CHAPTER 6 THE ROLE OF GOVERNMENT © John Aikins/Corbis RFPeople who enjoy eating sausage and obey the law should not watch either being made. Otto von Bismarck (1815–1898), chancellor of Germany Page 117 LEARNING OUTCOMES After studying this chapter, you should be able to: 6-1Identify the five key pieces of U.S. legislation designed to discourage, if not prevent, illegal conduct within organizations. 2. 6-2Understand the purpose and significance of the Foreign Corrupt Practices Act (FCPA). 3. 6-3Calculate monetary fines under the three-step process of the U.S. Federal Sentencing Guidelines for Organizations (FSGO). 1. 4. 6-4Compare and contrast the relative advantages and disadvantages of the SarbanesOxley Act (SOX). 5. 6-5Explain the key provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. FRONTLINE FOCUS Too Much Trouble S usan is a junior accounting assistant with one of the largest auditing firms in the Midwest. Since the Enron fraud case and the passing of the SarbanesOxley Act, her company has been very busy—in fact, it has so much business, it is starting to turn clients down. For Susan, so much business means great opportunities. Each completed audit takes her one step closer to running her own auditing team and finally to leading her own audit. The work is hard and the hours are often long, but Susan loves the attention to detail and the excitement of discovering errors and then getting them corrected. Also, knowing that the clients are releasing financial reports that are clean and accurate makes her feel that she is doing her part to restore the reputation of the financial markets one client at a time. One morning, her boss, Steven Thompson, comes into her office carrying a thick manila folder. “Hi, Susan, what are you working on right now?” he asks. Typical Thompson, Susan thinks. Straight to the point with no time for small talk. “We should be finished with the Jones audit by the end of the day. Why?” Susan replied. “I need a small favor,” Steven continued. “We’ve had this new small-business client show up out of the blue after being dropped by his previous auditor. It really couldn’t have happened at a worse time. We’ve got so many large audits in the pipeline that I can’t spare anyone to work on this, but I don’t want to start turning business away in case word gets out that we’re not keeping up with a growing client base—who knows when the next big fish will come along?” “I’m not sure I follow you, Steven,” answered Susan, confused. “I don’t want to turn this guy away, but we don’t want his business either—too small to be a real moneymaker. So just take a quick look at his file, and then quote him a price for our services—and here’s where I need the favor. Make the quote high enough that he will want to go somewhere else. Can you do that?” QUESTIONS 1. The Sarbanes-Oxley Act created an oversight board for all auditing firms. Look at the outline of the act, presented later in the chapter, for more information on the Public Company Accounting Oversight Board (PCAOB). Would the PCAOB endorse trying to dump a prospective client in this manner? 2. Is being too busy with other clients a justification for deliberately driving this customer away? 3. What should Susan do now? >> Key Legislation For those organizations that have demonstrated they are unable to keep their own house in order by maintaining a strong ethical culture, the last line of defense has been a legal and regulatory framework that offers financial incentives to promote ethical behavior and imposes penalties for those that choose not to adopt such behavior. Since the 1970s, there have been several attempts at behavior modification to discourage, if not prevent, illegal conduct within organizations: • • • • • The Foreign Corrupt Practices Act (1977). The U.S. Federal Sentencing Guidelines for Organizations (1991). The Sarbanes-Oxley Act (2002). The Revised Federal Sentencing Guidelines for Organizations (2004). The Dodd-Frank Wall Street Reform and Consumer Protection Act (2010). >> The Foreign Corrupt Practices Act (1977) The Foreign Corrupt Practices Act (FCPA) was introduced to more effectively control bribery and other less obvious forms of payment to foreign officials and politicians by American publicly traded companies as they pursued international growth. Before passage of this law, the illegality of this behavior was punishable only through “secondary” sources of legislation: 1. The Securities and Exchange Commission (SEC) could fine companies for failing to disclose such payments under its securities rules. 2. The Bank Secrecy Act also required full disclosure of funds that were taken out of or brought into the United States. 3. The Mail Fraud Act made the use of the U.S. mail or wire communications to transact a fraudulent scheme illegal. By passing the FCPA, Congress was attempting to send a clear message that the competitiveness of U.S. corporations in overseas markets should be based on price and product quality rather than the extent to which companies had paid off foreign officials and political leaders. To give the legislation some weight, the U.S. Department of Justice (DOJ) and the SEC jointly enforce the FCPA. The act encompasses all the secondary measures that were currently in use to prohibit such behavior by focusing on two distinct areas: • • Disclosure: The act requires corporations to fully disclose any and all transactions conducted with foreign officials and politicians, in line with the SEC provisions. Prohibition: The act includes wording from the Bank Secrecy Act and the Mail Fraud Act to prevent the movement of funds overseas for the express purpose of conducting a fraudulent scheme. A BARK WORSE THAN ITS BITE Even with the apparent success of consolidating three pieces of secondary legislation into one primary tool for the prohibition of bribery, the FCPA was still criticized for lacking any real teeth because of its formal recognition of facilitation payments, which would otherwise be acknowledged as bribes. The FCPA finds these payments acceptable provided they expedite or secure the performance of a routine governmental action. Examples of routine governmental actions include: • Providing permits, licenses, or other official documents to qualify a person to do business in a foreign country. • Processing governmental papers, such as visas and work orders. • Providing police protection, mail pickup and delivery, or scheduling inspections associated with contract performance or inspections related to transit of goods across a country. • Providing phone service, power, and water supply; loading and unloading cargo; or protecting perishable products or commodities from deterioration. • Performing actions of a similar nature. The key distinction in identifying bribes was the exclusion of any action taken by a foreign official in the decision to award new or continuing business. Such decisions, being the primary target of most questionable payments, were not deemed to be routine governmental action.1 Page 119 FCPA IN ACTION Alstom According to the December 22, 2014, edition of The New York Times, French industrial giant Alstom paid $772 million in criminal penalties to settle bribery charges brought by the U.S. Department of Justice. The company was alleged to have paid more than $75 million from 2000 to 2011 to secure $4 billion in engineering projects around the world that led to profits of over $300 million. While Alstom had agreed to sell most of its engineering business to General Electric (GE) for €12.4 billion in June 2014, the DOJ settlement required that Alstom, and not GE, would have to pay the fine.2 © RF James Hardy/PhotoAlto ADDITIONAL COMPENSATION Real-World Applications Enrique is a country manager for a global food company. His plantation is one of the largest employers in an area of political instability. Several local communities depend on employment on his plantation for their economic survival. Yesterday Enrique had a meeting with local officials about purchasing some additional acreage and updating the irrigation system for the plantation. The changes will require several work permits, and the officials made it clear that those permits could be delayed without some “additional compensation.” Should Enrique tell his U.S.-based boss or handle the situation locally? BNY Mellon According to the August 18, 2015, FCPA Blog, BNY Mellon agreed to pay $14.8 million to settle charges brought by the SEC that the company had violated FCPA rules. Between 2010 and 2011, BNY was alleged to have provided valuable student internships to family members of foreign government officials that were directly linked to a Middle Eastern sovereign wealth fund. The case was settled through an internal administrative order with no admission or denial of liability by BNY Mellon. The settlement amount was calculated based on a $5 million penalty, $1.5 million in interest, and $8.3 million in disgorgement (designated repayment of ill-gotten gains).3 MAKING SENSE OF FCPA Figure 6.1 summarizes the fine lines between legality and illegality in some of the prohibited behaviors and approved exceptions in the FCPA provisions. Page 120 Illegal Legal Bribes: • Payments of money or anything else of value to influence or induce any foreign official to act in a manner that would be in violation of his or her lawful duty. • Payments, authorizations, promises, or offers to any other person if there is knowledge that any portion of the payment is to be passed along to a foreign official or foreign political party, official, or candidate for a prohibited purpose under the act. Note that knowledge is defined very broadly and is Grease payments: • Facilitating payments to foreign officials in order to expedite or secure the performance of a routine governmental action. For example, routine governmental action could include obtaining permits, licenses, or other official documents; expediting lawful customs clearances; obtaining the issuance of entry or exit visas; providing police protection, mail pickup and delivery, and phone service; and performing actions that are wholly unconnected to the present when one knows an event is certain or likely to occur; even purposely failing to take note of an event or being willfully blind can constitute knowledge. Record-keeping and accounting provisions: • Books, records, and accounts must be kept in reasonable detail to accurately and fairly reflect transactions and dispositions of assets. • A system of internal accounting controls is devised to provide reasonable assurances that transactions are executed in accordance with management’s authorization. award of new business or the continuation of prior business. Marketing expenses: • Payments to foreign officials made in connection with the promotion or demonstration of company products or services (e.g., demonstration or tour of a pharmaceutical plant) or in connection with the execution of a particular contract with a foreign government. Payments lawful under foreign laws: • Payments may (very rarely) be made to foreign officials when the payment is “lawful under the written laws of the foreign country.” Political contributions: • Unlike in the United States, where foreign nationals are prohibited from making political contributions to U.S. political parties and candidates, it may occasionally be appropriate for a U.S. company’s overseas operations to make a political contribution on behalf of the company. Contributions not only include checks to political parties or candidates, but also payments for fundraising dinners and similar events. This would be an example of a payment that could violate the FCPA were it not for written local law. Donations to foreign charities: • U.S. companies may make donations to bona fide charitable organizations provided that the donation will not be used to circumvent the FCPA and that the contribution does not violate local laws, rules, or regulations. FIG. 6.1 ILLEGAL VERSUS LEGAL BEHAVIORS UNDER THE FCPA The Department of Justice can enforce criminal penalties of up to $2 million per violation for corporations and other business entities. Officers, directors, stockholders, employees, and agents are subject to a fine of up to $250,000 per violation and imprisonment for up to five years. The SEC may bring a civil fine of up to $10,000 per violation. Penalties under the books and recordkeeping provisions can reach up to $5 million and 20 years’ imprisonment for individuals and up to $25 million for organizations. KEY POINT If you pay money to a government official to expedite the processing of permits, licenses, or other official documents over and above the normal processing time, how is that not a bribe? Is the distinction between “normal operations” and “new or continuing business” a valid one? PROGRESS ✓ QUESTIONS 1. 