Mention the names Kenneth Lay and Enron, and even today many who have nothing to do with the worlds of energy trading, accounting practices or corporate law will recall that the career of Lay and the Enron Corporation both came to disastrous ends in 2001.

However, mention Sherron Watkins, and few people will recognize the name, even though Watkins earned a spot on Time magazine’s 2002 list of “People of the Year.”

The travails of Watkins put a spotlight on the need for companies and other organizations to fully and properly ensure that employees report misconduct internally. The phrase “fully and properly” are important here. Watkins was an accountant and Enron’s vice president for corporate development. She sent an anonymous email to then-CEO Lay that outlined all the bad accounting practices that would soon take down the entire company.

“I am incredibly nervous that we will implode in a wave of accounting scandals,” she wrote to Lay in the email.

According to reports, after a later meeting with Watkins, Lay and his cohorts’ first response was to fire Watkins. At the time, Texas did not have a statute to protect company whistleblowers. However, Lay and his advisers eventually decided against firing Watkins.

Tragically for the employees and shareholders of Enron, many of whom were depending on the value of their stock to fund their retirements, while Watkins did internally report the company’s misconduct it was too little, too late. Evidenced by the fact that Watkins felt compelled to send an anonymous email, it seems that the company did not have a properly implemented, fully developed and well supported internal misconduct reporting system. Had the situation been different, perhaps a lot of pain and suffering could have been prevented.

Essential to avoiding costly ethics problems is to take proactive measures and put in place a system that makes internal reporting the first impulse employees experience when they sense they have found a situation that needs attention. Further, management must do everything necessary to ensure that employees follow that first impulse to report internally and that requires ongoing attention to several factors.

Four Keys for Successful Internal Reporting

1. Establishing and training. Certainly the first step is to establish an efficient, effective and easy-to-use internal reporting system. We have written a white paper that fully explains why ethics hotlines are considered an industry best practice. However, once a good reporting system is established, it must be supported by ongoing training.
   The mechanics of reporting possible ethics violations must be familiar to everyone in the organization. Just as companies conduct ongoing safety training, the same approach must be taken with the internal reporting system. When members of the organization fully understand how the system works and are comfortable with it, only then can management rely on it being used properly.

   Also, repeated training not only makes members of the organization comfortable with the mechanics of the reporting system, it delivers the message that using the system is important to management. All too often companies will invest a lot of energy to “introduce” something new and then let it fall by the wayside over time. This can be a very costly mistake if it is allowed to happen to any internal reporting system.

   Finally, along with the mechanics of using the reporting system, everyone should be trained in what is considered unethical behavior and practices.

2. Corporate culture. Ongoing training and reinforcement can also shape—as well as reflect—corporate culture. As outlined above, training demonstrates the commitment of management to the internal reporting system. In addition, virtually any organization will end up reflecting the ethics of its leadership.
   At Enron the first impulse of top management was to retaliate against Sherron Watkins. It’s highly likely that such an attitude permeated the entire corporation. When people work together over a long time certain bonds are created. Without proactive guidance, these bonds can create an atmosphere in which a whistleblower can be seen as a “snitch.”

   In their February 2010 article for Compliance & Ethics Professional, authors Terry Morehead Dworkin, Marcia P. Miceli, and Janet P. Near emphasize the importance of establishing a culture that promotes the free flow of concerns between all levels. When information flows freely, they say, whistleblowing can be seen “merely as truth telling and an attempt to help the organization by dealing with the problem.”

   Organizations can further remove any stigma of whistleblowing by awarding and recognizing those who raise a “red flag” when they believe they have witnessed unethical practices. Corporations and other organizations typically have award sessions each year. Employees can be recognized and just like suggestions for process improvements sometimes come with cash awards, the same can be done when ethics violation warnings potentially save money. Organizational newsletters can also be used to praise whistleblowing activity, with the proper anonymity.

   For example, British defense contracting giant BAE Systems was hit with more than $440 million in fines resulting from criminal bribery changes in the United States and Great Britain. After the charges were made in 2008, BAE mounted a significant effort to change its corporate ethics culture and renew BAE’s commitment to its internal reporting hotline. Calls to the hotline jumped 72 percent the following year and that’s good. However, the cost effective time for an organization to establish a healthy corporate culture is before problems arise.

3. Prevent retaliation. The biggest fear an employee has in these situations is the fear of retaliation and all too often the fear is grounded in reality. The 2011 National Business Ethics Survey showed that more than one in five whistleblowers experienced retaliation.
   Strong policies must be in place that prevent retaliation, and just as with other aspects of the internal reporting system, these policies must be constantly reinforced. A part of the training to prevent retaliation should be to inform those who hold positions of authority that the financial consequences of a retaliation suit are often far greater than the consequences of the original alleged ethics violation. There are cadres of lawyers who specialize in filing retaliation lawsuits.
4. Close the loop. The worst response to the report of an alleged ethics violation is no response at all—or the perception of no response. The individual who reports a possible violation of the organization’s code of ethics should know that management is responding. Investigating the details can take time. However, the original reporter deserves to know that the problem just hasn’t disappeared into some management “black hole.” This also lets reporters know that management isn’t secretly devising the best way to “deal with” them.
   Similarly, it’s important to investigate these situations as quickly as possible and impose sanctions as soon as possible as well. Large organizations, whether they are corporations or governmental entities, often get “black eyes” among the press and public for their perceived inertia and willingness to “let things slide.” Appropriate action taken in a timely manner is essential.

   Of course, when the situation has been finally resolved, it’s important that the person who originally reported the incident be informed. Always close the loop. This would also be a good time to report what happened in a newsletter or mention it at a company, department or organization meeting.

The Right Kind of Whistleblower

In her paper for Santa Clara University’s Marukkula Center for Applied Ethics, Lilanthi Ravishankar says, “to prevent whistleblowing, encourage whistleblowing.” The point she is making is that to prevent costly public whistleblowing, it’s important to create the systems and culture that promote internal whistleblowing.

The right kind of whistleblower, one who works inside the organization, helps improve the workplace, saves money and betters the organization.

Additional reading:

http://www.sbnonline.com/article/how-to-encourage-internal-reporting-of-fraud-or-misconduct/

http://gbr.pepperdine.edu/2010/08/avoiding-ethical-misconduct-disasters/