud and abuse. Association of Certified Fraud Examiners. Retrieved December 21, 2016 from https://www.acfe.com/rttn/docs/2014-report-to-nations.pdf

Brenkert, G., & Beauchamp, T. (2012). The Oxford handbook of business ethics. New York, NY: Oxford University Press.

Bruns, S. M., Jackson, C., & Yue Z. (2012). Designing an effective peer-reporting system. Strategic Finance, 93, 8–13. Retrieved March 22, 2015 from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=75064613&site=ehost-live

Duska, R. (1985). Whistleblowing and employee loyalty. In Contemporary issues in business ethics (pp. 295-300). Belmont, CA: Wadsworth.

Dyck, A., Morse, A., & Zingales, L. (2010). Who blows the whistle on corporate fraud? Journal of Corporate Fraud, 65, 2213–2253. Retrieved March 22, 2015 from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=55088697&site=ehost-live

Giachetti, T. D. (2016). New federal law, SEC scrutiny triggers clarification of whistleblower rights. Investment Advisor, 36(10), 66. Retrieved December 21, 2016 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=118320227&site=ehost-live&scope=site

Heumann, M, Friedes, A., Cassak, L, Wright, W., & Joshi, E. (2014). The world of whistleblowing: From the altruist to the avenger. Public Integrity, 16, 25-52.

Larmer, R. (1992). Whistleblowing and employee loyalty. Journal of Business Ethics, 11, 125–128. Retrieved December 27, 2013, from EBSCO online database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=5397680&site=ehost-live

Leifer, S. C. (2014). Protecting whistleblower protections in the Dodd-Frank Act. Michigan Law Review, 113, 121–149. Retrieved March 22, 2015 from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=98929742&site=ehost-live

Pitroff, E. (2014). Whistle-blowing systems and legitimacy theory: A study of the motivation to implement whistleblowing systems in German organizations. Journal of Business Ethics, 124, 399–412. Retrieved March 22, 2015 from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=98676071&site=ehost-live

Tricker, R. I. (2014). Business ethics: A stakeholder, governance, and risk approach. Hoboken, NJ: Taylor and Francis.

Walters, K. (1975). Your employees' right to blow the whistle. Harvard Business Review, 53, 26–161. Retrieved December 27, 2014, from EBSCO online database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=3867272&site=ehost-live

Suggested Reading

Andrade, J. (2015). Reconceptualising whistleblowing in a complex world. Journal of Business Ethics, 128, 321–335. Retrieved March 22, 2015 from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=102059789&site=ehost-live

Brown, A. J. (2008). Whistleblowing in the Australian Public Sector. Canberra, Australia: ANU E Press.

Ciulla, J., Martin, C., & Colomon, R. (Eds.). (2011). Honest work: A business ethics reader. New York, NY: Oxford University Press.

Gao, J., Greenberg, R., & Wong-On-Wing, B. (2015). Whistleblowing intentions of lower-level employees: The effect of reporting channel, bystanders, and wrongdoer power status. Journal of Business Ethics, 126, 85–99. Retrieved March 22, 2015 from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=100256486&site=ehost-live

Lewis, D. (2015). Is a public interest test for workplace whistleblowing in society's interest? International Journal of Law & Management, 57, 141–158. Retrieved March 22, 2015 from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=101203252&site=ehost-live

Lipman, J. (2012). Whistleblowers: Incentives, disincentives, and protection strategies. New York, NY: Wiley.

Martini, J. W., & Giovino, C. (2016). Using the SEC's whistleblower program. Risk Management, 63(9), 6–9. Retrieved December 21, 2016 from EBSCO Online Database Business Source Ultimate. http://search.ebscohost.com/login.aspx?direct=true&db=bsu&AN=119052498&site=ehost-live&scope=site

Varelius, J. (2009). Is whistle-blowing compatible with employee loyalty? Journal of Business Ethics, 85, 263–275. Retrieved December 27, 2014, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=36936969&site=ehost-live

Walsh, D., Lewis, C., & Kim, Hakkyong. (2013). Investigation, enforcement, and governance. New York, NY: Palgrave Macmillan.