2. 3. 4. What was the primary purpose of the FCPA? What was the maximum fine for a U.S. corporation under the FCPA? Which two distinct areas did the FCPA focus on? List four examples of routine governmental actions. >> The U.S. Federal Sentencing Guidelines for Organizations (1991) The U.S. Federal Sentencing Commission was established in 1984 by the Comprehensive Crime Control Act and was charged with developing uniform sentencing guidelines for offenders convicted of federal crimes. The guidelines became effective on November 1, 1987. At that time, they consisted of seven chapters and applied only to individuals convicted of federal offenses. In 1991, an eighth chapter was added to the guidelines. Chapter 8 is more commonly referred to as the Federal Sentencing Guidelines for Organizations (FSGO). It applies to organizations and holds them liable for the criminal acts of their employees and agents. FSGO requires that organizations police themselves by preventing and detecting the criminal activity of their employees and agents. In its mission to promote ethical organizational behavior and increase the costs of unethical behavior, the FSGO establishes a definition of an organization that is so broad as to prompt the assessment that “no business enterprise is exempt.” In addition, the FSGO includes such an exhaustive list of covered business crimes that it appears frighteningly easy for an organization to run afoul of federal crime laws and become subject to FSGO penalties. Penalties under FSGO include monetary fines, organizational probation, and the implementation of an operational program to bring the organization into compliance with FSGO standards. Page 121 MONETARY FINES UNDER THE FSGO If an organization is sentenced under FSGO, a fine is calculated through a three-step process: Step 1. Determination of the “Base Fine.” The base fine will normally be the greatest of: • • • The monetary gain to the organization from the offense. The monetary loss from the offense caused by the organization, to the extent the loss was caused knowingly, intentionally, or recklessly. The amount determined by a judge based on an FSGO table. The table factors in both the nature of the crime and the amount of the loss suffered by the victim. Fraud, for example, is a level-six offense; a fraud causing harm in excess of $5 million is increased by 14 levels to a level-20 offense. Evidence of extensive preplanning to commit the offense can raise that two more levels to level 22. To put these levels in dollar terms, crimes at level six or lower involve a base fine of $5,000; offense levels of 38 or higher involve a base fine of $72.5 million. Step 2. The Culpability Score. Once the base fine has been calculated, the judge will compute a corresponding degree of blame or guilt known as theculpability score. This score is simply a multiplier with a maximum of 4, so the worst-case scenario would be a fine of four times the maximum base fine of $72.5 million, for a grand total of $290 million. The culpability score can be increased (or aggravated) or decreased (or mitigated) according to predetermined factors. Aggravating Factors • • • • High-level personnel were involved in or tolerated the criminal activity. The organization willfully obstructed justice. The organization had a prior history of similar misconduct. The current offense violated a judicial order, an injunction, or a condition of probation. Mitigating Factors • • The organization had an effective program to prevent and detect violations of law. The organization self-reported the offense to appropriate governmental authorities, fully cooperated in the investigation, and accepted responsibility for the criminal conduct. Step 3. Determining the Total Fine Amount. The base fine multiplied by the culpability score gives the total fine amount. In certain cases, however, the judge has the discretion to impose a so-called death penalty, where the fine is set high enough to match all the organization’s assets. This is warranted where the organization was operating primarily for a criminal purpose. ORGANIZATIONAL PROBATION In addition to monetary fines, organizations also can be sentenced to probation for up to five years. The status of probation can include the following requirements: • Reporting the business’s financial condition to the court on a periodic basis. • Remaining subject to unannounced examinations of all financial records by a designated probation officer and/or court-appointed experts. • Reporting progress in the implementation of a compliance program. • Being subject to unannounced examinations to confirm that the compliance program is in place and is working. COMPLIANCE PROGRAM Obviously the best way to minimize your culpability score is to make sure that you have some form of program in place that can effectively detect and prevent violations of law—a compliance program. The FSGO prescribes seven steps for an effective compliance program: 1. Management oversight. A high-level official (such as a corporate ethics officer) must be in charge of and accountable for the compliance program. 2. Corporate policies. Policies and procedures designed to reduce the likelihood of criminal conduct in the organization must be in place. 3. Communication of standards and procedures. These ethics policies must be effectively communicated to every stakeholder of the organization. 4. Compliance with standards and procedures. Evidence of active implementation of these policies must be provided through appropriate monitoring and reporting (including a system for employees to report suspected criminal conduct without fear of retribution).Page 122 5. Delegation of substantial discretionary authority. No individuals should be granted excessive discretionary authority that would increase the risk of criminal conduct. 6. Consistent discipline. The organization must implement penalties for criminal conduct and for failing to address criminal misconduct in a consistent manner. 7. Response and corrective action. Criminal offenses, whether actual or suspected, must generate an appropriate response, analysis, and corrective action. If all of this seems like an enormous administrative burden, consider the following example: A $25,000 bribe has been paid to a city official to ensure an award of a cable television franchise. This is a level-18 offense with a base penalty of a $350,000 fine. Due to a variety of factors (e.g., culpability, multipliers), that penalty is now increased to $1.4 million. The minimum fine with mitigating circumstances (e.g., the company has a compliance plan and there was no high-level involvement in the bribery) would have placed this fine in the $17,500 to $70,000 range instead of $1.4 million. If that doesn’t discourage you, consider the additional risk of negative publicity to your organization, which could result in a significant loss of sales, additional scrutiny from vendors, and even a drop in your stock price.4 PROGRESS ✓ QUESTIONS 5. What are the three steps in calculating financial penalties under FSGO? 6. What is the maximum fine that can be levied? 7. What is the maximum term of organizational probation? 8. What is the “death penalty” under FSGO? THE BRIBERY GAP In 1997, 35 countries signed the convention of the Organization for Economic Cooperation and Development (OECD) to make it a crime to bribe foreign officials. In May 1999, the OECD issued a series of six principles (updated in 2004) that have since become the basis of the corporate governance position of the World Bank and the International Monetary Fund (IMF). However, in 2015 alone: In February 2015, Goodyear Tire and Rubber Co. agreed to pay $16.2 million to settle charges from the SEC under FCPA for the payment of bribes in Kenya and Angola to increase tire sales. Goodyear subsidiaries were accused of paying more than $3.2 million in bribes to employees of state-owned and private companies between 2007 and 2011. • In May 2015, BHP Billiton paid $25 million to settle SEC charges in relation to FCPA offenses. BHP had been accused of improperly sponsoring foreign government officials as guests at the 2008 Summer Olympics in Beijing, China. The case was settled through an internal administrative order without going to court. • In July 2015, New Jersey-based construction management company Louis Berger International paid $17.1 million to resolve FCPA criminal offenses. In the resolution, the company admitted paying bribes to foreign officials in India, Indonesia, Kuwait, and Vietnam in order to win contracts. The settlement included a deferred prosecution agreement that will require a compliance monitor for at least three years. • In September 2015, Hitachi Ltd. paid $19 million to resolve SEC charges. The case was brought in relation to payments made to South Africa’s ruling political party in connection with contracts to build two multimillion-dollar power plants. • © Charles Gullung/zefa/Corbis RF Page 123 American companies operating under increasing federal and regulatory scrutiny face real consequences from trying to do business in a global business environment in which foreign business seems to function on the basis of “gifts” at every stage of the transaction. In December 2012, the SEC charged Eli Lilly and Co. with violations of the FCPA for improper payments made by subsidiaries to foreign government officials in Russia, Brazil, China, and Poland; and accepted a settlement in the amount of $29 million for offenses including the following: The SEC alleged that the Indianapolis-based pharmaceutical company’s subsidiary in Russia used offshore ‘marketing agreements’ to pay millions of dollars to third parties chosen by government customers or distributors, despite knowing little or nothing about the third parties beyond their offshore address and bank account information. Employees at Lilly’s subsidiary in China falsified expense reports in order to provide spa treatments, jewelry, and other improper gifts and cash payments to government-employed physicians. Lilly’s subsidiary in Poland made eight improper payments totaling $39,000 to a small charitable foundation that was founded and administered by the head of one of the regional government health authorities in exchange for the official’s support for placing Lilly drugs on the government reimbursement list. In November 2012, the Department of Justice issued a 120-page “Resource Guide” to the FCPA, including numerous case studies designed to clarify what actions would and would not be considered to be violations of the law. The guide was written as a resource for DOJ attorneys, but attorneys in private practice are encouraging their clients to become familiar with it. • QUESTIONS 1. Is it ethical for U.S. regulations to put U.S. companies at an apparent disadvantage to their foreign competitors? Explain why or why not. 2. If foreign companies pay bribes, does that make it OK for U.S. companies to do the same? Explain why or why not. 3. If you could prove that new jobs, new construction, and valuable tax revenue would come to the United States if the bribe were paid, would that change your position? Explain your answer. 