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Rewarding Whistleblowers: The Costs and Benefits of an Incentive-Based Compliance Strategy
Abstract
Canadians today are very much concerned about corporate crime and about corporations that do not comply with regulatory requirements, especially those related to the environment, securities law and occupational health and safety regulations. This increased concern has led to proposals to extend liability for illegal corporate conduct (by making directors personally liable for the actions of their companies, for example); it has also led to arguments in favour of greatly increasing the sanctions on corporations (and individual wrongdoers within those corporations) for wrongful conduct. The recent academic literature reflects a lively debate as to the effectiveness of such proposals in reducing illegal behaviour in corporations and their consequences for the functioning of the corporation as an economic institution.
With some notable exceptions, the focus of the debate on sanctions and liability rules has resulted in the relative neglect of an essential ingredient in effective deterrence; the capacity to monitor and detect wrongdoing within the corporation. The lack of attention to the potential for increased compliance through improved monitoring and detection is surprising for several reasons. First, as Jennifer Arlen notes, "[m]any corporate crimes - such as securities fraud, government procurement fraud, and some environmental crimes cannot be readily detected by government". Second, there is a significant body of literature on regulatory reform that relates the ineffectiveness of many traditional "command and control" forms of regulation to the costs and difficulties which are inherent in government monitoring and detection of wrongdoing. Third, one of the most generally held tenets of contemporary criminology is that increasing the likelihood of detection and prosecution tends to be a more effective means of strengthening deterrence than making sanctions more severe. In other words, it is better to put another cop on the beat than to build more jail cells.
This study is intended to help redress the inadequate emphasis on monitoring and detection in the current debate on corporate criminal and regulatory responsibility. Accepting the proposition that direct monitoring of corporate conduct by government as a means of detection is unlikely to be cost-effective, our concern is to identify agents within the corporation who can be enlisted in the cause of monitoring and detection, and to consider how public policies can provide stronger incentives, and make it easier, for these agents to identify and disclose wrongdoing within the corporation. In conducting this analysis, we begin by considering one such policy that has generated sustained public attention and controversy over the last decade: so-called "whistleblower protection."
... Moreover, whistleblowers must be ready to have their personal backgrounds scrutinized, to have their charges challenged as falsehood, and to face the accusation of undermining their organizations (Howse & Daniels, 1995), which often leads to guilt and humiliation (Jalan, 2020). ...
... To date, the topic of whistleblower rewards remains the subject of a contentious debate (Nyreröd & Spagnolo, 2021). In a critical review article, Howse and Daniels (1995) cautioned that financial rewards may result in false claims, and unintentionally act as an disincentive to internal reporting and also as an incentive to delayed reporting (to claim larger rewards), eroding trust and team spirit. In the same vein, Stout (2013) argued that financial incentives kill conscience and promote selfishness and opportunism. ...
... In this study, perceptions of whistleblower protection refer to the extent to which prospective whistleblowers believe they will receive equitable treatment and safeguards against retaliatory actions, which may include termination, demotion, harassment, and physical harm, as well as protection against the exposure of their identity (Chang et al., 2017;Feldman & Lobel, 2010;Howse & Daniels, 1995;Lee et al., 2020;Onyango, 2021). This definition underscores the importance of enforcing whistleblower protection policies, rather than the mere existence of a protective framework. ...
Previous research has provided valuable insights into the role of rewards in motivating whistleblowing, but there are still unanswered questions regarding the conditions under which whistleblower rewards can encourage or discourage individuals from whistleblowing. This study focuses on the disclosure of grand corruption activities and employs an expectancy theory framework to investigate the relationship between reward expectancy and external whistleblowing intentions. In so doing, this study examines whether this relationship is contingent upon the influence of three relevant factors, namely, public service motivation (PSM), seriousness of wrongdoing, and whistleblower protection. Survey data were gathered from 2,710 employees in 38 government agencies in Thailand. The findings generally support the hypotheses. Specifically, the results provide evidence against the motivation crowding out effect, while highlighting the importance of situational factors in enhancing the influence of whistleblower rewards. These findings offer practical implications for how whistleblower reward systems can be designed and leveraged to enhance the motivation of potential whistleblowers.
