The Cost of Not Having a Whistleblower System

by: Michelle Thompson

There are important consequences to not implementing or supporting a whistleblower system. If you believe a whistleblower system is unnecessary, think again. Not having one can mean not providing important opportunities for employees to report potential misconduct or concerns. It also means not having the mechanisms in place to correct problems in a timely way. There are also several other consequences for not having an internal whistleblower channel. For one thing, it can lead to more public disclosures. It can also harm a company’s reputation, decrease transparency and employee motivation, and increase the risk of financial damage. 

Consequences of Not Having a Whistleblower System

Weak corporate governance in risk management, board practices, and shareholder rights was later found to have played key roles in the rise of the global financial crisis in the late 2000s. Had there been more effective policies and tools in place for reporting wrongdoing internally, the problems would likely have been reported sooner and a financial crash may have been avoided. Here is a list of important consequences of not having a whistleblower system in place:

Lack of Transparency

When companies discourage speaking up, employees stop sharing concerns about employee and revenue performance and are less likely to report problems with internal processes. Having an open, ethical work culture makes employees more likely to report human resource issues and feel more valued and respected.

Less Staff Motivation and Productivity

having a culture of silence or fear can have a negative impact on your employees. It can make them less productive and engaged and affect their performance and motivation. On the other hand, whistleblower systems can improve staff performance over time. You can also ensure good employee relations and work conditions are maintained.   

Drop in Public Trust

When public disclosures of misconduct are made, public trust declines. Companies that fail to show a certain level of transparency are seen by the public as less trustworthy and capable of dealing with internal wrongdoings. 

Financial Loss and Regulatory Fines

Breaching rules can be expensive. One study found that company stock prices can decrease by 2.8% when more external disclosures to the press are made. Other potential financial consequences include having to deal with more shareholder lawsuits and seeing less return over time. The EU Directive has also introduced penalties for companies that don’t take measures to establish proper reporting channels or prevent reprisals.

Reputation Damage

When large companies Boeing and BP encourage a culture of silence, they contribute to global white-collar crime. This in turn has a negative impact on market valuations and reputations (Walsh, 2021). Businesses with effective whistleblowing systems can avoid having internal issues go public and reduce civil litigation and negative press that damage their reputation. 

Reduced Staff Retention

Not addressing concerns from employees about potential wrongdoings means having higher staff turnover and losing skilled competent team members. This will also increase recruitment and training costs. 

Poor Risk Management

Whistleblowing programs often overlap with risk management policies because both are focused on compliance with regulations and laws. When whistleblowing programs are poorly managed, they fail to meet the standards of risk management. Companies are less able to identify, assess, and mitigate risk at every level. Not having a strong whistleblowing reporting channel in place means companies are unable to effectively manage risk.  

More Internal Retaliation

Research shows that when managers perceive whistleblowing as a threat to their authority and to the company’s public image, retaliation and the need for employee protection increase. Improving your organisational culture and integrating whistleblowing policies into your risk management strategy can help reduce incidents of retaliation, which can further complicate cases of misconduct.

Managing Risk Through Whistleblowing

A 2014 EU Anti-Corruption Report notes that “[…] whistleblowing faces difficulties given the general reluctance to report such acts within one’s own organisation and fear of retaliation. To remedy this, effective protection mechanisms must give confidence to potential whistleblowers”. A United Nations study about its internal work culture revealed that most whistleblowers did not trust the protection mechanisms in place because “[…] there was a strongly held perception throughout the United Nations System of a pervasive culture of secrecy in the decision-making processes of the organizations and little, or no accountability” (UN Joint Inspection Unit, 2010). A United Nations Dispute Tribunal (UNDT) review of internal cases of disclosure filed between 2011 and 2014 by UN staff revealed that 96% of whistleblowers requesting protection were deemed not to meet the criteria. The Tribunal found the “Ethics Office had failed to protect UN staffers and Ethics Directors had ignored an Order from the UNDT to protect one whistleblower from retaliation (Hunt-Matthes & Gallo, 2017). The case shows that gaps in decision-making revealed problems in the internal assessment process and leadership. 

To avoid the consequences in the list above and those seen in the UN case, it is important for the board of directors, managers, and employees in a company to develop and apply more effective strategies that help identify potential problems and events that may negatively affect the organisation (COSO, 2004). Companies must foster a culture of trust and transparency to encourage employees to speak up. Whistleblowing has historically been seen as a problem generator rather than a tool for managing risk, and whistleblowers are often seen as disloyal. However, these perceptions are changing, and it is increasingly seen as a way of correcting unsafe products and work practices, reducing fraud, and improving businesses’ profitability and effectiveness (Rothwell and Baldwin, 2007). It’s not just a question of having a whistleblowing system, it’s also about having one that works well and increases employee trust.  

How Can Whistleblowing Mitigate Risk? 

Having a whistleblowing system enables companies to create internal cultures where concerns can be disclosed, discussed, and resolved at all levels. It can also reveal failures in organisational governance and risk management practices that would otherwise not be seen. Whistleblowing can provide added control, but ideally, an organisation should create a supportive environment for employees to raise concerns to avoid having to anonymously report wrongdoings. Risk management and whistleblowing programs should be integrated to ensure organisations and companies can effectively manage risk and avoid the cost of not having a ‘speak-up’ culture.

Your ability to effectively respond to disclosures is key. When done right, responses can enhance organisational culture and employee satisfaction and commitment. Anonymous channels can also improve a company’s ability to detect fraud. For example, a study by Business Ethicist Eva Tsahuridu showed that organisations with anonymous disclosure channels see higher fraud detection rates (47%) compared to other data reporting (34%). In cases of fraud disclosure, anonymous tips account for 40% of cases detected, while only 15% are identified through management reviews and 15% through internal audits (ACFE, 2010). 

Whistleblowing is an early warning system that can alert companies of safety issues in the workplace, fraudulent activity, bribery, damage to the environment, or misrepresented performance data. Internal whistleblowing tools like Northwhistle can offer confidential channels that enable companies to detect wrongdoings early, comply with legislation, reduce their financial loss, and avoid damage to their reputation or litigation. In the end, cases like the UN show how high profile organisations and businesses can face negative consequences and a loss of employee and public trust when they don’t have an effective whistleblowing system in place.