Corporate America and Whistle-Blowing

A new bill in the House of Representatives proposed by freshman congressman Michael Grimm (R-N.Y.), would make "any whistleblower who has legal, compliance, or similar responsibilities for . . . an entity and has a fiduciary or contractual obligation to investigate or respond to internal reports of misconduct" ineligible for the whistleblower awards incorporated into the Dodd-Frank Financial Reform Act. This  would include chief financial officers. The Dodd-Frank law passed last year aims to give witnesses to securities fraud a monetary incentive -- starting at $100,000 -- to report wrongdoing to the Securities and Exchange Commission. Under an SEC proposal made in December, informants would collect 10% to 30% of wrongdoers' payout to the commission for enforcement cases that involve penalties worth more than $1 million.

National Association of Corporate Directors (NACD) President and CEO Ken Daly testified before the House Financial Services' Capital Markets and Government Sponsored Enterprises Subcommittee on the impact of whistleblower reward provisions in the Dodd-Frank Act and supported the proposed Grimm bill. He enumerated the unintended consequences that may result from the proposed SEC whistleblower regulations to implement Dodd-Frank. Under previous rules, the SEC could choose to reward whistleblowers, but was not required to provide monetary compensation. The main focus of  Daly's testimony was to recommend deferral of the proposed regulations until further study can determine the effectiveness of the provisions that already exist in the Sarbanes-Oxley Act.    

The first person to win protection under the Sarbanes-Oxley Act's whistle-blower provision was a CFO, David Welch, a former finance chief of Cardinal Bancshares. Welch had claimed he was fired after raising questions about the bank's accounting policies and internal controls. A government review board later rejected the Department of Labor's initial decision that Welch should get his job reinstated and collect back pay. Dodd-Frank's whistle-blower rules were designed to make the process more favorable to informants.

 This is not an easy issue from an ethical perspective. On the one hand I believe whistle-blowing should be encouraged if it helps to uncover corporate fraud and save the investing public from untoled losses. On the other hand, a top company official like a CFO should go through the chain of command including reporting to the CEO and board of directors when he or she suspects corporate wrongdoing. I think it's reasonable to amend Dodd-Frank to require those steps be taken first before blowing the whistle externally. One would hope the proper corrective action would be taken internally before it comes to that point --  assuming the allegations are correct.

I have previously blogged about what it takes to have an ethical corporate culture -- one that promotes financial responsibility and fosters ethical behavior. However, I do take exception to Ken Daly's cynical characterization of Dodd-Frank that, he claims, " has created 'a perverse incentive' for whistle-blowers to let a problem fester in order to collect a higher reward." Daly is guilty of the same kind of rhetoric we hear all too often from corporate America today that they are over-regulated. Well, look in the mirror! Who do you think is to blame? Might it be these very same corporations that gave us Fannie Mae and Freddie Mac, Countrywide and all the risky derivatives trading, the Enrons and WorldComs of our world -- OR, should we blame Congress that, for all its other faults, is trying to protect the very public it was sworn to serve?

  Blog by Steven Mintz, aka Ethics Sage, May 27, 2011