4. It would seem that the playing field will never be level—someone will always be looking for a bribe, and someone will always be willing to pay it if she or he wants the business badly enough. If that’s true, why bother to put legislation in place at all? Sources: Richard L. Cassin, “The 2015 FCPA Enforcement Index,” The FCPA Blog, January 4, 2016; Erin Fuchs, “Pfizer Admits to Bribing Foreign Officials and Agrees to Fork Over $60 Million,” Businessinsider.com, August 7, 2012; U.S. Securities and Exchange Commission, Press Release 2012-273, December 20, 2012; and Charlie Savage, “Justice Department Issues Guidance on Overseas Bribes,” The New York Times, November 14, 2012. REVISED FEDERAL SENTENCING GUIDELINES FOR ORGANIZATIONS (2004) In May 2004, the U.S. Sentencing Commission proposed to Congress that there should be modifications to the 1991 guidelines to bring about key changes in corporate compliance programs. The revised guidelines, which Congress formally adopted in November 2004, made three key changes: • They required companies to periodically evaluate the effectiveness of their compliance programs on the assumption of a substantial risk that any program is capable of failing. They also expected the results of these risk assessments to be incorporated back into the next version of the compliance program. • The revised guidelines required evidence of actively promoting ethical conduct rather than just complying with legal obligations. For the first time, the concept of an ethical culture was recognized as a foundational component of an effective compliance program. • The guidelines defined accountability more clearly. Corporate officers are expected to be knowledgeable about all aspects of the compliance program, and they are required to receive formal training as it relates to their roles and responsibilities within the organization. KEY POINT The multiplication of a base fine amount by a culpability score under FSGO has the potential to generate fines in the hundreds of millions of dollars. Do you think that knowledge will prompt organizations to reconsider their unethical practices? Why or why not? Page 124 PROGRESS ✓ QUESTIONS 9. Explain the seven steps of an effective compliance program. 10. What are aggravating and mitigating factors? 11. Explain the risk assessments required in the 2004 revised FSGO. 12. What were the three key components of the 2004 revised FSGO? >> The Sarbanes-Oxley Act (2002) The Sarbanes-Oxley Act (SOX) became law on July 30, 2003.5 It was a legislative response to a series of corporate accounting scandals that had begun to dominate the financial markets and mass media since 2001. Launched during a period of extreme investor unrest and agitation, SOX was hailed by some as “one of the most important pieces of legislation governing the behavior of accounting firms and financial markets since [the SEC] legislation in the 1930s.” However, supporters of this law were equally matched by its critics, leaving no doubt that SOX may be regarded as one of the most controversial pieces of corporate legislation in recent history. The act contains 11 sections, or titles, and almost 70 subsections covering every aspect of the financial management of businesses. Each of the 11 sections can be seen to relate directly to prominent examples of corporate wrongdoing that preceded the establishment of the legislation—the Enron scandal in particular. TITLE I: PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD The series of financial collapses of publicly traded companies that the financial community had previously recommended as “strong buys” or “Wall Street darlings” had the greatest negative impact on investor confidence— especially since the accounts of all these companies had supposedly been audited as accurate by established and highly regarded auditing firms. The creation of the Public Company Accounting Oversight Board (PCAOB) as an independent oversight body was an attempt to reestablish the perceived independence of auditing companies that the conflict of interest in Arthur Andersen’s auditing and consulting relationship with Enron had called into question. In addition, as an oversight board, the PCAOB was charged with maintaining compliance with established standards and enforcing rules and disciplinary procedures for those organizations that found themselves out of compliance. Any public accounting firms that audited the records of publicly traded companies were required to register with the board and to abide by operational standards set by that board. TITLE II: AUDITOR INDEPENDENCE In addition to establishing the PCAOB, SOX introduced several key directives to further enforce the independence of auditors and hopefully restore public confidence in independent audit reports: 1. Prohibits specific “nonaudit” services of public accounting firms as violations of auditor independence. 2. Prohibits public accounting firms from providing audit services to any company whose senior officers (chief executive officer, chief financial officer, controller) were employed by that accounting firm within the previous 12 months. 3. Requires senior auditors to rotate off an account every five years and junior auditors every seven years. 4. Requires the external auditor to report to the client’s audit committee on specific topics. 5. Requires auditors to disclose all other written communications between management and themselves. TITLES III THROUGH XI Here are some highlights of Titles III through XI. Title III: Corporate Responsibility • Requires audit committees to be independent and undertake specified oversight responsibilities. • Requires CEOs and CFOs to certify quarterly and annual reports to the SEC, including making representations about the effectiveness of their control systems. • Provides rules of conduct for companies and their officers regarding pension blackout periods—a direct response to the Enron situation where corporate executives were accused of selling their stock while employees had their company stock locked in their pension accounts.Page 125 Title IV: Enhanced Financial Disclosures • Requires companies to provide enhanced disclosures, including a report on the effectiveness of internal controls and procedures for financial reporting (along with external auditor sign-off on that report), and disclosures covering off-balance sheet transactions—most of the debt Enron hid from analysts and investors was placed in off-balance sheet accounts and hidden in the smallest footnotes in its financial statements. Title V: Analyst Conflicts of Interest • Requires the SEC to adopt rules to address conflicts of interest that can arise when securities analysts recommend securities in research reports and public appearances—each of the “rogue’s gallery” of companies in the 2001–2002 scandals had been highly promoted as growth stocks by analysts. Title VI: Commission Resources and Authority Provides additional funding and authority to the SEC to follow through on all the new responsibilities outlined in the act. Title VII: Studies and Reports • Directs federal regulatory bodies to conduct studies regarding consolidation of accounting firms, credit rating agencies, and certain roles of investment banks and financial advisers. Title VIII: Corporate and Criminal Fraud Accountability • Provides tougher criminal penalties for altering documents, defrauding shareholders, and certain other forms of obstruction of justice and securities fraud. Arthur Andersen’s activities in shredding Enron documents directly relates to this topic. • Protects employees who provide evidence of fraud. Enron and WorldCom were both exposed by the actions of individual employees (seeChapter 7, “Blowing the Whistle”). Title IX: White-Collar Crime Penalty Enhancements • Provides that any person who attempts to commit white-collar crimes will be treated under the law as if the person had committed the crime. • Requires CEOs and CFOs to certify their periodic reports and imposes penalties for certifying a misleading or fraudulent report. Title X: Corporate Tax Returns • Conveys the sense of the Senate that the CEO should sign a company’s federal income tax return. Title XI: Corporate Fraud and Accountability • Provides additional authority to regulatory bodies and courts to take various actions, including fines or imprisonment, with regard to tampering with records, impeding official proceedings, taking extraordinary payments, retaliating against corporate whistle-blowers, and certain other matters involving corporate fraud. Section 404 of the Sarbanes-Oxley Act (listed as Title IV in this chapter) is estimated to have generated auditing fees in the hundreds of millions of dollars—all in the hope of enforcing ethical conduct in U.S. organizations. The legislation was swift and wide-ranging and was specifically designed to restore investor confidence in what, for a brief period, appeared to be financial markets that were run with two primary goals: corruption and greed. • The danger with such a rapid response is that key issues have a tendency to be overlooked in the eagerness to demonstrate responsiveness and decisiveness. In this case, the question of whether you can really legislate ethics was never answered. What SOX delivers is a collection of tools and penalties to punish offenders with enough severity to put others off the idea of bending or breaking the rules in the future, and enough policies and procedures to ensure that any future corporate criminals are going to have to work a lot harder to earn their money than the folks at Enron, WorldCom, and the rest—there are a lot more people watching now. However, SOX does not help you create an ethical corporate culture or hire an effective and ethical board of directors—you still have to do that for yourself. Just be sure to remember that there are now a lot more penalties and people waiting to catch you if you don’t. PROGRESS ✓ QUESTIONS 13. Explain the role of the PCAOB. 14. Which title requires CEOs and CFOs to certify quarterly and annual reports to the SEC? 15. Which title protects employees who provide evidence of fraud? 16. What are the five key requirements for auditor independence? Page 126 AN UNETHICAL WAY TO FIX CORPORATE ETHICS? FOXES GUARDING THE HENHOUSE? The Sarbanes-Oxley Act, which the United States enacted in an atmosphere of extraordinary agitation in 2002, is one of the most influential—and controversial—pieces of corporate legislation ever to have hit a statute book. Its original aim, on the face of it, was modest: to improve the accountability of managers to shareholders, and [then] calm the raging crisis of confidence in American capitalism aroused by scandals at Enron, WorldCom, and other companies. The law’s methods, however, were anything but modest, and its effects are going to be far-reaching. © PhotoAlto/Punchstock RF The cost of all this [new oversight] is steep. A survey by Financial Executives International, an association of top financial executives, found that companies paid an average of $2.4 million more for their audits [in 2004] than they had anticipated (and far more than the statute’s designers had envisaged). … This result underlines a notable and unintended consequence of the legislation: It has provided a bonanza for accountants and auditors—a profession thought to be much at fault in the scandals that inspired the law, and which the statute sought to rein in and supervise. Already reduced in number by consolidation and the demise of Arthur Andersen, the big accounting firms are now known more often as the Final Four than the Big Four, since any further reduction is thought unlikely. WHO’S LOOKING OUT FOR THE LITTLE GUY? Smaller companies without access to the internal resources (or funds to pay for external resources) to comply with Sarbanes-Oxley are being particularly hard-hit by the legislation, even though the transgressions that prompted the statute in the first place came from large, publicly traded organizations. This is not to suggest that smaller firms don’t face their own ethical problems—it just seems that they are expected to carry an administrative burden that is equal to that of their much larger counterparts. NOT VERY NEIGHBORLY Sarbanes-Oxley applies to all companies that issue securities under U.S. federal securities statutes, whether headquartered within the United States or not. Thus, in addition to U.S.