... According to Guthrie and Taylor (2017), the provision of financial rewards signals to individuals that their information about fraud or misconduct is valued, encouraging them to engage in whistleblowing activities. Furthermore, Martinez and F� abio (2021), Dworkin and Near (1997), and Howse and Daniels (1995) contend that financial incentives offer a cost-effective mechanism for governments to recover lost tax revenues when compared to traditional enforcement methods conducted solely by tax authorities. Additionally, a study by Dey et al. (2021) found that increasing financial incentives in whistleblower programs led to a rise in lawsuits and regulatory investigations, highlighting the significant impact of such rewards on whistleblowing. ...
... Whistleblowing has also significantly impacted tax compliance, reduced hidden income, and enhanced auditing procedure precision (Bernasconi et al., 2023). However, contextual factors, such as corruption levels, institutions, and compliance culture, can affect the effectiveness of incentive-based whistleblowing programs (Ayagre & Aidoo-Buameh, 2014;Howse & Daniels, 1995). So, to properly judge how well incentive-based whistleblowing programs work at getting people in developing economies to pay their taxes, it is important to look at the specific situation and think about the things listed above. ...
... Additionally, the efficiency of increasing the sanctions is dependent on the detection probability. Since the latter is usually very low, higher sanctions rarely lead to a proportional effect in decreasing corruption (Howse & Daniels 1995). It is highly possible that there is a threshold after which these monetary incentives are no longer efficient -an aspect that is difficult to investigate. ...
Even though most of the causes of corruption are easily identifiable at the macro level, there is considerable disagreement when it comes to the intrinsic motivations leading people to engage in this activity. The present paper tries to shed light on the aspect concerning the correlation between corruption and individual performance. This is useful for understanding the dynamics of common events like medical students attempting to bribe their way towards becoming a doctor, or companies bribing public officials to obtain licenses to build public highways, buildings, or provide electricity and water. However, corruption's secretive nature makes it difficult to obtain trustworthy qualitative data on this subject. Hence, the study addresses the issue in the lab, through an experiment based on a bribery game. The results show that there is a significant correlation between performance and propensity to engage in a corrupt activity, opening the way for an improvement in the allocation of resources to reduce this negative phenomenon.
... No obstante, la mayoría considera también que es un problema fácil de solucionar introduciendo penalización de estos actos. De hecho, señalan que las leyes ya existentes que penalizan difamación, perjuicio o falso testimonio son suficientes para desincentivarlos (Howse y Daniels, 1995;Nyreröd y Spagnolo, 2018). En este sentido, van también las recomendaciones de buenas prácticas regulatorias, como el Proyecto de Ley modelo de la Organización de Estados Americanos (s. ...
En este artículo se analizan las implicaciones de incentivos económicos por denunciar actos de corrupción en el sector público. Inicia con la revisión del estado de arte sobre el tema, para demostrar la limitada atención que este fenómeno ha despertado en México, y en América Latina en general. En seguida, se analizan las ventajas y desventajas de los incentivos económicos, así como su interacción con otros (protección, obligación y multa). Se resalta el efecto de desplazamiento motivacional como consideración más importante para el diseño de una regulación al respecto. El artículo aporta al debate sobre las estrategias de combate a la corrupción desde las políticas públicas.
... The costs and benefits of rewarding whistleblowers have been discussed informally in, for example,Howse and Daniels (1995). A highly influential article in the Washington Post byZingales (2004) argued strongly in favor of rewarding whistleblowers who uncover financial fraud, as is currently happening at the SEC.Kovacic (2000) argued in favor of introducing these schemes in antitrust. ...
