Journal of Business Ethics

, Volume 112, Issue 3, pp 385–395

Whistle-Blowing Methods for Navigating Within and Helping Reform Regulatory Institutions

Authors

    • Carroll School of ManagementBoston College
    • Visiting Aristides Daskalopoulos Foundation Professor of Business EthicsAthens Laboratory of Business Administration
Article

DOI: 10.1007/s10551-012-1247-0

Cite this article as:
Nielsen, R.P. J Bus Ethics (2013) 112: 385. doi:10.1007/s10551-012-1247-0

Abstract

There are at least four important, institutional obstacles to whistle-blowing to regulatory institutions. First, regulatory institutions are often systematically understaffed and do not have the resources needed to adequately process whistle-blowing cases. Second, regulators who process whistle-blowing cases are often systematically inexperienced and do not understand the strategic importance of whistle-blowing cases. Third, regulators are often under systemic pressure from the politicians who appoint them to ignore whistle-blowing cases relevant to their sources of financial and/or ideological political support. Fourth, there are high systemic risks to whistle-blowers who blow the whistle to regulatory institutions. Nonetheless, understanding how the institutions and obstacles operate can help us understand what types of whistle-blowing methods can be used to navigate around the obstacles and within the regulatory institutions. In addition, sometimes whistle-blowing methods can help reform regulatory institutions.

Keywords

EthicsInstitutionsWhistle-blowing

Introduction

There is a great deal of evidence to suggest that whistle-blowing is one of the most important sources of information for detecting and reducing illegal and unethical corporate behaviors (Kohn 2011). For example, in a comprehensive study by the accounting firm, Pricewaterhouse Coopers (2009), that included data from interviews with 5,400 chief executive officers, chief financial officers, and chief compliance officers, the study found that whistle-blowing was the most important source of information about illegal and unethical corporate behaviors. Similarly and according to a study published in The New England Journal of Medicine, “90% of health care fraud cases are … actions in which whistle-blowers with direct knowledge of the alleged fraud initiate the litigation…” (Kesselheim et al. 2010, p. 1832).

Nonetheless, Kohn (2011, p. xiii), the Executive Director of the National Whistleblower Center, has found that simultaneously and somewhat paradoxically most whistle-blowing cases to regulators are ignored and that “whistle-blowers … uncovered far more fraud than all the government police and regulatory authorities, and they uncovered more fraud than even the paid professional corporate auditors and compliance officers.” Even with these large numbers about the importance of and need for whistle-blowing, there is also evidence to suggest that, because of a variety of institutional obstacles, most whistle-blowing cases as well as many important and strategic whistle-blowing cases are not paid attention to by regulators. This can result in lack of exposure, delay in exposure of corporate wrong doing, inaction by regulatory institutions, and hindrance to institutional reform. For example, in the notorious case of the Bernard Madoff “Ponzi” scheme that defrauded investors of about $50 billion, one whistle-blower, Hari Markopolos, tried for years to blow the whistle to the U.S. Securities and Exchange Commission about the Madoff Ponzi scheme without success in stimulating the regulatory institution to act (Zuckerman and Gauthier-Villars 2009).

There are three objectives to this article. The first objective is to understand the institutional obstacles to effective whistle-blowing to regulatory institutions. The second objective is to consider how different types of whistle-blowing methods can navigate around the obstacles and within the regulatory institutions to effectively resist illegal and unethical behaviors. In a sense, there can be important micro opportunities and methods for resistance within macro institutional rigidities. The third objective is to consider how whistle-blowing methods can sometimes not only navigate around institutional obstacles, but also help change and reform regulatory institutions.

The article proceeds as follows. First, institutional obstacles to effective whistle-blowing to regulatory institutions are analyzed. Second, the article considers how micro whistle-blowing methods can be effective in navigating around the institutional obstacles and within the regulatory institutions. Third, a discussion is offered concerning how micro whistle-blowing methods for navigating around obstacles within regulatory institutions can sometimes also help produce more macro institutional reforms. That is, thinking macro about how institutional systems operate can sometimes suggest important micro methods for helping create effective macro level changes and reforms.

Institutional Obstacles to Effective Whistle-Blowing

There are at least four important obstacles to whistle-blowing to regulators. First, regulators can be understaffed and not have the resources needed to adequately process whistle-blowing cases. When regulators do not have the resources to process whistle-blowing cases, the whistle-blower can sometimes help the regulator understand the strategic importance of a whistle-blowing case that encourages the regulator to allocate scarce resources to a particular case. Second, lower level staff regulators who process whistle-blowing cases can be inexperienced and not understand the importance of a whistle-blowing case. When inexperienced regulators do not understand the strategic importance of a whistle-blowing case, whistle-blowers can sometimes help the regulator understand why the regulator needs to act in a particular case. Third, regulators may be under pressure from the politicians who appointed them to ignore whistle-blowing cases. When regulators do not respond to whistle-blowers because of political pressures, sometimes regulators can be threatened with exposure for not doing their jobs and therefore, incentivized to do their jobs. Fourth, there are high risks to the whistle-blower for blowing the whistle to regulators. When there are high risks to the whistle-blower, whistle-blowing can be done secretly and can sometimes be rewarded to compensate the whistle-blower for the risk-taking. Case examples where the methods were used effectively both to address a particular case as well as help influence institutional change are discussed.