-based firms, approximately 1,300 foreign firms from 59 countries fall under the law’s jurisdiction. Reactions to SOX from this quarter were swift. Some foreign companies that had previously contemplated offering securities in the U.S. market reconsidered in light of the conflicts they believe SOX created. For example, in October 2002, Porsche AG announced it would not list its shares on the New York Stock Exchange. A company press release identified the passage of SOX as the “critical factor” for this decision and singled out CEO and CFO certification of financial statements for criticism. After recounting the process Porsche uses to prepare, review, and approve its financial reports, the release concluded that “any special treatment of the Chairman of the Board of Management [i.e., Porsche’s CEO] and the Director of Finance would be illogical because of the intricate network within which the decision-making process exists; it would be irreconcilable with German law.” QUESTIONS 1. SOX has introduced sweeping changes in the name of enforcing corporate ethics. Is it really a “fair” piece of legislation? Explain your answer. 2. Do U.S. ethical problems give us the right to demand ethical controls from international companies based outside the United States? 3. Does the decision to increase auditing requirements seem to be an ethical solution to the problem of questionable audits? Explain your requirements. 4. If there were more than four large accounting firms in the marketplace, would that make the decision more ethical? Explain your answer. Source: “A Price Worth Paying?” The Economist, May 19, 2005. Page 127 >> Wall Street Reform In September and October 2008, financial markets around the world suffered a severe crash as the consequences of aggressive lending to subprime borrowers in a deregulated environment came back to haunt companies that, as recently as a few months earlier, had reported record earnings based on these questionable lending practices. Some companies, such as JPMorgan Chase (which purchased the assets of Bear Stearns and Washington Mutual at fire-sale prices) and Wells Fargo (which purchased Wachovia Bank at an equally discounted price), were able to benefit from this downturn, but two companies in particular came to exemplify a new round of corporate arrogance and questionable ethics that earned them a place in the rogue’s gallery previously occupied by such infamous companies as Enron, WorldCom, and HealthSouth. American Insurance Group (AIG), formerly one of the world’s largest insurance companies, received a lifeline loan of $85 billion from the U.S. government in September 2008, followed by an additional $37.8 billion in October 2008. The need for the rescue funding (which AIG was expected to repay by selling pieces of its global business) followed the company’s descent into near bankruptcy after it invested extensively in complicated financial contracts used to underwrite mortgage-backed securities. Intervening to rescue a venerable name in the finance industry could be justified on the basis of a need to restore stability at a time of extreme global instability, but when two senior executives for AIG—Chief Executive Martin J. Sullivan and Chairman Robert Willumstad—appeared before the House Oversight and Government Reform Committee, questions focused less on the company’s recovery strategy and more on the lack of oversight and poor financial judgment that got them into the mess in the first place. The decision to proceed with a celebratory sales meeting in California for the top sales agents of AIG’s life insurance subsidiary, with a budget for the event of $440,000, only one week after the government came forward with the $85 billion bailout loan, drew particular criticism from members of the committee. In addition, Sullivan’s positive comments, recorded in December 2007, reassuring investors of AIG’s financial health only days after receiving warnings from company auditors about the company’s exposure to these risky mortgage contracts drew severe criticism from the committee. In November 2008, the Federal Reserve and the Treasury Department coordinated an even larger deal for AIG that raised the overall cost of the rescue to $152.5 billion, after the company petitioned that the sale of assets to repay the loan would take longer than originally anticipated. After announcing a $25 billion loss for the third quarter of 2008, AIG was able to negotiate a reduction in the original bailout loan from $85 billion to only $60 billion, along with a reduction in the interest rate on that loan. The additional $37.8 billion loan was replaced by an outright purchase of $40 billion of AIG stock as part of the Treasury’s $700 billion bailout package—the so-called Troubled Asset Relief Program (TARP). In addition, the Federal Reserve purchased $22.5 billion of the company’s mortgage-backed securities and added an additional $30 billion to underwrite the complicated financial contracts that had led to AIG’s near collapse. © Frank Rumpenhorst/EPA/CorbisThe financial crisis that began in fall 2008 had an impact that will likely affect markets for some time. Lehman Brothers Holdings, an investment house that had historically been held in the same high regard as AIG, did not fare as well in this financial crisis. For reasons known only to the government, Lehman did not receive a bailout loan like AIG’s and collapsed in the summer of 2008. When Chief Executive Richard S. Fuld Jr. appeared before the House Oversight and Government Reform Committee in October 2008, questions focused on the same issue of reassurances of financial health in the face of audited reports indicating extreme risk exposures and, in particular, Fuld’s highly lucrative compensation package with Lehman—a total of almost $500 million in salary and bonus payments over the last eight years of his employment with the company. It is ironic and alarming that the enactment of the Sarbanes-Oxley Act, supposedly to prevent the recurrence of the type of corporate malfeasance that Enron and WorldCom came to exemplify, should be followed so quickly by evidence that the lessons from the days of Enron remained unlearned. Page 128 Life Skills >> GOVERNING YOUR OWN ETHICAL BEHAVIOR Does the fact that we appear to need government legislation to enforce ethical business practices both here and overseas suggest that we are unable to self-govern our individual ethical behavior? Can we be trusted to act in an ethical manner both in our personal and professional lives? Or do we need a regulatory framework and a clearly defined system of punishment to force people to act ethically or face the consequences? As we discussed in Chapter 1, your personal value system represents the cumulative effect of a series of influences in your life—your upbringing, religious beliefs, community influences, and peer influences from your friends. As such, your ethical standards already represent a framework of influences that have made you the person you are today. However, where you take that value system in the future depends entirely on you. State and federal bodies may put punitive legislation in place to enforce an ideal model of personal and professional behavior, but whether or not you abide by that legislation comes down to the decisions you make on a daily basis. Can you stay true to your personal value system and live your life according to your own ethical standards? Or are you the type of person who is swayed by peer pressure and social norms to the point where you find yourself doing things you wouldn’t normally do? Developing a clear sense of your personal values is as much about knowing what you aren’t willing to do as it is about knowing what you are willing to do. Understanding the difference allows you to remain grounded and focused while those around you sway in the wind in search of someone to help them make a decision. It’s when someone is not acting in his or her best interests that poor decisions are made and things can start to go wrong. THE DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT (2010) On July 21, 2010, the U.S. government’s plan to ensure that the words “too big to fail” would never be applied to Wall Street again was delivered in the form of the Dodd-Frank Wall Street Reform and Consumer Protection Act.6 Weighing in at an astounding 2,319 pages, Dodd-Frank survived an acrimonious journey through Congress in the face of Republican opposition and aggressive lobbying by Wall Street companies (“Big Finance”), which sought to weaken what was expected to be a tough response to a global financial crisis. With midterm elections scheduled for November 2010, the expectation from critics was that the final version of the bill would be watered down with a series of compromises as politicians balanced their support for key provisions of the bill without risking any damage to their reelection hopes. As it was, the legislation passed with no Republican support. A final verdict is still up for debate, since many of the provisions had implementation deadlines of several years into the future, and the Republican controlled Congress is still trying to repeal much of the bill, but with Dodd-Frank celebrating its fifth birthday on July 21, 2015, the primary achievements of the legislation can be summarized as follows. The Consumer Financial Protection Bureau Applauded as bringing a muchneeded consumer focus to regulatory oversight of financial products and services, the creation of the Consumer Financial Protection Bureau (CFPB) generated considerable debate over the independence and power of the bureau—in other words, who would Page 129control it, and how much damage could it do. The final version placed the bureau within the Federal Reserve and assigned separate financing and an independent director to minimize the potential for aggressive lobbying practices by financial services companies. The responsibilities originally granted to the bureau were extensive and included authority to examine and enforce regulations for banks and credit unions with assets over $10 billion; the creation of a new Office of Financial Literacy; the creation of a national consumer complaint hotline; and, most confusingly, the consolidation of all consumer protection responsibilities currently handled by the Office of the Comptroller of the Currency, Office of Thrift Supervision, Federal Deposit Insurance Corporation (FDIC), Federal Reserve, National Credit Union Administration (NCUA), the Department of Housing and Urban Development (HUD), and the Federal Trade Commission (FTC). Republican opposition to the confirmation of any director included threats of a filibuster (a deliberate attempt to delay a debate or block a vote), forcing the appointment of Richard Cordray as a “recess appointment” by President Obama in July 2013, two years after the legislation was enacted. The Financial Stability Oversight Council Promoted as the “fix” for “too big to fail,” the Financial Stability Oversight Council (FSOC) is empowered to act if a bank with more than $50 billion in assets “poses a grave threat to the financial stability of the United States.”7 That action in response to the threat can include limiting the ability of the bank to merge with, acquire, or otherwise become affiliated with another company; restricting the ability to offer financial products or services; terminating one or more activities; imposing conditions on how the company conducts business; and selling or transferring assets to unaffiliated entities to mitigate any perceived risk. The council is led by the Treasury secretary and is made up of top financial regulators. With over 180 banks with assets above $50 billion, the FSOC can act on not only banks that are too big to fail but also banks that may be deemed to be “too interconnected” with other financial institutions to fail. The warning being given here, at least, is that the riskier the institution is determined to be, the more regulated it will become. Critics have argued that community banks are now suffering as a result of the regulatory paperwork demanded by the FSOC. The Volcker Rule American economist and past Federal Reserve Chairman Paul Volcker proposed that there should be a key restriction in the legislation to limit the ability of banks to trade on their own accounts (termed proprietary trading). The original Volcker rule sought to stop the trading of derivatives (which are financial instruments based on the performance of other financial instruments, such as mortgage-backed securities) completely, but was scaled back to a compromise that limited the ethically questionable practices of banks taking opposing positions to trades that they are simultaneously promoting to their clients. After tooth-and-nail battles with the banking industry that delayed the implementation of the rule