It is often claimed that rewards for whistleblowers lead to fraudulent reports, but for several US programs this has not been a major problem. We model the interaction between rewards for whistleblowers, sanctions against fraudulent reporting, judicial errors, and standards of proof in the court case on a whistleblower’s allegations and the possible follow-up for fraudulent allegations. Balancing whistleblower rewards, sanctions against fraudulent reports, and courts’ standards of proof is essential for these policies to succeed. When the risk of retaliation is severe, larger rewards are needed and so are tougher sanctions against fraudulent reports. The precision of the legal system must be sufficiently high, hence these programs are not viable in weak institution environments, where protection is imperfect and court precision low, or where sanctions against false reporting are mild.
... However, such policy should, as a minimum ensure inconspicuousness for the whistle blower and also protect his/her job if a member of staff. Such a policy should also consider instituting reward for the whistle blower (Agyare et al;Howse & Daniels, 1995). A whistle blowing policy at the macro-economic level as entrenched in the laws of the country through passage in 2006 of Whistle Blowers Act (Act 720), when properly enforced and fully implemented will have a salutary effect on fraud control at the micro finance subsector. ...
Due to the recent financial crisis, micro finance institutions cannot afford to be indifferent to fraud risk management practices in the battle for survival, financial sustainability and self-sufficiency. Microfinance institutions serve some of the world's most financially challenged population who otherwise would not have access to financial services. This paper is a theoretical study on effective fraud risk management in micro finance institutions in Ghana. The study adopts exploratory approach by reviewing and analyzing the views of scholars and practitioners in the area of fraud risk management. The research revealed that corrupt board of directors, senior management and employees, weak systems of internal control, policies and procedures, weak regulatory institutions, greed on the part of culprits, inadequate staffing, inadequate training and retraining, ineffective internal and external audit functions and a macroeconomic environment that eulogises wealth irrespective of how it is made constitute aids to fraud in micro finance institutions in Ghana. The researchers recommend that microfinance institutions and Bank of Ghana must ensure the creation of a culture of transparency and integrity among staff members and clients; and educate clients on their rights and ensure there is a mechanism for whistle-blowing.
... 15 Benoît andDubra, 2004 andRoider (2008) show that, even in the absence of a threat of direct retaliation, reporting might not occur due to the fear of enforcement errors or future non-cooperation. 16 See e.g., Givati (2016) , Howse and Daniels (1995) , Callahan and Dworkin (1992) and the references given in Footnote 6 . Of the 27 countries surveyed in OECD (2016) , 30% have incentives for whistleblowers in place (e.g., financial rewards, expediency of the process, or follow-up mechanisms). ...
Whistleblowing by employees plays a major role in uncovering corporate fraud. Recent laws and global policy recommendations aim at facilitating whistleblower protection to enhance the willingness to report and to increase the detection and deterrence of misbehavior. We study these issues in a theory-guided laboratory experiment. As expected, protecting whistleblowers leads to more reporting of misbehavior. However, the predicted improvements in detection and deterrence do not materialize in the experiment. This is mainly driven by prosecutors being less inclined to investigate upon a report when protection is in place.
We conduct a laboratory experiment to analyze the influence of whistleblower protection on the cooperative behavior between a manager and an employee. Before taking part in a trust game with her employee, a manager has the opportunity to embezzle money at the expense of a third party. The employee observes her decision and may trigger an investigation by blowing the whistle. The treatments vary with respect to immunity and anonymity for the whistleblower. We compare misbehavior, reporting, and cooperative behavior across the treatments. The results suggest that whistleblower protection could deter wrongdoing, but could also have a detrimental effect on cooperation in organizations if it increases the probability for whistleblowing.
The significance of whistleblowing extends beyond its role in promoting public sector accountability; whistleblowers also play a crucial role in safeguarding tax compliance. Evidence suggests that a tax whistleblowing program with a financial incentive leads to less aggressive tax filing and improves the quantity and/or quality of information compared to a program without an incentive. This article explores arguments for and against whistleblowers, as well as incentivising disclosure. Additionally, it discusses design considerations for a tax whistleblowing, aiming to initiate a discussion on the ideal structure for such an incentive programme in South Africa.
