More on Internal Reporting Data

Last week we presented new academic research that found a strong correlation between more internal whistleblower reporting and better business outcomes: fewer material lawsuits against the company, smaller legal settlements, better corporate governance, and even higher profitability metrics.

This is crucial material for compliance officers that raises lots of issues to explore. So today we’re going to discuss why internal whistleblower activity is such an important metric for corporate performance in the first place.

First, let’s dispense with “number of reports received” as a metric worth compliance officers’ time. It tells you nothing about the number of reports not received, and without that context, you’ll never know the true number of problems within the organization. You only get to know the number of reported problems.

For example, we’ve all heard the saying that if you receive zero calls on your reporting hotline, there’s no telling whether that’s good news (your organization has no problems) or bad (everyone is too terrified to speak up).

Well, that same logic holds true regardless of zero calls, 10 calls, or 1,000 calls. If you don’t know the number of problems people aren’t reporting (and by definition, you can’t) then you’ll never know whether zero, 10, 100, or any other number captures a large percentage of your total issues. So don’t spend too much time trying to answer that question.

Much more important is to track more holistic measurements of internal whistleblower activity over time — and, as last week’s research from George Washington University suggests, to increase that level of activity.

Here we should stress that the GWU researchers did not measure only the number of whistleblower reports. They also examining criteria such as number of reports submitted per employee, average number of times each case file was accessed and reviewed by management, and the portion of data fields filled in by complainant rather than left blank.

That work gave them a metric of internal whistleblower activity overall, from when a complaint was filed to how management resolved it. That is the broad, comprehensive metric compliance officers want to monitor.

Why? Because rising whistleblower activity measures employees’ willingness to bring problems to the attention of management. It’s a barometer of employees’ engagement in the long-term success of the company — ethically, financially, and strategically. That engagement is precisely the corporate culture that boards and CEOs want to achieve.

Think of Internal Reporting This Way

A good analogy comes from the world of public health and child mortality rates. Child mortality tracks the number of children per 1,000 who die before the age of 5. Over the last 50 years, child mortality rates have plunged in almost every country in the world.

That is not just good news. It’s actually great news because so much else must be moving in the right direction for child mortality rates to fall. Lower mortality rates mean children are getting better access to clean water; better access to food; and better access to sanitation. Lower rates also mean mothers are getting better educated, and fathers are finding more gainful employment. They mean more children are getting vaccinated, and more vaccines are available.

You get the idea. Child mortality rates are an important metric because they reflect other important metrics. Mortality rates don’t move in the right direction unless those other metrics are also moving in the right direction.

Internal whistleblower activity is a lot like that. Internal reporting doesn’t move in the right direction unless many other characteristics of a well-run company are also moving in the right direction.

For example, if more employees are reporting misconduct, that means more employees feel comfortable reporting misconduct — so fear of retaliation is falling. If more employees are reporting misconduct, that means more employees want to see the issue resolved — so we can make an educated guess that employee turnover is lower.

(The GWU research didn’t examine that specific question about turnover, but the premise is sound. In organizations with a poor speak-up culture, unhappy employees are much more likely to quit and let the building burn to the ground, rather than stay and help to fight the fire.)

We can go on. If managers are reviewing complaint files more frequently, they are listening to employees’ complaints more carefully. If total complaints and management reviews are rising while complaints specifically about retaliation are falling, that means your anti-retaliation training is working and you’re getting closer to the fabled “culture of compliance.”

More broadly, if employees are more willing to speak up about what’s going wrong, they’re also more likely to be chatty about what the company is doing well. Take this point from my colleague Erica Salmon Byrne at Ethisphere:

Makes total sense. A speak up culture won’t be limited to just speaking up about issues – employees will raise ideas, talk over challenges, etc. Aligns with all the research on diversity and our own tracking too. Great data to have.

— Erica Salmon Byrne (@ESalmonByrne) November 3, 2018

Ethisphere has been tracking the stock performance of its World’s Most Ethical Companies list for years. The companies on that list generate higher stock returns than their peers not on the list.

Why wouldn’t that be the case? Internal reporting activity measures employees’ willingness to bring problems to the attention of management. That’s just as true whether the problem is an FCPA violation, a bad manager, or a challenging new product design or marketing campaign.

That’s why compliance officers want to track internal reporting activity so closely. Really, we should be printing out the latest numbers of that metric and stapling it to board directors’ foreheads every quarter.