Blogs & Comment

Workplace investigations: Getting it right

Directors act out of self-interest. Even ineffective ones need incentives to move on.

As a corporate board advisor I have been involved in situations that have included alleged bribery, stock-option backdating, manipulation of financial statements and mismanagement of risk causing property destruction and death.

In all of these crises company whistle-blowing procedures—which ensure employees and executives can come forward with their concerns in a protected manner—were defective. The board was the last to know what was happening and lawsuits soon followed. Once the board did know, some of the investigations into the wrongdoing were also deficient in some manner.

I gave a speech last week on the ethics of conducting proper workplace and board-level investigations. (See slide deck here.) I talked about how many investigations suffer from serious setbacks that need to be corrected to be effective. The impetus for change is the new Securities and Exchange Commission (SEC) “whistle-blowing” rule that permits employees now to go directly to the regulator with a complaint and completely bypass the company’s internal processes. When SEC Chair Mary Schapiro introduced the rule, she said it was the right thing to do to address toxic workplaces. Directors then and now voiced stiff opposition to the rule, saying it would result in “bounties,” or a portion of the rewards being given to the whistle-blower.

Not only are rewards a good thing to incent employees to come forward, but companies, I argue, should match these rewards for employees to come forward with concerns of fraud and ethical wrongdoing.

The practical effect of this new rule is to put the heat on companies and corporate boards to reexamine how concerns come forward and how workplace investigations of potential wrongdoing are conducted—and that is a welcome development.

Where do workplace investigations go wrong? Three key areas:

1. Lack of anonymity, no protected mechanism for whistle-blowers

Employees are rational. Why would anyone—especially an executive—come forward if they know their identity will be revealed, the complaint will not be properly investigated and they will suffer scorn and even retaliation? What happens then is the wrongdoing festers and gets worse, when it should have been addressed earlier. It becomes part of workplace culture. The identity and personality of the person are largely irrelevant. What is relevant is the nature of the complaint itself. Without a system that guarantees anonymity, an important source of intelligence is suppressed.

2. A weak audit committee and board

Boards now need to know what best practice reporting channels are, when to get involved and even when to lead an investigation of conduct that involves management and can put the reputation of the organization at risk. This is changing now with contagion and social media.

Employee and culture surveys, informal walk-arounds and a strong internal audit provide excellent intelligence. There is a natural tendency for management and company lawyers to unduly influence the investigation, which is a red flag for employees not to come forward. The audit committee should have its own independent advisors to receive the complaint directly, and then communicate with management on behalf of the audit committee. If the complaint is serious enough, independent advisors should lead the investigation, not management.

3. Flawed investigation and “lawyering up”

There is a tendency for management to become defensive and even passive-aggressive with very serious allegations. Who is on the investigation team, how documents and other evidence are assembled, how interviews are conducted, and how upward reporting occurs are all critical. Self-reporting and ready co-operation to cure the complaint can be viewed favourably by regulators and the public. A good example of proper investigation and crisis management is Maple Leaf Foods; CEO Michael McCain publicly apologized and promised to fix the problem. Lawyers have a tendency to hone in on process and not see the bigger public relations picture and opportunity.

On the verge of viral

Employees, the media, customers and others need to have confidence that when contentious issue arises, it will be investigated independently and appropriately. Good boards insist on advance planning and investigation protocols, and warning employees that all actions are public.

In the age of social media, an employee or customer with a cell phone can be a company whistle-blower, choosing to trigger a media story and investigation. The consequences of not being ready, conducting a flawed process or being defensive can be more damaging to the company’s reputation than the original allegation. A company’s actions are now always one step away from going viral.