The benefits of the use of employee friendly hotlines as a means of reporting safety issues, problems in the smooth running of your organization and any other issues that might arise in the day to day running of an organization has long been promoted but with little academic evidence. To this end; two scientists (Stephen R Stubben from the University of Utah and Kyle T Welsh from the George Washington University) conducted a research study titled “Evidence on the Use and Efficacy of Internal Whistle blowing Systems.” This research study aimed to provide clarity over the matter of whistle blowing.
Media sources are often biased one way or another whereas companies who supply hotlines only share anecdotal evidence that hotlines work – but this study sought to present the evidence-based reality. The study was published in October 2018 and held some surprising results.
What the Study Entailed
Stubben and Welsh surveyed data from a collection of some one million reported cases of employees using internal reporting systems. They worked on the premise and possibility that some companies only install their own Whistle Blower (WB) policy because the Sarbanes-Oxley Act (SOX) requires them to do so – and therefor that the WB system could be in place in name only. This presents the first problem of a hotline as an effective employee resource – the company must fully endorse and back the module for it to operate at full efficacy.
The study entailed measuring the subject companies’ internal hotlines for employee use, recording each time management reviewed and assessed the complaint and calculating the rate at which employees left certain details out of reports. By correlating this data, the researchers were able to analyze how engagement with the use of a WB hotline was able to impact the company’s success in legal matters overall. The main purpose of this was to discover if frequent engagement with the WB system lowered the number of lawsuits or unreported issues in the following months. By finding the answer to this question the researchers would finally be able to judge the overall efficacy of hotline systems in the workplace.
The study found that there were ‘substantial variations’ in the number of times different companies were using their systems. In general, the use of hotlines installed increased gradually but some companies still reported much less use than others. This presents an issue all of its own: were certain companies failing to encourage and promote the use of the hotline? Were the staff scared to use the hotline? Were these companies simply problem free? What the researches did find was a direct link between profitability of a company and thorough use of the hotline system.
“Companies that more actively use their internal WB systems tend to be more profitable (as measured by return on assets), older, and have fewer employees. Rapidly growing organizations are less likely to use their internal WB systems. Notably, companies with more discretionary accruals tend to use the systems less, which could reflect that an actively used internal WB system helps prevent earnings management or the types of organizations that manage earnings also chose not to promote or utilize their internal WB systems.”
The study went on to find that the use of an employee hotline is perceived to have a negative impact on the number of material lawsuits a company encounters – but this is simply not the case. In fact:
“In particular, we find that a one standard deviation increase in the use of an internal WB system is associated with 3.9% fewer pending lawsuits in the subsequent year and 8.9% less in aggregated legal settlement amounts. The associations are even larger when examining material lawsuits and settlements over the subsequent three years. A one standard deviation increase in the use of an internal WB system is associated with 8.9% fewer pending lawsuits and 20.4% less in aggregate settlement amounts. Whereas positive associations could result from both internal WB activity and litigation being driven by the severity of issues at the organization, these negative associations are consistent with the notion that internal WB systems provide relevant and actionable information to management about issues arising within the organization relating to, for example, financial reporting improprieties, harassment of employees or workplace safety.”
Lastly, the study took a look into the relationship between internal and external issue reporting. The researchers found that companies who did not respond to complaints by employees were then likely to receive those same complaints from external sources the following year. If the issue is not fixed it will likely ultimately reflect negatively on the organization from the outside as well as the inside.
We can best let the results speak straight from the paper itself:
“We find that increased activity from internal WBs is associated with improved outcomes in terms of litigation. Our results are consistent with the idea that internal WB systems can be a tool within organizations for discovering and resolving issues before they become increasingly severe and costly. Specifically, the active use of internal WB systems is associated with fewer lawsuits on issues ranging from financial reporting improprieties to sexual harassment.”
Why Whistle Blowing Works in the Organization’s Favor
The study ascertains that employees are in the best possible placement to notice issues from the inside of your organization. When you establish an active WB system you will be in receipt of a stream of data from those employees that helps you rectify issues before they become costly. The active, encouraged use of an employee hotline helps prevent future lawsuits, reduces complaints made from external sources and helps you monitor day-to-day operations.
The study is the first of its kind and conclusively proves, once and for all, that the use of an active whistle blowing scheme within an organization can reduce the number of lawsuits, reduce costs and improve your company’s efficiency all around. To quote from the source:
“We find that more active use of internal WB systems is associated with fewer material lawsuits being filed against the organization and smaller legal settlement amounts.”