Over the past two decades, reporting hotlines have become indispensable corporate governance tools implemented by organizations of all types and sizes. By enabling employees to report misconduct and inappropriate behavior anonymously and confidentially, hotlines are instrumental in detecting fraud, negligence, abuse and other potentially harmful activities. Further, a well-crafted whistleblower program comprised of a hotline along with effective investigative and anti-retaliation measures encourage a speak-up culture that can significantly reduce incidents of wrongdoing.

While most compliance professionals have maintained that there is a link between hotline usage and improved business performance, they haven’t always had access to reliable data to support their claims. They’ve often had to depend on anecdotal evidence to demonstrate the value of reporting hotlines to top executives and board members – until recently.

A comprehensive study entitled “Evidence on the Use and Efficacy of Internal Whistleblowing Systems” has helped to quantify the value of hotline reporting. The study, conducted by researchers at George Washington University, is based on data culled from more than three million internal record reports made from 2004-2017 at approximately 5,000 public companies, more than half of which were Fortune 500 organizations. (Note: to maintain confidentiality and privacy, the study did not use any personally or company-identifiable data points.)

General Study Findings

The study provided statistical validation of the relationship between the use of internal reporting systems (hotlines) and improved business performance. The data also demonstrates a positive correlation between reporting activity and return on assets (ROA) – the more hotline activity, the higher the ROA. Conversely, the study established a link between lower hotline usage and weaker corporate governance practices.

This might seem counterintuitive: it’s logical to conclude that organizations experience more hotline activity because they are poorly managed and have more ethical and compliance issues. However, the opposite appears to be the case. Organizations that encourage reporting seem to have a greater chance of detecting and mitigating issues in the early stages – before they escalate.

Positive Outcomes of Increase Hotline Usage

Specific findings that identify a positive correlation between increased hotline usage and enhanced operational results include:

• Increased productivity and profitability: Although not a substantial difference, organizations that saw a higher level of hotline activity experienced a 2.9 percent increase in ROA when compared to those with lower usage. This “bump” takes the form of higher productivity and larger profit margins. The logic behind this phenomenon is that companies that make a stronger effort to encourage whistleblowing typically are also well-managed in other areas, contributing to the better ROA results.
• Decrease in material lawsuits: According to the study, organizations with more hotline activity experienced 3.9 percent fewer pending material lawsuits in the following year, a figure that increased to 6.9 percent over the succeeding three-year period.
• Lower litigation settlement costs: Organizations with higher levels of hotline usage also saw an 8.9 decrease in the settlement amounts they were required to pay in the following year after litigation. They also paid 20.4 percent smaller amounts over the following three years. This infers that higher reporting activity gives organizations the opportunity to resolve issues before they reach the lawsuit stage.

What About Organizations with Lower Hotline Participation?

The study identified two key areas where lower hotline usage had negative implications for organizations:

• Increased likelihood of earnings manipulation: There is a correlation between less hotline usage and an increase in the number of “discretionary accruals.” These are judgments and estimates that management makes regarding cash flows that tend to be arbitrary in nature. In short, discretionary accruals often lead to a deviation from accepted accounting principles and may result in earnings manipulation. The study postulates that organizations that do not encourage whistleblowing are more prone to the negative financial impact of discretionary accruals.
• Less vigilant corporate governance practices: Organizations with less hotline activity tend to implement lax corporate governance practices that contribute to lower firm valuations. Examples include fewer rights for shareholders, staggered terms for the board of directors and substantial “golden parachute” payouts to senior executives that leave the firm. These organizations also typically have autocratic executives who discourage dissenting opinions.

What Does It Mean for Your Organization?

The most obvious implication from this study is that heavy hotline usage is not necessarily a cause for alarm – in fact, it indicates a high level of employee engagement. Because workers do not hesitate to report a problem when it arises, your organization stands a better chance of identifying and preventing an issue sooner.

Additionally, if you notice an increase in the volume of hotline reports, it means that your efforts to create an ethical culture are producing the desired results. A greater willingness to raise ethical issues indicates that your employees share your concern about establishing a positive work environment that benefits the organization as a whole. They understand that by taking action to prevent misconduct or a compliance violation, they are also protecting the organization and their livelihoods.

If you’re a compliance officer, you now have solid empirical evidence you can present to top management and the board of directors regarding the efficacy of your organization’s hotline program. Because the study assigns quantitative values regarding the correlation between hotline use and productivity and profitability and decreased litigation expenses, you can more easily justify the cost of the hotline and its positive impact on business performance.

These findings also make a case for increasing the investment in ethics and compliance programs and initiatives. Compliance professionals can use the empirical data to justify the benefit of allocating additional resources for enhanced ethics and compliance training, ramped up third-party due diligence vetting and monitoring, and hiring more report handling and investigative personnel.

Finally, the study demonstrates that organizations with comprehensive, fully implemented and actively promoted reporting mechanisms experience an increase in the flow of employee-generated information and feedback. This enables the compliance team and top management to more readily identify potential issues quickly and take corrective measures promptly – before they become serious, and potentially devastating ethics and compliance problems.