De-regulation and Neo-institutional Logics that Contribute to Understaffing

If regulatory agencies do not have adequate resources, they may not be able to effectively process whistle-blowing cases. For example, the U.S. Securities and Exchange Commission Chairman Mary Schapiro has complained that “budget constraints” were preventing the agency’s ability to enforce the securities laws including the requirements for the SEC to pay attention to whistle-blowers (Holzer 2011, p. 1). Similarly, Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler explained that with inadequate funding for staffing, “We’d have to have significant curtailment of our staff and resources. We would not be able to police or ensure transparent markets.”

The New York office of the Securities and Exchange Commission received more than 200,000 whistle-blowing tips per year in the last 10 years (Zuckerman and Gauthier-Villars 2009). The entire staff of the New York office is less than 400 people. Unlike the Internal Revenue Service, there are not even enough resources available to establish a unit charged with processing the whistle-blowing tips such as exists within the Internal Revenue Service. Whistle-blowing tips are considered as staff members have time to consider them in addition to their normal assigned duties.

Part of the explanation for understaffing relative to the resources needed to adequately process whistle-blowing cases has to do with the neo-liberal institutional logic of de-regulation (Ong 2006). Within the neo-liberal institutional logic, de-regulation is often considered as a structural method for stimulating economic growth, reducing the costs of bureaucracy, and increasing the flexibility needed for innovation and creativity of regulated organizations.

However, and in effect, this can also result in not only less regulatory costs and less rigidities, but also fewer resources available for the processing of whistle-blowing cases. Banerjee (2010, p. 270) explains, “Neo-liberal [deregulation] policies of … institutions and national governments have seen an increasing incursion of market and corporate rationalities into the political realm reconfiguring power relationships between the market, state and civil society.” For example, Campbell (2010) in referring to the 2008 U.S. financial crisis attributes part of the cause of the crisis to a neo-liberal inspired institutional logic of deregulation and reconfiguration of regulation that permits and encourages more latitude for market actors and also includes fewer resources for regulation that might restrict market actors. Campbell (2010, p. 66) explains, “Since the late 1970s national politics in the United States has been dominated increasingly by neoliberals who have argued that less government regulation is better for the economy….This, of course, is a view that is rooted in the … writings of von Hayek (1944) and Milton Friedman (1962) who argued for free markets and against any form of state planning or state intervention into the economy other than for purposes of rectifying the most serious market failures or negative externalities…. This view came to political fruition in the United States with the election of Ronald Reagan as President in 1980 and have been pursued since then in varying degree by all presidents….”

From a political-economic history perspective and while there are important county and regional regulatory differences, particularly between the relatively more regulated social democratic Northern European countries and the relatively less regulated finance capitalism U.S. and U.K. political economic systems, de-regulation both with respect to amount of regulation and funding for regulatory agencies appears to be a global phenomenon (Hill 2010; Nielsen 2010). Krier (2009, p. 406) explains that even with important regional and country differences, globally, “during the Fordist 20th century, government was viewed as a facilitator of capitalism, mediating conflicts between labor and capital and within various segments of the capital class. The late 20th century ushered in a new era of neo-liberal economic policy, as political elites and business leaders redefined government as a competitive handicap and a source of inflexibility in the global economy…. Neo-liberal economic policy was most thoroughly deployed in a massive wave of financial deregulation throughout global capitalism in the past 30 years….” As illustrated above in the observations of the Chairpersons of the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission, combined with this deregulation with respect to the rigor and amount of regulations was and is the relative reduction of investigatory and enforcement budgets of regulatory agencies.

Institutional Careers that Encourage Experienced Regulators to Leave Regulatory Institutions to Work for Regulated Businesses

Another institutional obstacle to effective whistle-blowing can be the inexperience of many regulators that has to do with institutional career paths. Lawyers and economists who work for regulatory agencies receive comparatively low pay relative to the high pay for lobbyists and analysts who work for the businesses being regulated and the law firms hired by the regulated companies to represent them before the regulators as well as to lobby on behalf of the regulated to the politicians. An institutional career path for lawyers, economists, and former elected officials is to begin a career working for a regulatory agency or as an elected official, gain knowledge and experience of the regulatory processes in the early years of one’s career, and then, change jobs and work for the corporations that one was previously charged to regulate.

For example, the U.S. telecommunications corporation, AT&T, directly employs more than ten former Federal Communications Commission and U.S. Department of Justice regulators as well as “at least six prominent former members of Congress, including the former Senate majority leaders Trent Lott … and former Senator John Breaux… (Wyatt 2011).” All of these employees receive much more compensation from AT&T than they did from their salaries as Congressmen, Senator, or regulators. The experience they gained in the public sector greatly helped quality them for and obtain analyst, legal, and lobbying work for AT&T.