until the fifth anniversary of the original legislation, the final version still leaves too much of what critics refer to as “haziness.” Banks are banned from proprietary trading, but they can still hedge investments and take other steps to protect client positions in specific investments. There is already growing evidence of banks simply reclassifying proprietary trades as “hedged investments” to leverage this gray area.8 With over 2,300 pages, 1,500 provisions, and about 398 rule-making requirements, the elements of the legislation go far beyond the three items listed above, but these three have been most actively promoted as evidence of a strong response to extreme mismanagement of risk in the financial sector. However, the effectiveness of the legislation remains to be proved, and critics are concerned that there are still too many unknowns for the Dodd-Frank Act to be acknowledged as a success. For example, banker salaries are Page 130still so high as to warrant Democratic promises to curb the practice, and the largest financial institutions are still “too big to fail.” In addition, the simplification of confusing mortgage disclosure forms (which many foreclosed homeowners blamed as contributing to their lack of understanding of the true nature of their adjustable mortgages) that was promised by 2012 was still not accomplished in 2016.9 © Travelwide/Alamy RF >> Conclusion With the banking industry aggressively seeking to undermine legislation designed to enforce ethical business conduct, students of business ethics can be forgiven for wondering if corporations can ever be counted on to “do the right thing.” Indeed, cynics would argue that the first order of business for the financial institutions directly affected by Dodd-Frank was to assign teams to figure out ways around the new rules and restrictions. However, if, as we discussed in Chapter 5, the internal governance mechanisms of corporations can’t always be counted on to prevent unethical behavior, what other options are there to protect consumers? In the especially complex world of financial services, where individual investors trust their hard-earned savings to mutual fund managers in the hope of providing enough for a secure and comfortable retirement, any evidence of mismanagement of those savings can result in a loss of trust that may prove very difficult to regain. In the next chapter we consider the actions of employees on the inside of corporations who experience corporate malfeasance directly and find themselves face-to-face with the ethical dilemma of speaking out or looking the other way. FRONTLINE FOCUS Too Much Trouble—Susan Makes a Decision S usan was beginning to realize that the Sarbanes-Oxley Act was a mixed blessing. Greater scrutiny of corporate financial reports was meant to reassure investors, and it was certainly bringing her firm plenty of business, but now she was faced with this “small favor” to her boss. On the face of it, she couldn’t really understand why they just didn’t tell this guy that they only worked with clients worth a dollar figure that was higher than his company’s valuation and be done with it, but her boss was so paranoid about the firm’s reputation, and he was convinced that the next big client was always just around the corner. Susan spent a couple of hours reviewing the file. Steven’s assessment had been accurate—this was a simple audit with no real earning potential for the company. If they weren’t so busy, they could probably assign a junior team— her team perhaps—and knock this out in a few days, but Steven had bigger fish to fry. Susan thought for a moment about asking her boss to let her put a small team together to do this one, but then she realized that by not delivering on the small favor he had asked, she could be ruining her chances for getting assigned to some of the bigger audits down the road. So she ran the numbers, multiplied them by four, and submitted the price quotation. Unfortunately, the quotation was so outrageous that the small-business client complained to the PCAOB, which promptly wrote a letter demanding a full explanation of Susan’s company’s pricing schedule. QUESTIONS 1. What could Susan have done differently here? 2. What do you think will happen now? 3. What will be the consequences for Susan, Steven Thompson, and their auditing firm? [ For Review ] 1. Identify the five key pieces of U.S. legislation designed to discourage, if not prevent, illegal conduct within organizations. • The Foreign Corrupt Practices Act (1977): The act was passed to more effectively control bribery payments to foreign officials and politicians by American publicly traded companies. • • The U.S. Federal Sentencing Guidelines for Organizations (1991): FSGO applies to organizations and holds them liable for the criminal acts of their employees and agents. The Sarbanes-Oxley Act (2002): SOX was a legislative response to a series of corporate accounting scandals that had begun to dominate the financial markets in 2001. Page 131 The Revised Federal Sentencing Guidelines for Organizations (2004): The revision modified the 1991 guidelines by requiring periodic evaluation of the effectiveness of corporate compliance programs and evidence of active promotion of ethical conduct rather than passive compliance. • The Dodd-Frank Wall Street Reform and Consumer Protection Act (2010): The act introduced a complex list of new rules and restrictions designed to provide greater regulatory oversight of the financial sector, along with improved protection for consumers. 2. Understand the purpose and significance of the Foreign Corrupt Practices Act (FCPA). The FCPA represented an attempt to send a clear message that the competitiveness of U.S. corporations in overseas markets should be based on price and product quality rather than the extent to which companies had paid off foreign officials and political leaders. However, the legislation was criticized for lacking any real “teeth” because of its formal recognition of “facilitation payments” for “routine governmental action” such as the provision of permits, licenses, or visas. Critics argued that since the payment of bribes was typically designed to expedite the paperwork on most projects, the recognition of these facilitation payments did nothing more than legalize the payment of bribes. 3. Calculate monetary fines under the three-step process of the U.S. Federal Sentencing Guidelines for Organizations (FSGO). • Step 1: Calculate the “base fine” based on the greatest of the monetary gain to the organization from the offense, the monetary loss from the offense caused by the organization, or an amount determined by the judge. • Step 2: Compute a corresponding degree of blame or guilt known as the “culpability score” that can be increased (or aggravated) or decreased (or mitigated) according to predetermined factors. • Step 3: Multiply the base fine by the culpability score to arrive at the total fine amount. In certain cases the judge has the discretion to impose a socalled death penalty, where the fine is set high enough to match all the organization’s assets. 4. Compare and contrast the relative advantages and disadvantages of the Sarbanes-Oxley Act (SOX). The aim of SOX was to improve the accountability of managers to shareholders and to calm the raging crisis of confidence in American capitalism aroused by scandals at Enron, WorldCom, and other companies. The establishment of the • PCAOB and the specific changes to auditor independence and corporate responsibility certainly helped achieve that aim. However, critics argue that the rush to restore confidence produced legislation that was too heavy-handed in its application. Smaller companies were directly affected by the additional auditing costs, even though the unethical behavior that SOX was designed to address had occurred in publicly traded companies. In addition, the legislation applied to all companies issuing securities under U.S. federal securities statutes (whether headquartered in the United States or not), which brought 1,300 foreign firms from 59 countries under the law’s jurisdiction. 5. Explain the key provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Passed into law in July 2010, Dodd-Frank was promoted as the “fix” for the extreme mismanagement of risk in the financial sector that led to a global financial crisis in 2008–2010. At over 2,300 pages, the legislation presented a complex list of new rules and restrictions designed to provide greater regulatory oversight of the financial sector, along with improved protection for consumers. The three most actively promoted elements of Dodd-Frank were: • The Consumer Financial Protection Bureau (CFPB): Designed as an independently run entity in the Federal Reserve, the CFPB promises to act on any perceived misconduct by financial institutions in the treatment of their customers. • The Financial Stability Oversight Council (FSOC): Led by the Treasury secretary and a team of senior financial regulators, the FSOC is empowered to regulate any bank with assets over $50 billion if it determines that the business practices of the bank pose “a grave threat to the financial stability of the United States.” As the promised fix for “too big to fail,” the FSOC has the power to intervene in any aspect of the bank’s management up to and including the termination of business practices. • The Volcker rule: Proposed by former Federal Reserve Chairman Paul Volcker, this rule limits the ability of banks to trade on their own accounts (i.e., invest their own money) in any way that might threaten the financial stability of the institution (and, by definition, the financial markets as a whole). CHAPTER 7 BLOWING THE WHISTLE © John Lund/Drew Kelly/Blend Images LLC RFThe word whistle-blower suggests that you’re a tattletale or that you’re somehow disloyal. … But I wasn’t disloyal in the least bit. People were dying. I was loyal to a higher order of ethical responsibility. Dr. Jeffrey Wigand, The Insider Page 143 LEARNING OUTCOMES After studying this chapter, you should be able to: 1. 7-1Explain the term whistle-blower, and distinguish between internal and external whistle-blowing. 2. 7-2Understand the different motivations of a whistle-blower. 3. 7-3Evaluate the possible consequences of ignoring the concerns of a whistle-blower. 4. 7-4Recommend how to build internal policies to address the needs of whistle-blowers. 5. 7-5Analyze the possible risks involved in becoming a whistle-blower. FRONTLINE FOCUS Good Money B en is a sales team leader at a large chain of tire stores. The company is aggressive and is opening new stores every month. Ben is very ambitious and sees plenty of opportunities to move up in the organization—especially if he is able to make a name for himself as a star salesman. As with any retail organization, Ben’s company is driven by sales, and it is constantly experimenting with new sales campaigns and incentive programs for its salespeople. Ben didn’t expect this morning’s sales meeting to be any different—a new incentive tied to a new campaign, supported by a big media campaign in the local area. Ben’s boss, John, didn’t waste any time in getting to the point of the meeting: “OK guys, I have some big news. Rather than simply negotiating short-term incentives on specific brands to generate sales, the company has signed an exclusive contract with Benfield Tires to take every tire produced in the new Voyager line. That exclusive contract comes with a huge discount based on serious volume. In other words, the more tires we sell, the more money we’ll make—and I’m talking about good money for the company and very good bonus money for you—so put everybody into these tires. If we do well in this first contract with Benfield, there could be other exclusives down the road. This could be the beginning of something big for us.” John then laid out the details on the sales incentive and showed Ben and his fellow team leaders how they could earn thousands of dollars in bonuses over the next couple of months if they pushed the new Benfield Voyagers. Ben could certainly use the money, but he was concerned about pushing a new tire model so aggressively when it was an unknown in the marketplace. He decided to talk to their most experienced tire mechanic, Rick. Rick had worked for the company for over 25 years—so long that many of the younger guys joked that he either had tire rubber in his veins or had apprenticed on Henry Ford’s Model T. “So, Rick, what do you think about these new Benfield Voyagers?” asked Ben. “Are they really such a good deal for our customers, or are they just a moneymaker for us?” Rick was very direct in his response: “I took a look at some of the specs on them, and they don’t look good. I think Benfield is sacrificing quality to cut costs. By the standards of some of our other suppliers, these tires would qualify as ‘seconds’—and pretty bad ones too. You couldn’t pay me to put them on my car—they’re good for 15,000 miles at the most. We’re taking a big risk promoting these tires as our top model.” QUESTIONS 1. If Ben decides to raise concerns about the product quality of the Benfield Voyagers, he will become a whistle-blower. The difference between internal and external whistle-blowing is discussed later in the chapter. Which approach should Ben follow if he does decide to raise his concerns? 