Let's Not Step Backwards with Whistleblowing Provisions

It is time for a cooling off period for the Dodd-Frank Whistleblower legislation. Whistleblower systems, which enable employees to report fraud, are important. The Sarbanes-Oxley (SOX) Act of 2002 appropriately requires publicly-held companies to set up mechanisms by which anonymous whistleblowers can report appropriate matters directly to the compliance officers or general counsels of their companies to quickly intervene, commence investigations and cause corrections to be made. SOX further includes protection provisions for whistleblowers against threats, harassment, or other discrimination. Based on the many discussions that we at the National Association of Corporate Directors and others have had with shareholders and corporate executives since SOX was implemented, these systems are working. Tens of millions of dollars have already been spent by shareholders through their corporations to establish robust whistleblower hotlines and procedures for investigations under SOX. That is why the proposed Dodd-Frank whistleblower provisions are so baffling. They seem to have been developed to address needs that have already been adequately addressed. Under the proposed provisions of Dodd-Frank, whistleblowers are not required to use internal hotlines to report problems. They can instead go straight to the regulators and law enforcement, bypassing the comprehensive systems that are required under SOX and precluding the company from addressing and hopefully resolving the problem before an external investigation begins. Further, if a tip results in a penalty against the company in excess of $1 million, the tipster will receive a “bounty” from the Securities and Exchange Commission (SEC) equal to a minimum of ten percent of the penalty. It's easy to see how this could raise some concerns. More than 260 companies, including McDonald's Corp., Gap Inc., GlaxoSmithKline PLC, and Oracle Corp., have spoken out against the new rules, emphasizing that “bounties” to employees who haven't first pursued internal remedies will discourage them from trying to improve corporate behavior and instead encourage potential profiteering. It has even been suggested that employees may let bad behavior go unreported for longer periods of time to increase their potential bounty. Current estimates suggest that the SEC will get tens of thousands of whistleblower complaints. Yet if history is any predictor, they will be predominantly human resources issues or cases of employee dissatisfaction, not financial reporting and auditing matters. Further, it appears that we are in danger of creating systems that first incent penalties and only secondarily look at correcting problems. Imagine the flood of new bounty claims submitted directly to the SEC by hopeful bounty hunters without being reported to the company on a timely basis. Add the fact that Dodd-Frank lacks adequately punitive consequences for false allegations, and it's likely the Commission will be inundated. Even with the proposed expanded staff, it will be difficult and if not impossible for the SEC to separate important complaints from irrelevant ones. That means it will be increasingly likely that really important matters might never emerge in a timely basis from the pile of superfluous claims. One reason why the Dodd-Frank whistleblower provisions are now so questioned is that there are myriad unintended consequences being identified. The SEC is trying through its regulatory authority to respond to these matters, but it is clear to many observers that this may be a mission too far—that perhaps changes to the legislation may be required to avoid a very unhealthy impact on Corporate America. In fact, it is my understanding that there were no hearings on the Whistleblower provision prior to the bill's enactment. For whatever reason, these provisions were never properly vetted by people who understand what is happening in boardrooms across the country. There was no robust determination of long-range impact and possible unintended consequences. The only channel that was opened to corporate directors was the SEC comment period as that agency tries to develop an approach that might work. Another example of hurried and faulty fact finding on this major piece of legislation and rule making is the report in January 2011 by the National Whistleblower Center meant to demonstrate that the new bounties will not discourage employees from first using internal reporting systems. The report included a small pool of 107 claims filed over a three-year period under a section of the False Claims Act. One provision of that Act requires prior internal reporting, so of course the conclusion of the report that persons would first report internally was predestined. We may do a disservice to everyone when we impose this legislation—companies, shareholders, regulators, and taxpayers alike. Let's delay the implementation of the Dodd-Frank whistleblower provisions until we have had more open discussions with regulators, shareholders, directors, and executives especially since with the SOX regulations we have a system that is working. By taking that step, we will probably end up with something that makes more sense for the long run. Let's not needlessly hamper honest businesses. Ken Daly is the CEO and president of the National Association of Corporate Directors.