This is not a new phenomenon. For example, as former Senator George Smathers explained in 1969, “I’m going to be a Clark Clifford [a prominent Washington, D.C. government official and lobbyist who served as Secretary of Defense for President Lyndon Johnson]. That’s the life for me! I’ve found the pastures outside [government] are a lot greener than I had reasoned. A fellow with my background can make more money in thirty days out here than he can in fifteen years as a Senator (Green 1975).” That, of course, is even more true for regulators within administrative agencies than it is for U.S. senators and congressmen. The institutional career path from inexperienced government employee to experienced government employee and then to corporate employee, law firm partner, or lobbyist is very lucrative and pays many times more than a permanent career as a regulatory agency employee.

From an historical perspective and consistent with the global rise in neo-liberalism, Rose-Ackerman (1999, p. 73) explains that, “Pay [of regulators and government employees generally] has fallen in many countries relative not only to private sector wages but also to civil service pay in the past…. Skilled workers, even those trained by the government itself, exit….” Where the skilled regulators often exit to are the companies that they formerly regulated as well as the law firms and consulting companies hired by the regulated companies to represent them before the regulatory institutions and the politicians who appoint the top regulators.

It is not uncommon for professional career paths to both influence and be influenced by institutional logics (Greenwood et al. 2002). The neo-liberal and market oriented deregulation logic has influenced other professions as well as the regulatory professions. For example, Thornton (2004) found that the profession of higher education publishing has moved to a more commercial, market orientation even though the universities that house the publishing organizations are either nonprofit or government organizations. Similarly, Dunn and Jones (2010) found that the balance between the institutional logics that govern teaching hospitals has moved more toward a logic of market competition for research funds from a logic of patient care. This can sometimes result in disastrous consequences such as patient deaths caused by researchers who have to spend so much time competitively seeking research funds that they do not have time to pay enough attention to patient care (Nielsen and Dufresne 2005).

Not only, for example, can the professions of lawyers and economics working for the regulated instead of the regulators be much more lucrative than being a professional regulator, an institutional career logic can normatively support this type of career path since deregulation is considered, within this logic, a fundamentally better thing than regulation. That is, it can be part of such a logic that a career path from regulator to lobbyist is normatively an ethical progression as well as a financially rewarding progression. However, a downside to such a progression is that the regulated can have much more experienced professionals than the regulatory agencies since many of the regulatory professionals regularly leave government after they have gained experience to work in the private sector for the regulated. This can create very uneven experience levels between regulatory institutions and the corporations they are charged to regulate.

Institutional Pressures and Incentives from Campaign Contributors and Lobbyists on Regulators to Not Act on Information Unfavorable to Contributors

In some countries such as the United States, it can be enormously expensive to run for election and re-election (McGregor 2011). For example, it is estimated that the U.S. Presidential election campaigns will cost both the Democratic and the Republican candidates at least $1 billion each to run for the office of President. In the U.S. Congressional elections of 2010, the average campaign expenditures were more than $10 million for the Democratic and Republican candidates.

U.S. senators and representatives earn $175,000 in annual salaries. Even if their salaries were increased tenfold, that would not be nearly enough to run for election and re-election. Candidates believe that they have to actively seek campaign contributions from wealthy contributors in order to obtain the financial resources they need to run for election and re-election. While some wealthy contributors give money with no strings attached, many other wealthy people contribute money to candidates in order to have friendly politicians who will appoint friendly regulators of their businesses and industries. There is also an element of potential and actual extortion here. If business people do not contribute to the election campaigns of politicians, and the politicians get elected, then they may have unfriendly politicians and regulators to worry about. Political fundraisers often point this out to potential donors. This is one of the reasons why many wealthy individuals who work for business and financial organizations contribute large sums of money to candidates from both parties.

Not only do organizations such as AT&T hire many former regulators to work as analysts, advocates, and lobbyists as referred to above; wealthy individuals who work for AT&T contribute large sums of money to political election campaigns. According to Wyatt (2011, p. 8), “Over the last two decades, AT&T employees and its political action committees have pumped more campaign contributions into federal politics than any other American corporation.” By the way, the U.S. has a narrow legal definition of what is a lobbyist. Executives and managers of business and nonprofit organizations, even when they give money to political campaigns, are not legally considered lobbyists and do not have to register as such.

AT&T as well as many other organizations contribute money to both Democrats and Republications. For example, in 2010, AT&T contributed to the political campaigns of 390 representatives and 70 senators. It is common for wealthy employees and owners of businesses to contribute billions of dollars to politicians within both parties (Center for Responsive Politics 2011). Similarly, over the last 10 years executives from pharmaceutical companies contributed over $1 billion to the election campaigns of both Democratic and Republican candidates (Center for Public Integrity 2010). In the 2004 Congressional and Senate elections, Representative Barney Frank, Chairman of the House Financial Services Committee and Senator Christopher Dodd, Chairman of the Senate Banking Committee received much of their campaign contributions from executives of financial institutions (Cooper 2008; Center for Responsive Politics 2005; Mullins 2010). Within the U.S., while executives from technology companies such as AT&T and pharmaceutical companies such as Merck and Pfizer remain very large contributors, the largest industry group of political contributors is financial services.

