The risk that current or past employees will step forward to report wrongdoing directly to the Securities & Exchange Commission (SEC) under SEC Rule 21F has very little to do with the Dodd-Frank Act, as many mistakenly assume. The risk that such whistleblowing can destroy a company before the company has a chance to respond is indeed real nevertheless.

Unbeknownst to most, the original SEC whistleblowing provision, Rule 21A(e) of the Exchange Act, was ratified in 1988 as part of the Insider Trading and Securities Fraud Enforcement Act (ITSEA) which was in large part a response to the October 1987 stock market crash commonly known as Black Monday.

What makes the potential threat of whistleblowing under Rule 21F more intense, however, is the fact that in the midst of a prolonged recession, corporate leaders have not taken adequate measures to reengineer pre-existing compliance programs towards greater transparency and accountability.

Comprehensive, articulately written compliance programs are nothing new. Follow-though on the formally documented procedures however is where the rubber meets the road. The United States Department of Justice provides practical guidance to federal prosecutors who are required to “determine whether a corporation’s compliance program is merely a ‘paper program’ or whether it was designed, implemented, reviewed, and revised, as appropriate, in an effective manner.”

Thus, we see a dual benefit to credible compliance programs: 1) convincing employees that their concerns about wrongdoing are dealt with seriously, thereby encouraging them to report it sooner, and 2) reducing the potential sentencing that the organization and its directors and officers could face in the event of federal prosecution.

The 2011 National Business Ethics Survey (NBES 2011) published by the Ethics Resource Center (ERC) concluded that the trend from the past biennial report has been very worrying, suggesting that “trouble lies ahead.” NBES 2011 cites the following three predominant negative indicators:

1. Retaliation against employee whistleblowers rose sharply with 22% of those reporting misconduct having experienced retaliation in 2011 compared with 15% and 12% in 2009 and 2007, respectively.
2. The percentage of employees perceiving pressure to compromise ethical standards in order to maintain their jobs increased to 13% compared with 8% in 2009. The all-time high in the 17 year history of the NBES was 14% following the bursting of the dot.com bubble in 2000.
3. Perhaps most worrying is the finding that 42% of companies are now reported to exhibit weak ethics cultures, compared with 35% in 2009. Nearly one-third of the 4,683 survey respondents indicated they believed “bad actors in their company are laying low because of the recession.”

Handling the Threat of Whistleblowing

After having researched hundreds of cases where whistleblowing was involved and having personally worked with dozens of whistleblowers from various industries (and including several highly-cited legal verdicts), one thing is clear to me: While dozens of conflicting and confusing federal whistleblowing provisions exist within the United States alone, what happens after the whistle is blown is almost always the same: retaliation.

Section 1107 of the Sarbanes-Oxley Act labels retaliation against whistleblowers as a federal crime constituting obstruction of justice under Title 18, Section 1513(e) of US Code. Few would dispute that retaliation is a bad, but if we look a bit closer, we can actually view it as a negative externality: The direct harm experienced by the whistleblower is just the tip of the iceberg of the damage borne by the organization and public in the form of eroded confidence in leadership and poor employee engagement leading to a lack of productivity in the truest economic sense. Despite the seriousness with which the law treats retaliation, it persists nonetheless.

HR professionals need to extend their concern beyond the formally documented procedure to also include the light in which management actions are perceived. Despite the availability of federal protection from retaliation—which can only be invoked by judicial or administrative proceedings—employees who feel that they will suffer by reporting wrongdoing often choose to keep quiet. When potential “first responders” decline to report, wrongdoing persists, growing undetected until it finally explodes.

A team of Dutch researchers conducted a study spanning 16 nations of employees’ trust of their supervisors. They found disturbingly low levels of employees who believed that their managers displayed consistency in demonstrating and reinforcing workplace ethics:. 41% of employees reported that their manager punished deviation from organizational principles and 25% reported having managers that only rewarded conformity to those same norms, while only 34% reported that their managers applied both rewards and discipline symmetrically.

The same study also revealed that only 33% of employees believed their managers would praise the employees’ decision to stand up to them if they observed the manager displaying unethical behavior, indicating a significant lack of transparency on the part of the managers and also significant mistrust among 67% of respondents.

Since HR is inevitably going to occupy the middle position between matters arising between the “rank & file” and management, it is critical that employees believe in the transparency with which principles are carried out. Too often, the approach taken by HR leaders is overly based on advice from in-house or external counsel which results in HR being viewed as a police force rather than as an open facilitator of knowledge and information that helps all employees to develop professionally while fulfilling their organization’s strategic objectives.

Many of the whistleblowers with whom I have spoken explicitly state that in their whistleblowing experiences they believe that HR merely reinforced the ineffective structures in place to allow the reported wrongdoing to continue. Whether this is entirely true is not as critical as whether employees believe it is true. When it comes to fairness and ethics—more often than not—perception is reality.

Please join my BLR webinar "Whistleblower Update: Keys to Corporate Compliance, Limiting Risk, and Stopping Fraud," on January 26, 2012 to learn How you should respond to the threat of whistleblowers .

Ahmad Abdul-Qadir, CPA, MBA, is the managing director of Continewity LLC, which provides innovative solutions in corporate governance, productivity, and strategy to progressive organizations committed to outpacing the competition. With more than 15 years of experience as a risk management, financial, and operations leader, Mr. Abdul-Qadir has planned and executed dozens of engagements in more than 20 countries that have generated valuable insights for firms within various industries. This experience includes working with Fortune 100, 500, and Global 1000 firms, as well as Big Four public accounting firms and Big Three management consulting firms.

Mr. Abdul-Qadir specializes in developing advanced analytical tools for organizations that highlight business, economic, and demographic trends impacting the future demands for goods/services, supplier, and competitor trends. He also assists organizations to establish effective governance systems by efficiently utilizing human and technology resources, guiding policy creation, and benchmarking relevant performance metrics. He has personally assisted dozens of whistleblowers evaluate and handle their concerns about organizational wrongdoing.