2. The five conditions that must exist for whistle-blowing to be ethical are outlined later in the chapter. Has Rick given Ben enough information to be concerned about the Benfield Voyagers? 3. What should Ben do now? Page 144 >> What Is Whistle-Blowing? When an employee discovers evidence of malpractice or misconduct in an organization, he or she faces an ethical dilemma. On the one hand, the employee must consider the “rightness” of his or her actions in raising concerns about this misconduct and the extent to which such actions will benefit both the organization and the public good. On the other hand, the employee must balance a public duty with a corresponding duty to his or her employer to honor the trust and loyalty placed in him or her by the organization. So some serious choices have to be made. First, the employee can choose to “let it slide” or “turn a blind eye”—a choice that will relate directly to the corporate culture under which the organization operates. An open and trusting culture would encourage employees to speak out for the greater good of the company and fellow employees. A closed and autocratic culture, on the other hand, would lead employees to believe that it would be wiser not to draw attention to themselves, to simply keep their mouths shut. However, if an employee’s personal value system prompts him or her to speak out on the misconduct, the employee immediately takes on the role of a whistle-blower. The employee then faces a second and equally important choice. One option is to bring the misconduct to the attention of a manager or supervisor and take the complaint through appropriate channels within the organization. We refer to this option as internal whistle-blowing. If the employee chooses to go outside the organization and bring the misconduct to the attention of law enforcement officials or the media, we refer to this decision as external whistle-blowing. PROGRESS ✓ QUESTIONS 1. 2. 3. 4. What is a whistle-blower? What is internal whistle-blowing? What is external whistle-blowing? Is whistle-blowing a good thing? Read this section if you do not understand the highlighted topic. x >> The Ethics of Whistle-Blowing It may be argued that whistle-blowers provide an invaluable service to their organizations and the general public. The discovery of illegal activities before the situation is revealed in the media could potentially save organizations millions of dollars in fines and lost revenue from the inevitable damage to their corporate reputations. The discovery of potential harm to consumers (from pollution or product-safety issues, for example) offers immeasurable benefit to the general public. From this perspective, it is easy to see why the media often applaud whistle-blowers as models of honor and integrity at a time when integrity in the business world seems to be in very short supply. © Radlund & Associates/Getty Images RF However, in contrast to the general perception that whistle-blowers are brave men and women putting their careers and personal lives at risk to do the right thing, some argue that such actions are not brave at all—they are, it is argued, actions motivated by money or by the personal egos of “loose cannons” and “troublemakers” who challenge the policies and practices of their employers while claiming to act as the corporate conscience. In addition, rather than being viewed as performing a praiseworthy act, whistle-blowers are often severely criticized as informers, “sneaks,” spies, or “squealers” who have in some way breached the trust and loyalty they owe to their employers. WHEN IS WHISTLE-BLOWING ETHICAL? Whistle-blowing is appropriate—ethical—under five conditions:1 1. When the company, through a product or decision, will cause serious and considerable harm to the public (as consumers or bystanders) or break existing laws, the employee should report the organization. 2. When the employee identifies a serious threat of harm, he or she should report it and state his or her moral concern. 3. When the employee’s immediate supervisor does not act, the employee should exhaust the internal procedures and chain of command to the board of directors.Page 145 4. The employee must have documented evidence that is convincing to a reasonable, impartial observer that his or her view of the situation is accurate, and evidence that the firm’s practice, product, or policy seriously threatens and puts in danger the public or product user. 5. The employee must have valid reasons to believe that revealing the wrongdoing to the public will result in the changes necessary to remedy the situation. The chance of succeeding must be equal to the risk and danger the employee takes to blow the whistle. WHEN IS WHISTLE-BLOWING UNETHICAL? If there is evidence that the employee is motivated by the opportunity for financial gain or media attention or that the employee is carrying out an individual vendetta against the company, then the legitimacy of the act of whistle-blowing must be questioned. The potential for financial gain in some areas of corporate whistle-blowing can be considerable: • On November 30, 2005, New York City’s Beth Israel Hospital agreed to pay $72.9 million to resolve allegations from a former hospital executive that it falsified Medicare cost reports from 1992 to 2001. The case stemmed from a 2001 whistle-blower lawsuit filed in the U.S. District Court in New York City by a former Beth Israel vice president of financial services, Najmuddin Pervez. Pervez was expected to receive 20 percent of the recovery amount, around $15 million.2 • In June 2010, Northrop Grumman Corp. agreed to pay the federal government $12.5 million to settle allegations that the company caused false claims to be submitted to the government. Allegedly, Northrop Grumman’s Navigation Systems Division failed to test electronic components it supplied for military airplane, helicopter, and submarine navigation systems to ensure that the parts would function at the extreme temperatures required for military and space uses. This case was filed under the qui tam provisions of the federal False Claims Act by whistleblower Allen Davis, a former quality assurance manager at Northrop Grumman’s Navigation Systems Division facility in Salt Lake City. Davis will receive $2.4 million out of the settlement.3 • Douglas Durand, former vice president of sales for TAP Pharmaceutical Products, received a $126 million settlement from the U.S. government after filing suit against his employer and a TAP rival, the former Zeneca, Inc., accusing both companies of overcharging the federal government’s Medicare program by tens of millions of dollars.4 Under the federal Civil False Claims Act, also known as “Lincoln’s Law,” whistle-blowers (referred to as “relators”) who expose fraudulent behavior against the government are entitled to between 10 and 30 percent of the amount recovered. Originally enacted during the Civil War in 1863 to protect the government against fraudulent defense contractors, the act was strengthened as recently as 1986 to make it easier and safer for whistleblowers to come forward. The lawsuits brought under the act are referred to as qui tam, which is an abbreviation for a longer Latin phrase that establishes the whistle-blower as a deputized petitioner for the government in the case. Since 1986, more than 2,400 qui tam lawsuits have been filed, recovering over $2 billion for the government and enriching whistle-blowers by more than $350 million. Whether the motivation to speak out and reveal the questionable behavior comes from a personal ethical decision or the potential for a substantial financial windfall will probably never be completely verified, but the threat of losing your job or becoming alienated from colleagues by speaking out against your employer must be diminished by the knowledge that some financial security will likely result. Whether the choice is based on ethical or financial considerations, you had better be very sure of your facts and your evidence had better be irrefutable before crossing that line. KEY POINT The large payouts to whistle-blowers in qui tam lawsuits are a direct result of the way the legislation is written. Is it fair to question the motives of those whistle-blowers simply because the corporate conduct they are revealing affects the U.S. government? On the other hand, do you think the potential for that payout influences that person’s decision to become a whistle-blower? Page 146 PROGRESS ✓ QUESTIONS 5. List five conditions for whistle-blowing to be considered ethical. 6. Under what condition could whistle-blowing be considered unethical? 7. If you blow the whistle on a company for a personal vendetta against another employee but receive no financial reward, is that more or less ethical than doing it just for the money? 8. Would the lack of any financial reward make you more or less willing to consider being a whistle-blower? Why? THE YEAR OF THE WHISTLE-BLOWER Since examples of internal whistle-blowing rarely receive media attention, it is impossible to track the history of such actions. However, external whistleblowing is a 20th-century phenomenon. One of the first instances of the use of the term whistle-blower occurred in 1963 when Otto Otopeka was dismissed from the U.S. State Department after giving classified documents on security risks to the chief counsel of the Senate Subcommittee on Internal Security. In the 1970s, the Watergate scandal broke after former Marine commander Daniel Ellsberg leaked over 7,000 pages of confidential Pentagon documents on government misconduct in the Vietnam conflict to the press, risking life imprisonment to do so; and an anonymous source named Deep Throat (only recently revealed to be Mark Felt, former assistant director of the FBI during the Nixon administration) helped Washington Post journalists Bob Woodward and Carl Bernstein expose the extent of government misconduct in attempting to track down Ellsberg. © Simonpietri/Sygma/Corbis Christian © Mark Peterson/Corbis In the 1983 film Silkwood, Meryl Streep portrayed Karen Silkwood, a nuclear plant employee who blew the whistle on unsafe practices. The real Karen Silkwood died in an auto accident under mysterious circumstances. Public awareness of whistle-blowers reached a peak in 2002 when Time magazine awarded its Person of the Year award to three women “of ordinary demeanor but exceptional guts and sense”:5 • Sherron Watkins, the vice president at Enron Corp., who, in the summer of 2001, wrote two key e-mails warning Enron Chairman Ken Lay that it was only a matter of time before the company’s creative “accounting treatment” would be discovered and bring the entire organization down. • Coleen Rowley, an FBI staff attorney, who rose to public prominence in May 2002 when she made public a memo to Director Robert Mueller about the frustration and dismissive behavior she faced from the FBI when her Minneapolis, Minnesota, field office argued for the investigation of a suspected terrorist, Zacarias Moussaoui, who was later indicted as a coconspirator in the September 11, 2001, attacks. • Cynthia Cooper, whose internal auditing team first uncovered questionable accounting practices at WorldCom. Her team’s initial estimates placed the discrepancy