As Rose-Ackerman (1999, p. 133) concluded, and campaign financing pressures have only gotten worse since her 1999 study, “In democracies corruption scandals are frequently associated with the financing of political campaigns…. Elections must be financed, and wealth interests concerned with legislative outcomes and government policy may be willing to foot the bill. Financial pressures give politicians an incentive to accept payoffs….the cost of political campaigns encourages quid pro quo deals.” Similarly, in his conclusions concerning what Laufer refers to as “the failure of corporate criminal liability,” Laufer (2006, p. xi) concludes that “And, finally, in considering the importance of a constituency supporting a substantive corporate criminal law, the historically powerful role of politics in fashioning corporate reforms must never be forgotten. Too little attention is given to the instrumental role of corporate lobbyists, corporate donations, and willing legislators.”

High Risks to Whistle-Blowers Which Discourage Whistle-Blowing

There is, unfortunately, a massive amount of evidence that whistle-blowers are both retaliated against and suffer very negative consequences from whistle-blowing in a wide variety of circumstances and countries (Alford 2001; Kohn 2011). For example, Kesselheim et al. (2010) in a study published in The New England Journal of Medicine found that in the U.S., “Currently, 90% of health care fraud cases are … actions in which whistle-blowers with direct knowledge of the alleged fraud initiate the litigation on behalf of the government.” In these cases, Kesselheim et al. (2010, p. 1836) found that “82% [of whistle-blowers] reported being subjected to various pressures by the company in response to their complaints…. A common theme was that the decision to blow the whistle had ‘put their career on the line’….the financial consequences were reportedly devastating…. Financial difficulties often were associated with personal problems… [Whistle-blowers] reported divorces, severe marital strain, or other family conflicts during this time…[whistle-blowers] reported having stress-related heath problems, including shingles, psoriasis, autoimmune disorders, panic attacks, asthma, insomnia, temporomandibular joint disorder, migraine headaches, and generalized anxiety.” As one pharmaceutical company whistle-blower described, “I just wasn’t able to get a job. It went longer and longer. Then I lost – I had a rental house that my kids were using to go to school. I had to sell the house. Then I had to sell the personal home that I was in. I had my cars repossessed. I just went – financially I went under. Then once you’re financially under? Then no help. Then it really gets difficult. I lost my 401(k). I lost everything. Absolutely everything (Kesselheim et al. 2010, p. 1836).”

Retaliation against whistle-blowers appears to be a cross-cultural phenomenon. For example, in the recent Japanese nuclear troubles, whistle-blowers had both warned about the problem and been retaliated against for over 20 years (Onishi and Belson 2011). For instance, in 2000, Kei Sugaoka, a nuclear inspector blew the whistle to the Japanese Nuclear and Industrial Safety agency about a cracked steam dryer at the Fukushima Daiichi nuclear plant. In spite of a Japanese law that prohibits divulging the names of whistle-blowers, the regulatory agency nonetheless informed Tokyo Electric, the owner of the nuclear plant, of Mr. Sugaoka’s identity. In retaliation, he has been excluded from the Japanese nuclear industry since then. Subsequent investigations revealed that Tokyo Electric “had actually hidden other, far more serious problems, including cracks in the shrouds that cover reactor cores (Onishi and Belson 2011, p. A1).”

In contrast, in Japan as well as many other countries, not blowing the whistle can be quite rewarding. Onishi and Belson (2011, p. A14) explain: “Nuclear industry officials, bureaucrats, politicians and scientists – have prospered by rewarding one another with construction projects, lucrative positions, and political, financial and regulatory support. The few openly skeptical of nuclear power’s safety have become … outcasts, losing out on promotions and backing…. Influential bureaucrats tend to side with the nuclear industry – and the promotion of it – because of a practice known as amakudari, or descent from heaven. Widely practiced in Japan’s main industries, amakudari allows senior bureaucrats, usually in their 50s, to land cushy jobs at the companies they once oversaw.” This is very similar to the phenomenon in the U.S. discussed above concerning the career path of former regulators going to work for the regulated companies and lobbying companies at much higher compensation after their regulatory careers.

In Japan, retaliation for whistle-blowing and potential whistle-blowing also extends to academic researchers. Onishi and Belson (2011, p. A14) further explain, “Academics who challenge the industry may find themselves shunned. As Japan has begun looking into the problems surrounding collusion since March 11 [2011], the Japanese news media has highlighted the discrimination faced by academics who raised questions about the safety of nuclear power. In Japan, research into nuclear power is financed by the government or nuclear power-related companies. Unable to conduct research, skeptics, especially a group of six at Kyoto University, languished for decades as assistant professors.”

