Rio Tinto Group is the world’s second-largest metals and mining corporation and a company with operations in multiple countries. In 2019, the company faced a public scandal when executives failed to report significant delays in the expansion of the Oyu Tolgoi copper mine in Mongolia. After having sounded the alarm regionally, internal whistleblower Richard Bowley disclosed his concerns to regulators in the US, UK, Australia, and Mongolia, all countries where the company group was operating. The company had failed to disclose concerns about its operational delays to investors. The example shows how internal and external reporting channels can be crucial for revealing problems in one branch and can decrease the negative impact on the parent company.
A group company is formed when a parent company holds a controlling interest in two or more entities (subsidiaries) that come together. The subsidiary is usually a smaller company, branch, or division controlled by the larger holding company. This business structure allows the parent company to centralize its resources and management practices and share the financial risk between several smaller companies. The group company structure is common in real estate, insurance, and banking. The advantage of having a group company structure is that decisions are made quicker and more efficiently when changes are needed due to market fluctuations. There are also tax incentives such as offsetting losses in one subsidiary against the profit of another.
Company groups can reduce their liability for debts and protect their assets by sharing the risk with their subsidiaries. Yet, the group company structure can also present a few disadvantages. It can be difficult to shift strategic plans, make decisions that are relevant to one subsidiary but don’t affect the other, and can lead to conflicts of interest. For example, when a parent company puts its interests before those of its subsidiaries it can risk profit in one member company or reveal its trade secrets. The opposite is also true. Subsidiaries can sometimes put the group company at risk by dismissing internal reports of wrongdoing or delaying sharing the information with the parent company. If one subsidiary gets negative press, the entire group can suffer a loss of revenue and public trust.
Whistleblowing Guidelines for Company Groups
Company groups can be set up and structured in different ways, making it a challenge to figure out how to best implement a whistleblowing channel. The EU Directive provides whistleblowing guidelines for company groups and their subsidiaries when it comes to the implementation of internal reporting channels. In Article 8, the directive states that any private entity with more than 50 employees must implement an internal reporting system, whether it belongs to a company group or not. One of the primary reasons for this is that each Member State implements the Whistleblower Directive differently and has its own legal requirements.
The directive specifies that mid-sized companies with 50 to 259 employees can have a centralized group-wide whistleblower system and share resources and expertise when receiving and investigating reports. However, it must exist in parallel with an internal reporting system for each subsidiary. If your group company already has a central system in place, you may continue to operate it and can still refer investigations to the parent company. But group company members may not outsource their internal whistleblower systems to other entities. The best approach to implementing the EU Directive is to create whistleblowing systems for individual subsidiaries and maintain a second reporting channel at the parent company.
Benefits of Having Two Reporting Channels
There are several benefits to implementing a bilateral internal reporting system. Having both a group-wide and individual reporting channel gives the whistleblower a choice to disclose information about misconduct through either the central or internal system. This can decrease the risk of retaliation. It also offers increased protection and compliance with existing laws and the directive and your group’s ability to prevent and detect fraud and corruption sooner. The added benefit of having individual and central systems is that investors and shareholders will feel more protected and an even playing field for all businesses across the EU will be guaranteed.
Having individual reporting channels as well as a central system allows group companies to pool their resources to investigate each whistleblowing report with their parent company and subsidiaries. There are, however, three conditions that need to be met:
- Each member company must have its own active reporting channel.
- Whistleblowers must be informed that the central office will participate in the investigation.
- Subsidiaries need to stay directly involved with any follow-up communication with the employee who discloses the wrongdoing.
Giving whistleblowers the option to report internally, rather than using a central channel enables private companies to ensure the confidentiality of the employee when they receive, assess, and investigate cases. Having two options for submitting internal reports also reduces the likelihood of employees making public disclosures of breaches. This can help preserve the reputation of the group company members. Studies have shown that most whistleblowers feel more comfortable reporting internally and this is the best way to get early resolution and reduce potential risks to the public and to the group company. An individual whistleblower channel can also expose shortcomings in the enforcement of rules, policies, and procedures that are decided on by the central company.
4 Tips for Group Company Reporting Channels
Group Companies should make sure their subsidiaries are implementing independent reporting channels. Here are a few useful tips for making sure this is managed successfully:
1. Inform the whistleblower
Let whistleblowers know that the parent company will likely have access to the report since they will be involved in the investigation.
2. Give options
Give whistleblowers the option to refuse that the parent company investigate the misconduct they have disclosed, and to ask that the investigation be conducted by the subsidiary.
3. Train additional employees
Multiple whistleblowing case managers are needed to receive, process, and investigate reports both regionally and centrally. This will ensure compliance with the EU Directive and keep reporting processes separate.
4. Make sure responsibility is understood
Ensure that subsidiaries understand their responsibility for maintaining the confidentiality of each report and are sharing feedback and subsequent corrective actions with whistleblowers.
These four actions can help increase the chances that employees will report the misconduct they observe. They will also ensure your group company remains in compliance with the directive and provides subsidiaries with an independent channel for submitting their whistleblowing reports. Involving the central company in the investigation process does not mean subsidiaries aren’t responsible for providing an internal reporting channel or managing whistleblower cases. Think of your parent company as a resource for helping your subsidiaries deal with disclosures of wrongdoing. They should still identify the right policy and whistleblowing system for their company.