at $3.8 billion; the final balance was nearer to $11 billion. >> The Duty to Respond Whether you believe whistle-blowers to be heroes who face considerable personal hardship to bring the harsh light of media attention to unethical behavior, or you take the opposing view that they are breaking the oath of loyalty to their employer, the fact remains that employees are becoming increasingly willing to respond to any questionable behavior they observe in the workplace. The choice for an employer is to ignore them and face public embarrassment and potentially ruinous financial penalties, or to create an internal system that allows whistle-blowers to be heard and responded to before the issue escalates to an external whistle-blowing case. Obviously, responding to whistle-blowers in this context means addressing their concerns, and not, as many employers have decided, firing them. Page 147 THE INSIDER With their classic portrayals of good guys against the corporate bad guys, movie depictions of whistle-blowers are by no means a new idea. Films such as The China Syndrome, Silkwood, and The Insider have documented the risks and challenges whistle-blowers face in bringing the information they uncover to the general public. The movie The Insider documents the case of Dr. Jeffrey Wigand and his decision to go public with information alleging that his employer, the tobacco company Brown & Williamson (B&W), was actively manipulating the nicotine content of its cigarettes. Wigand was portrayed by Russell Crowe, and the part of Lowell Bergman, the CBS 60 Minutes producer who helped Wigand go public, was played by Al Pacino. The movie captures several key issues that are common to many whistle-blower cases: © Photodisc/Getty Images RF Wigand was initially reticent to speak out about the information— partly out of fear of the impact on his family if he lost his severance package and health benefits under the terms of his confidentiality agreement with B&W, and partly because of his strong sense of integrity in honoring any contracts he had signed. It was only after B&W had chosen to modify the confidentiality agreement after firing Wigand (allegedly for “poor communication skills”) that Wigand, angered by B&W’s apparent belief that he wouldn’t honor the confidentiality agreement he had signed, chose to go public. • B&W’s response was immediate and aggressive. It won a restraining (or “gag”) order against Wigand to prevent him from giving evidence as an • expert witness in a case against tobacco companies brought by the state of Mississippi, but he testified anyway. B&W then proceeded to undertake a detailed disclosure of Wigand’s background in order to undermine his reputation, eventually releasing a thick report titled “The Misconduct of Jeffrey S. Wigand Available in the Public Record.” The extent to which the findings of this investigation were exaggerated was later documented in a New York Times newspaper article. The movie portrays Bergman as providing the material for a New York Times journalist to refute the B&W claims against Wigand. • Wigand’s testimony was extremely damaging for B&W. He not only accused the CEO of B&W, Thomas Sanderfur, of misrepresentation in stating before congressional hearings in 1994 that he believed that nicotine was not addictive, but Wigand also claimed that cigarettes were merely “a delivery system for nicotine.” • Even though Wigand’s credibility as a witness had been verified, CBS initially chose not to run Wigand’s interview with CBS reporter Mike Wallace in fear of a lawsuit from B&W for “tortious interference” (which is defined as action by a third party in coming between two parties in a contractual relationship—that is, CBS would be held liable for intervening between Wigand and B&W in the confidentiality agreement Wigand had signed). The fact that CBS’s parent company was in the final stages of negotiations to sell CBS to the Westinghouse Corp. was seen as evidence of CBS’s highly questionable motivation in avoiding the danger of tortious interference. In reality, the fear of litigation was probably well founded. After ABC had run an equally controversial segment on its Day One show accusing Philip Morris of raising nicotine levels in its cigarettes, Philip Morris, along with another tobacco company, R. J. Reynolds, launched a $10 billion lawsuit against ABC, which was forced to apologize and pay the tobacco companies’ legal fees (estimated at over $15 million). • In November 1998, B&W subsequently joined with three other tobacco giants—Philip Morris, R. J. Reynolds, and Lorillard—in signing the Tobacco Master Settlement Agreement (MSA), settling state lawsuits against them in 46 states for recovery of the medical costs of treating smoking-related illnesses. The settlement totaled $206 billion and included provisions that forbade marketing directly or indirectly to children and banned or restricted the use of cartoons, billboards, product placement, or event sponsorship in the marketing of tobacco products. • As vice president for research and development for B&W, Wigand was a corporate officer for the company and, therefore, the highest-ranking insider ever to turn whistle-blower at the time. His reward for speaking out was that he never reached the $300,000 salary level he held at B&W again. At the time his story went public, he had found employment as a teacher in Louisville, Kentucky, teaching chemistry and Japanese for $30,000 a year. His marriage didn’t survive the intense media scrutiny and B&W’s attempts to discredit him. • Six years later, Wigand was interviewed by Fast Company magazine, and he shared his unhappiness with the title of whistle-blower: “The word whistle-blower suggests that you’re a tattletale or that you’re somehow disloyal,” he says. “But I wasn’t disloyal in the least bit. People were dying. I was loyal to a higher order of ethical responsibility.” Page 148 QUESTIONS 1. Wigand was initially unwilling to go public with his information. What caused him to change his mind? 2. Did CBS pursue Wigand’s story because it was the right thing to do, or because it was a good story? 3. Since CBS played such a large part in bringing Wigand’s story to the public, do you think the network also had an obligation to support him once the story broke? Explain why or why not. 4. Was CBS’s decision not to run the interview driven by any ethical concerns? Sources: Elizabeth Gleick, “Where There’s Smoke,” Time, February 12, 1996, p. 54; Ron Scherer, “One Man’s Crusade against Tobacco Firms,” Christian Science Monitor, November 30, 1995, p. 3; and “Jeffrey Wigand: The Whistle-Blower,” Fast Company, March 2002. Before 2002, legal protection for whistle-blowers existed only through legislation that encouraged the moral behavior of employees who felt themselves compelled to speak out, without offering any safeguards against retaliation aimed at them. As far back as the False Claims Act of 1863, designed to prevent profiteering from the Civil War, the government has been willing to split up to 30 percent of the recovered amount with the person filing the petition—a potentially lucrative bargain—but it offered no specific prohibitions against retaliatory behavior. The Whistleblower Protection Act of 1989 finally addressed the issue of retaliation against federal employees who bring accusations of unethical behavior. The act imposed specific performance deadlines in processing whistle-blower complaints and guaranteed the anonymity of the whistleblower unless revealing the name would prevent criminal activity or protect public safety. The act also required prompt payment of any portion of the settlement to which the whistle-blower would be entitled, even if the case were still working its way through the appeals process. The Whistleblower Protection Act of 1989 applied only to federal employees. Not until the Sarbanes-Oxley Act of 2002 (also known as the Corporate and Criminal Fraud Accountability Act, and most commonly abbreviated to SOX) did Congress take an integrated approach to the matter of whistle-blowing by both prohibiting retaliation against whistle-blowers and encouraging the act of whistle-blowing itself.6 The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 introduced a new reward program for whistle-blowers who report securities law violations to the Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC). The legislation stipulates that if more than $1 million is collected, the whistle-blower is entitled to between 10 and 30 percent of the monies collected, in addition to a clear entitlement to job and confidentiality protection. The SEC’s new Office of the Whistleblower was created in August 2011 and received 2,700 tips in its first year. PROGRESS ✓ QUESTIONS 9. If an employee blows the whistle on an organization on the basis of a rumor, is that ethical? 10. If that information turns out to be false, should the employee be liable for damages? Explain your answer. 11. Compensation under Dodd-Frank isn’t as clear as the percentage of the funds recovered for a government whistle-blower. Does that make it less likely that we’ll see more whistle-blowing under Dodd-Frank? 12. Under SOX, complaining to the media isn’t recognized as whistleblowing. Is that ethical? KEY POINT The language on a whistle-blower’s entitlement to “all compensatory damages to make the employee whole” is not clear in the SOX legislation. Considering the cases you have read in this chapter, what would you need to be made “whole”? Page 149 >> Addressing the Needs of WhistleBlowers Given this new legal environment surrounding whistle-blowers, all employers would be wise to put the following mechanisms in place: 1. A well-defined process to document how such complaints are handled—a nominated contact person, clearly identified authority to respond to the complaints, firm assurances of confidentiality, and nonretaliation against the employee. 2. An employee hotline to file such complaints, again with firm assurances of confidentiality and nonretaliation to the employee. 3. A prompt and thorough investigation of all complaints. 4. A detailed report of all investigations, documenting all corporate officers involved and all action taken. A HOTLINE CALL Real-World Applications Pat is the newest member of a three-person crew for the local franchise of a national moving company. The team leader is Gene, who has been with the company for a couple of years now. Pat has serious concerns about some of Gene’s business practices—he has asked Pat to do some “private” cash-only moves (off the books but using the company’s equipment) and has negotiated very low prices for “friends” with, Pat suspects, an agreement to receive cash under the table in return for the low price bid. Pat thinks that Gene’s tactics are damaging the company’s reputation and putting Pat’s job security in jeopardy. The company has a hotline number for employees to share such concerns, and the company guarantees anonymity for all callers. However, with only three people on the crew, if something happens to Gene, Pat is concerned that it won’t take Gene too long to figure out who placed the call. What should Pat do? Above all, employers must have a commitment to follow through on any and all reports whether or not those reports end up being substantiated. For a whistle-blower hotline to work, trust must be established between employees and their employer—trust that the information can be given anonymously and without fear of retaliation, even if the identity of the whistle-blower is ultimately revealed during the investigation. The organization can make all the promises in the world, but until that first report is investigated through to a full conclusion, the hotline may never ring again. If the investigation is perceived to be halfhearted, or there is even the remotest suggestion of a cover-up, then the hotline will definitely never ring again. PROGRESS ✓ QUESTIONS 13. How should managers or supervisors respond to an employee who brings evidence of questionable behavior to their attention? 14. Should that employee be given any reassurances of protection for making the tough decision to come forward? 15. Do you think a hotline that guarantees the anonymity of the caller will encourage more employees to come forward? 