Retaliation against whistle-blowers can also be much more severe than loss of money and career opportunities. It can also include retaliation in the form of jailing, torturing, and killing whistle-blowers. For example, Elder (2011, p. 4) found that “Russia…. has seen its greatest government critics [and whistle-blowers] jailed, exiled and killed.” According to William Browder (Elder 2011, p. 4), “There’s a history of the Russian authorities coming up with trumped-up criminal cases as well as physical attacks on people who expose corruption.” Similarly, Elena Panfilova (Elder 2011, p. 4) of Transparency International, which rated Russia 154 out of 178 countries on it corruption index, agrees and explains that “We all worry about everyone who goes out front [public whistle-blowing].”

Unfortunately, retaliation against whistle-blowers in many countries can be very severe in the form of loss of income, careers, physical health, physical injury, and even death. This can even include cases such as referred to above where the whistle-blowers thought they were blowing the whistle confidentially to regulators and government officials. However, sometimes regulators and government officials and people from the media intentionally reveal whistle-blower identities to those who then retaliate against the whistle-blowers. Fortunately, as is discussed in the next section, there are effective whistle-blowing methods that can also protect the whistle-blowers.

Whistle-Blowing Methods for Navigating Around Obstacles and Within Institutions

Two of the foundational findings of institutional theory are that institutions tend to remain more or less the same over long periods of time and that institutions are hard to change. These findings are common and for the most part agreed upon among classical critical institutionalists such as Veblen (1899, 1904) and Weber (1904, 1949) who join ethical/normative analysis with social science, neo-institutionalists such as DiMaggio and Powell (1983) and Scott (2004) who study institutions from a modernist social science perspective that for the most part separates normative/ethical analysis from social science, as well as some contemporary scholars who combine both neo-institutional and critical, normative, ethical perspectives such as Clegg (2010) and Misangyi et al. (2008).

Nonetheless, and even when characteristics of institutions such as the obstacles discussed above make it difficult to solve ethical problems, understanding the obstacles can sometimes help us find effective ways to navigate around the institutional obstacles to effectively address ethical problems. This is very different than changing the obstacles or changing the institutions. Instead, it is about how to navigate around the obstacles and within the institutions that tend to remain more or less the same over long periods of time and that are hard to change and reform. However, in the last section of this article, how whistle-blowing can help change and reform institutions and institutional obstacles is also considered.

Simple Employee Whistle-Blowing to Regulators and/or Media About Illegal and Unethical Behaviors

With this method, an employee simply notifies a regulator or media, with or without revealing the whistle-blower’s name, about information concerning an ethical or legal violation. I use the term simply here since this method does not involve, at least initially, the more complicated methods discussed below concerning negative incentives/threats to the regulators, helping regulators or media understand the importance of issues, and/or helping regulators prosecute violators. Of course, simple notification is often ignored and can sometimes evolve to the more complex whistle-blowing methods discussed below.

As referred to above, in many areas such as pharmaceutical and financial regulation, most successful discoveries of regulatory violations come from whistle-blowers. As referred to above and somewhat paradoxically, at the same time that most cases are discovered though whistle-blowing, most whistle-blowing cases are also ignored by regulators (Kohn 2011; PricewaterhouseCoopers 2009; Elder 2011; Onishi and Belson 2011). Most cases are ignored both because sometimes the whistle-blowing cases have little merit, but also because of the types of institutional obstacles discussed above concerning systemic inadequate resources, lack of understanding by regulators of the cases and issues, career path opportunities for the regulators and politicians, and political lobbying and campaign financing factors.

It is not at all clear what proportion of the whistle-blowing cases that are acted upon by regulators and/or media come from the different types of whistle-blowing methods. Nonetheless, a whistle-blower can at least begin the whistle-blowing process with simple notification. Then, if that does not work, the whistle-blower can move to some of the more complex methods discussed below. However, since there is massive evidence about retaliation against whistle-blowers, simple whistle-blowing should probably at least begin without revealing the identity of the whistle-blower.

With simple whistle-blowing notification, the action can be directed in several different directions: inside the organization to the CEO, an ethics officer, a compliance officer, a human resources manager, or even a member of the Board of Directors; outside the organization to regulators or prosecutors; and/or, outside the organization to media organizations. As discussed below, there can be effective interaction relationships among the types of whistle-blowing. For example and also as discussed below, secretly threatening to blow the whistle to the media can encourage both regulators and internal compliance officers to do something about an issue and/or case.

In effect, with whistle-blowing, the employee is asking others for help in addressing organizational misconduct. As referred to above in the discussion concerning obstacles to whistle-blowing, employees often do need help because of realistic fears of organizational, industry, and even cultural retaliation for whistle-blowing. In addition, some employees need the help of others because top management often has the power to suppress information about organizational misconduct. As referred to above, this fear of retaliation is not unrealistic, there is a great deal of evidence to demonstrate the reality of such retaliation as well as the suppression of transparency with respect to organizational misconduct.