Este trabalho faz uma revisão das contribuições da Teoria Econômica a compreensão do problema da corrupção.
Why do some observers of organizational wrongdoing choose to report it? This question has received little research attention despite its prominence in the popular media. This paper attempts to show that whistle-blowing is a form of prosocial behavior. Empirical studies in the social-psychological literature of prosocial behavior provide clues about personality and situational variables predictive of whistle-blowing. Latané's and Darley's (1968, 1970) bystander intervention framework is modified for whistle-blowing decisions. Propositions for future research are offered.
A shift to incentive-based instruments of regulation is often viewed as a solution to the defects and limits of the traditional regulatory state. This article argues that, although in some contexts incentive-oriented approaches are desirable, there are limits to the use of economics in the regulatory process, particularly with respect to defining the goals of regulation in a pluralist democracy. As well, traditional policy instruments can be altered, evolved or supplemented to allow for belter government. There are many ways that government can bring about basic social change that neither suggest a return to old command and control approaches nor an increased reliance on or deference to economically self-interested market behaviour. It is these alternative approaches that are most promising for advancing the unfinished agenda of the social welfare slate, through a better reconciliation of care with autonomy and choice with community.
Examined the power–dependency relationships between "whistle blowers" and their employers through the regression analyses of survey data from 636 employees of federal agencies who had reported evidence of official wrongdoing. Ss reported that they were more likely to suffer retaliation if they lacked the support of their supervisors and managers. Retaliation was also more severe if the wrongdoing was serious and if the S used channels outside the organization to report the incident. Following severe retaliation, Ss were likely to file official complaints about the retaliation and to leave their jobs involuntarily. Other predictors of reactions to retaliatory action are discussed. (36 ref) (PsycINFO Database Record (c) 2012 APA, all rights reserved)
Property in transition (Book I, chapter 1) …The typical business unit of the 19th century was owned by individuals or small groups; was managed by them or their appointees; and was, in the main, limited in size by the personal wealth of the individuals in control. These units have been supplanted in ever greater measure by great aggregations in which tens and even hundreds of thousands of workers and property worth hundreds of millions of dollars, belonging to tens or even hundreds of thousands of individuals, are combined through the corporate mechanism into a single producing organization under unified control and management.… Such an organization of economic activity rests upon two developments, each of which has made possible an extension of the area under unified control. The factory system, the basis of the industrial revolution, brought an increasingly large number of workers directly under a single management. Then, the modern corporation, equally revolutionary in its effect, placed the wealth of innumerable individuals under the same central control. By each of these changes the power of those in control was immensely enlarged and the status of those involved, worker or property owner, was radically changed. The independent worker who entered the factory became a wage laborer surrendering the direction of his labor to his industrial master. The property owner who invests in a modern corporation so far surrenders his wealth to those in control of the corporation that he has exchanged the position of independent owner for one in which he may become merely recipient of the wages of capital.
Examined the trade-offs facing the potential whistle-blower who decides to remain unidentified, using survey data from 8,587 federal employees. Propositions derived from a model of bystander intervention (B. Latané and J. Darley, 1970) were investigated, with consideration of 3 decision points: whether the observer of organizational wrongdoing should blow the whistle, whether the whistle-blower should act anonymously, and whether the whistle-blower should report the wrong-doing through internal channels or to someone outside the organization. Results suggest a compounding of the last 2 decisions; that the choice of channels represents 1 of 4 distinct strategies. Whistle-blowers may be anonymous or identified with either external or internal channels, but the conditions under which they do so vary. The whistle-blower who chooses to use an anonymous external channel faces a series of interrelated and complex decisions. (PsycINFO Database Record (c) 2012 APA, all rights reserved)