16. Does your company have a whistle-blower hotline? How did you find out that there is (or isn’t) one? THE COLD, HARD REALITY The media’s attention to Jeffrey Wigand, Sherron Watkins, Coleen Rowley, and Cynthia Cooper could lead you to believe that doing the right thing and speaking out against the perceived wrongdoings of your employer will guarantee you public support as an honorable and ethical person, putting the needs of your fellow human beings before your own. In reality, the majority of whistle-blowers face the opposite situation. They are branded as traitors, shunned by their former colleagues, and often singled out to the extent that they never find work in their respective industries again. Consider the cases of the following two individuals who made the same tough ethical choices as their more famous counterparts with markedly different outcomes. © U. Baumgarten/Getty Images Khaled Assadi, an American employee of GE Energy, was temporarily assigned to the company’s Amman, Jordan, operations, where he was responsible for coordinating with Iraq’s governing bodies to secure and manage energy service contracts. In 2011 Assadi reported to both his supervisors and the GE ombudsperson that the company could be in violation of the Foreign Corrupt Practices Act (FCPA) for actions taken in relation to a joint venture agreement with the Iraqi minister of electricity. Assadi alleged that, during the negotiations, the company agreed to hire Iman Mahmood, a woman “closely associated” with the senior deputy minister for electricity, at the specific request of that minister. Assadi was later fired from the company. In a subsequent lawsuit alleging that his termination represented illegal retaliation for his disclosures of alleged bribery, Assadi stated that he received a negative performance review immediately after reporting his concerns about the hiring of Iman Mahmood, and that GE began “constant and aggressive severance negotiations” to force him to leave the company until it finally “abruptly ended all discussions and terminated” him. Assadi sought protection under the Dodd-Frank whistle-blower provisions, but in June 2012, the U.S. Court for the Southern District of Texas dismissed the lawsuit on the grounds that the antiretaliation provision did not apply in cases of “extraterritoriality” (where the petitioner was assigned overseas at the time of the alleged event). Kyle Lagow, a former home appraiser, will receive $14.5 million as part of a whistle-blower lawsuit that accused subprime lender Countrywide Financial (a Bank of America subsidiary) of inflating appraisal values on government-insured loans. Lagow lost his job after raising concerns about appraisal practices at his company, and his inability to find similar employment after the termination placed his family in severe financial hardship. His complaint was brought under the qui tam provision, and his lawsuit was one of five whistle-blower complaints that were folded into a larger $25 billion national mortgage settlement that five banks—Ally Bank (formerly GMAC), Bank of America, Citicorp, JPMorgan Chase, and Wells Fargo—reached with state and federal officials in February 2012. QUESTIONS 1. Who took the greater risk here: Khaled Assadi or Kyle Lagow? Why? 2. Was the alleged behavior at GE Energy more or less unethical than the behavior at Countrywide Financial? Explain your answer. 3. Do you think Assadi and Lagow regret their decisions to go public with their information? Why or why not? 4. Do you think their behavior changed anything at either company? Sources: “Dodd-Frank Whistleblower Provisions not Extended to American Working Abroad,” SEC Whistleblower Blog, July 6, 2012; and Rick Rothacker, “Bank of America Whistleblower Receives $14.5 Million in Mortgage Case” Reuters, May 29, 2012. Read this section if you do not understand the highlighted topic. x Page 150 >> Conclusion: Whistle-Blowing as a Last Resort The perceived bravery and honor in doing the right thing by speaking out against corporate wrongdoing at personal risk to your own career and financial stability adds a gloss to the act of whistle-blowing that is Page 151 undeserved. The fact that an employee is left with no option but to go public with information should be seen as evidence that the organization has failed to address the situation internally for the long-term improvement of the corporation and all its stakeholders. Becoming a whistle-blower and taking your story public should be seen as the last resort rather than the first. The fallout of unceasing media attention and the often terminal damage to the reputation and long-term economic viability of the organization should be enough of a threat to force even the most stubborn executive team to the table with a commitment to fix whatever has been broken. Regrettably, the majority of executives appear to be unwilling to fix the problem internally and, where necessary, notify the appropriate authorities of the problem—they choose to either bury the information and hire the biggest legal gunslinger they can find to discredit the evidence or, as in the case of Jeffrey Wigand, tie their employees in such restrictive confidentiality agreements that speaking out exposes the employee to extreme financial risk, which managers no doubt hope will prompt the employee to “keep his mouth shut.” As Peter Rost explains:7 A study of 233 whistle-blowers by Donald Soeken of St. Elizabeth’s Hospital in Washington, DC, found that the average whistle-blower was a man in his forties with a strong conscience and high moral values. After blowing the whistle on fraud, 90 percent of the whistle-blowers were fired or demoted, 27 percent faced lawsuits, 26 percent had to seek psychiatric or physical care, 25 percent suffered alcohol abuse, 17 percent lost their homes, 15 percent got divorced, 10 percent attempted suicide, and 8 percent were bankrupted. But in spite of all this, only 16 percent said they wouldn’t blow the whistle again. Life Skills >> MAKING DIFFICULT DECISIONS In Chapter 1, “Understanding Ethics,” we talked about using your personal value system to live your life according to your own ethical standards. As you have seen in this chapter, people like Jeffrey Wigand, Sherron Watkins, Coleen Rowley, and Christine Casey may come across situations in their business lives where the behavior they observe is in direct conflict to their ethical standards, and they find themselves unable to simply look the other way. Ask yourself what you would do in such a situation. Would you ignore it? Could you live with that decision? If you chose to speak out, either as an internal or external whistle-blower, could you live with the consequences of that decision? What if there was a negative impact on the company as a result of your actions and people lost their jobs, as they did at Enron or WorldCom? Could you live with that responsibility? Speaking out in response to your own ethical standards is only one part of the decision. The consequences for you, your immediate family, your co-workers, and all the other stakeholders in the organization represent an equally important part of that decision. You can see why whistle-blowers face such emotional turmoil before, during, and after what is probably one of the toughest decisions of their lives. If you find yourself in such a situation, don’t make the decision alone. Talk to people you can trust, and let them help you review all the issues and all the potential consequences of the decision you are about to make. Page 152 FRONTLINE FOCUS Good Money—Ben Makes a Decision B en lost a lot of sleep that night. He trusted Rick as his most experienced tire mechanic, but he had never seen him be so negative about one particular tire model—and it wasn’t as if he had anything to gain by trashing the reputation of a tire that the company wanted to sell so aggressively. The company had sold seconds before—heck, they even sold “used” tires for those customers looking to save a few bucks. How was this any different? Plus, Rick didn’t have to deal with the sales pressure that John placed on his team leaders—you had to hit your quota every week or else—and if the company was pushing Benfield Voyagers, then John expected to see him sell Benfield Voyagers by the dozen. But what if Rick was right? What if Benfield had cut corners to save on costs? They could end up with another Firestone disaster on their hands. What was Ben supposed to do with this information? If Rick was so concerned, why wasn’t he speaking up? The company advertised its hotline for employees to use if they had concerns about any business practices. Why was it Ben’s job to say something? He needed this job. He had bills to pay just like the other guys in the store—in fact, the bills were getting pretty high and that bonus money would really help right now. Ben tossed and turned for a few more hours before reaching a decision. Rick might be right to be concerned, but he was only one guy. The guys at corporate looked at the same specs as Rick did, and if they could live with them, then so could Ben. He wasn’t going to put his neck on the block just on the basis of Rick’s concerns. If the company was putting its faith in Benfield Voyagers, then Ben was going to sell more of them than anyone else in the company. Two weeks later, there was a fatal crash involving a minivan with three passengers—a husband and wife and their young son. The minivan had been fitted with Benfield Voyagers at Ben’s tire store just one week earlier. QUESTIONS 1. What do you think will happen now? 2. What will be the consequences for Ben, Rick, their tire store, and Benfield? 3. Should Ben have spoken out against the Voyager tires? [ For Review ] 1. Explain the term whistle-blower, and distinguish between internal and external whistle-blowing. When an employee discovers evidence of corporate misconduct and chooses to bring that evidence to the attention of others, he or she becomes a whistleblower. If that employee chooses to bring the evidence to the attention of executives within the organization through appropriate channels, that option is referred to as internal whistle-blowing. If, on the other hand, the employee chooses to go outside the organization and contact law enforcement officials or the media, that option is referred to as external whistle-blowing. 2. Understand the different motivations of a whistle-blower. Whistle-blowers are generally considered to be models of honor and integrity at a time when integrity in the business world seems to be in very short supply. However, such actions can also be motivated by the desire for revenge, when an ex-employee feels maligned and tries to create trouble for her former employer. In addition, the potential for financial gain through the settlement of qui tam lawsuits can be seen to bring the true intent of the whistle-blower into question. 3. Evaluate the possible consequences of ignoring the concerns of a whistle-blower. The opportunity to address illegal or unethical activities before the situation is revealed in the media could potentially save an organization’s corporate reputation, prevent a punitive fall in the company’s stock price, and, as we saw in Chapter 6, help to minimize federal fines. Choosing to dismiss the concerns of a whistle-blower, as organizations seem to do with disheartening frequency, merely serves to escalate an already volatile situation and place the organization in an even deeper hole when the situation is made public. 4. Recommend how to build internal policies to address the needs of whistle-blowers. The greatest fear of any whistle-blower is retaliation, both within the organization and within that employee’s profession. Addressing that fear requires a guarantee of anonymity in coming forward with whatever evidence has been uncovered. For that guarantee to have any credibility, there must be trust between employees and their employer. Critics argue that expecting such trust to be present in an environment where illegal/unethical behavior is taking place is unrealistic. Nevertheless, the organization can encourage whistle-blowers to come forward with a series of clearly defined initiatives: Page 153 • A well-defined process to document how such complaints are handled—a nominated contact ...
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