Secretly Threatening Regulators and/or Compliance Officers with Blowing the Whistle to Competing Regulators or the Media

One of the most powerful whistle-blowing methods is to threaten, preferably without anger or malice, regulators and/or compliance officers with blowing the whistle to competing regulators or the media. In a sense, this method creates an incentive, albeit a negative incentive, and in some cases, even an excuse, for the regulator or compliance officer to do their jobs. In addition, this method protects the whistle-blower from retaliation by the regulators, the lobbyists, and the political contributors to the politicians who appoint and influence the regulators since their identities are concealed.

Threatening exposure without anger or malice is important because, in a sense, this recognizes that the regulators and compliance officers are often operating within powerful institutional environments and pressures that can be much more powerful in determining institutional behaviors than individual agency of individual regulators. Sympathetic understanding of the constrained situations of the regulators and compliance officers can help the whistle-blower help the regulators do their jobs without transforming the whistle-blower into a state of dysfunctional and self-damaging anger and even hatred toward the regulators, the lobbyists, the politicians, and the compliance officers who are part of the problematical institutional pressures.

As a compliance officer of one of the largest U.S. financial institutions explained to the author in 2011 on condition of anonymity, “I receive several threats a week from anonymous employee whistle-blowers who say that if I do not do something about a problem, they will blow the whistle outside the organization to the S.E.C. [Securities and Exchange Commission], the state Attorney General’s office, or the media. By the way, their whistle-blowing through our ethics hot line really is anonymous. We contract with an outside vendor to receive and process the whistle-blowing messages and I never know who the whistle-blowers are. Most of the complaints of course are groundless or minor. But that threat to go outside the organization sometimes can help me get the attention of managers and sometimes even top management when I need to. While the SEC has a well deserved reputation for not doing much about whistle-blowing information, that may be changing after Madoff and the financial crisis, but it’s too early to tell. However, neither the S.E.C. or ourselves want to risk being exposed by a politically ambitious state attorney general or the media. Blowing the whistle or threatening to blow the whistle to state Attorney Generals’ offices can be much more effective that blowing the whistle to Federal regulators since they receive far fewer whistle-blowing cases, and even in New York, the state regulators seem to be more insulated from the political contributions and lobbying problems. And even if they are not [more insulated], the Feds don’t seem to want to risk being upstaged by local Attorney Generals or media.”

It is not uncommon for employees with Wall Street experience to secretly blow the whistle to state attorney general offices instead of Federal regulators. Many Wall Street insiders understand how Federal regulators have been compromised by the dual problems of political contributions and career paths.

For example, Noreen Harrington, who had worked for Goldman Sachs for 11 years as a Managing Director as well as for Barclays Bank as Director of Emerging Markets Bond Trading, first secretly and then publicly blew the whistle about illegal trading of mutual fund shares at before market close prices after markets had closed (Sender and Zuckerman 2003). She blew the whistle to the New York state attorney general’s office instead of Federal regulators. According to the Wall Street Journal, “She says she didn’t go to the Securities and Exchange Commission because she wasn’t confident the agency would follow up on her allegations (Sender and Zuckerman 2003, p. A6).” Once the New York State Attorney General’s office became actively involved with corresponding media attention, both the Federal S.E.C. and Justice Department got involved. However, this Federal involvement appears to have needed the stimulus of the state regulator to get the attention of the federal regulators. Apparently, the federal regulators did not want to be embarrassed about not doing their job while the state attorney general’s office was receiving a great deal of favorable media attention for addressing the issue.

Embarrassment through media attention to regulator inaction seems to be having some positive effects. Stabile (2011, p. 10) has found that “It [the S.E.C.] has faced great pressure to perform in the wake of its inability to sniff out most of the scams and shady practices that precipitated or were exposed by the 2008 market crash.”

Whistle-Blowing that Helps Regulators Understand the Key Issues

As referred to in the discussion of the obstacles concerning inexperienced regulators and understaffed regulatory agencies, regulators do not always understand the importance of key whistle-blowing cases. Whistle-blowers can help regulators understand.

For example, a key provision of the complicated and extensive Dodd-Frank financial reform law established legal liabilities for ratings agencies that are similar to the liabilities that apply to certified public accounting firms. However, the S.E.C. ordered that the ratings not be disclosed to potential investors in asset-backed securities deals. Morgenson (2011, p. BU 10) observed that “Congress couldn’t have been clearer in its intent of holding the [ratings] agencies accountable. That the S.E.C. is undermining that goal is absurd in the extreme.” This S.E.C. order protects the ratings agencies from liability for faulty ratings since the S.E.C. does not allow the ratings to be disclosed (Morgenson 2011). That is a complicated type of case that is not easy for an inexperienced or understaffed regulatory agency to understand and then act upon. What some whistle-blowers did to overcome such obstacles was to explain to regulators, in this case, the office of the Attorney General of Massachusetts, the significance of the case. With this information, the Massachusetts Attorney General, Martha Coakley, made a formal inquiry and protest to the S.E.C. about this matter. The whistle-blowers were able to help the Attorney General act effectively. Massachusetts state Attorney General Martha Coakley explains that “We wanted to make clear that we see this [the S.E.C. order to conceal the evaluations of the ratings agencies] as a problem and important enough that we would like an answer…. They are either going to enforce this or say why they are not.”

In another such case, a lawyer for a whistle-blower (both lawyer and whistle-blower require that their identities not be revealed) informed city real estate development regulators about three planned violations by a real estate developer that the regulators did not understand in the initial proposals of the real estate developer. First, the developer tried to illegally build two houses on a piece of land where only one house could be built. Second, the developer tried to not grade the land angle slope in accordance with drainage regulations. Third, the developer tried to build terraces without adequate land space. In each of these instances the developer was proceeding and the regulators did not understand that the developer was violating the regulations. However, once the lawyer for the whistle-blower explained the violations to the regulators and before the regulators had ruled on the proposals, the regulators then did not approve the proposals by the developer. The lawyer prefers that the identities of the town and the regulators not be revealed in order not to embarrass the regulators who, if they had more resources and experience, might have better understood the planned violations without the help of the lawyer. It is also important for the effectiveness of lawyers representing whistle-blowers not to embarrass regulators.

Whistle-Blowing that Helps Regulators Prosecute Violators

Once one of the above whistle-blowing methods has succeeded in gaining the attention and motivation of regulators to investigate a case, the whistle-blower can also help regulators prosecute violators. Laufer (2006) has identified two different types of whistle-blowing methods with respect to helping regulators prosecute violators: forward whistle-blowing (FWB) and reverse whistle-blowing (RWB).

With respect to FWB, Laufer (2006, p. 136) explains, “To obtain incriminating evidence on a CEO or CFO, for example, prosecutors sought the cooperation of employees with increasing seniority, working up the corporate hierarchy to eventual targets. This forward assignment of blame … often entails … prosecutorial leniency or amnesty to subordinates, midlevel manages, and even senior managers, in exchange for their cooperation blowing the whistle on the crimes of their superiors.”

This frequently used method of FWB offers win–win, positive incentives for blowing the whistle on people higher in the hierarchy. This method is commonly used in both white-collar and organized crime investigations and prosecutions. It is considered win–win since the prosecutors receives help in prosecuting those most responsible for the misconduct and the whistle-blower receives some leniency or amnesty from prosecution in exchange for their help in the investigation and prosecution.

RWB is different. Laufer (2006, p. 137) explains, “Prosecutors secure the cooperation of senior corporate officials who … offer evidence against culpable subordinate employees in a trade for promises of corporate leniency or possible corporate amnesty.” This method is used when prosecutors either do not consider more senior managers responsible, prosecutors do not think there is enough evidence available to successfully prosecute senior managers, or prosecutors do not think they have the resources to successfully prosecute senior executives so they go after the lower level employees who, with the help of senior managers, can be successfully prosecuted. There are important ethical problems with this latter type of case related to “scape-goating” less powerful employees (Laufer 2006; Hasnas et al. 2010).

Whistle-Blowing Can Sometimes Help Change and Reform Institutions

As referred to above, two of the foundational findings of institutional theory that are common among classical critical institutionalists, neo-institutionalists, and scholars who combine critical and neo-institutional studies are that institutions tend to remain more or less the same over long periods of time and that institutions are hard to change (Veblen 1899, 1904, 1919; Weber 1904; Scott 2004; Powell and DiMaggio 2001; Clegg 2010; Thornton 2004; Dunn and Jones 2010). It may be a rare case where a single whistle-blowing act by itself was the primary cause for fundamental institutional change.

The potential whistle-blower might do well to attend to Tolstoy’s (1910, p. 67) advice to those seeking large scale institutional reform as Tolstoy was doing himself in Czarist Russia with respect to land reform, “Do not wait [expect] for the realization of … [fundamental institutional reform] work that you are serving; but know that not one of your efforts will be useless, but will hasten the hour.” Whistle-blowing does seem sometimes to play a part in hastening the hour of institutional reform. There are many examples of how whistle-blowing was not able to achieve institutional reform during the time of the whistle-blowing, but also that whistle-blowing does appear to have played a part in longer term institutional reform.

There are both very macro and more micro examples of whistle-blowing playing a part in institutional reform. For example and at the more macro level, there are detailed histories (Brown 1971) including records of extensive whistle-blowing about unethical and illegal institutional behaviors toward Native Americans to first the U.S. Office of Indian Affairs, founded in 1824, and then the Bureau of Indian Affairs. There was a great deal of whistle-blowing about how Native Americans over a more than two-hundred-year period were systematically and nearly exterminated by various U.S. government regulatory and business policies and practices. This included nearly 100% treaty violations by U.S. government institutions and businesses concerning land ownership, agriculture, trading, railroads, health, etc., with little positive results from whistle-blowing. All through this terrible history for Native Americans there was a great deal of whistle-blowing that appears to have had little positive effects in protecting Native Americans until well into the twentieth century.

There was also a great deal of whistle-blowing about terrible “sweat-shop” working and living conditions of factory workers in the nineteenth and early twentieth century in Europe and the U.S. that for many decades appeared to have little effect in reforming regulatory institutions concerned with labor and employment issues (Boyer and Morais 1973; Edwards 1979; Beaud 2001). Nonetheless, in Europe, the U.S., and other developed countries, nineteenth century sweat-shop conditions have for the most part been eliminated as awareness grew and regulatory agencies were created and expanded their activities to better protect workers and improve working conditions. Whistle-blowing as a stimulus to public awareness seems to have played a limited, but nonetheless, positive role in such large scale and long-term regulatory institutional reform movements.

Similarly and after many decades of whistle-blowing exposure of multinationals paying bribes and making extortion payments to government officials all over the world, domestic regulatory agencies reformed their jurisdiction to include such international corruption as well as the more traditional attention to domestic corruption behaviors (Rose-Ackerman 1999; Heidenheimer and Johnston 2002).

Also, over the past 150 years, there has been a great deal of whistle-blowing to regulatory agencies about illegal and unethical practices of financial institutions which did not appear to do much good in preventing the scandals associated with the great recession of 2008 (Kindleberger and Aliber 2005; Nielsen 2010; Stiglitz 2010; Posner 2010). However, there does appear to be some movement around the world since the great recession of 2008 toward greater social control of financial institutions by regulatory institutions. Whistle-blowing appears to have played a positive role in this trend. The neo-liberal de-regulation trend may be reversing in the direction of more regulation as a result of both the world-wide financial crisis of 2008 and the massive amount of whistle-blowing about the financial practices of both government and business that contributed to the crisis (Davis 2009; Nielsen 2010; Posner 2010; National Commission on the Causes of the Financial and Economic Crisis in the United States 2011).

On a more micro product level, whistle-blowing also seems to have played a positive role in longer term institutional change with respect to specific types of product industries and regulatory institutions. For example in the cigarette industry, for many years various types of regulatory institutions concerned with health issues such as the U.S. Food and Drug Administration ignored the many whistle-blowing actions that exposed the links among tobacco smoking, cancer, and heart disease (Brandt 2007; Gately 2004). Ultimately, the accumulated whistle-blowing efforts of many people and in particular, the whistle-blowing by Jeffrey Wigand to the U.S. television news program, 60 Minutes, as well as to the regulatory agency, the U.S. Food and Drug Administration, appears to have helped. Jeffrey Wigand was the Research and Development Director of the cigarette company, Brown and Williamson. He released information about how the cigarette companies had concealed research information about links between tobacco, cancer, and heart disease. These types of whistle-blowing actions appear to have helped stimulate massive regulation in both the health and mass media (cigarette advertising) areas that may have helped save millions of lives (Brandt 2007; Gately 2004).

On both the more macro societal levels as well as more micro industry, business practice, and product levels, whistle-blowing does seem to have helped change and reform regulatory institutions.

Conclusion

There is a great deal of accumulated evidence to support the claim that whistle-blowing to regulatory institutions is one of the most important sources of information about illegal and unethical corporate behaviors. Nonetheless, there are at least four key institutional obstacles that hinder the effectiveness of whistle-blowing to regulatory institutions with respect to the regulatory institutions acting on the information: (1) de-regulation and neo-liberal institutional logics that contribute to understaffing; (2) institutional careers that encourage experienced regulators to leave the regulatory institutions in order to work for the regulated businesses; (3) institutional pressures and incentives from campaign contributors and lobbyists on regulators to not act on information unfavorable to contributors; and (4) high risks to whistle-blowers which discourage whistle-blowing.

Fortunately, there are at least four types of whistle-blowing methods that are often effective for navigating around the obstacles in the short-run and that can to some extent help with fundamental and longer-term institutional reform. The whistle-blowing methods are: (1) simple, direct employee whistle-blowing to regulators and/or media about illegal and unethical behaviors; (2) secretly threatening regulators and/or compliance officers with blowing the whistle to competing regulators or the media; (3) whistle-blowing that helps regulators understand the key issues; and (4) whistle-blowing that helps regulators prosecute violators.

However, it is important to recognize the distinction between how to effectively work around the institutional obstacles in the short-run within the current institutional structures and how to fundamentally reform the regulatory institutions. While the whistle-blowing methods can be very effective in the short-run in working around the institutional obstacles, institutional theory and research strongly suggests that it is much more difficult and takes much longer to fundamentally reform institutions. Nonetheless, short-run whistle-blowing methods are not only effective in navigating around institutional obstacles in the short-run, but also can play a positive if limited role in long-term institutional reform.

Copyright information

© Springer Science+Business Media B.V. 2012