The economics of Whistleblowing – it doesn’t pay!

150 150 Justin Jenk

The economics of Whistleblowing seem clear – they do not pay, especially not for the Whistleblower and do not deter deceptive behaviour by corporations nor organisations.

Whistleblowers have always played a role in society. Whistleblowers are individuals revealing information or “deceptions” (be it corruption, malfeasance, fraud, incompetence, etc) in the belief of righting some moral or ethical wrong that members of a broader group or society would rather wish remained secret. Corruption alone accounts for $2.6 trillion a year, according to the World Economic Forum <https://www.weforum.org/agenda/2015/11/corruption-the-hidden-tax-on-global-growth>. Government waste is an even a higher figure. Malfeasance, in all its forms, is a larger figure still.

Motivations

Whistleblowers, by their actions, are revealing deception and seeking to hold those responsible individuals and organizations to account. Whistleblowers are not driven by self-interest nor self-benefit. They are driven by a different (some might say higher) level of morality and ethics, even if naive. A whistleblower is seeking to: clear his/her conscience, perform an act of social good or punish the perpetrators – they are not seeking personal nor economic gains. Whistleblowers wish to ‘tell their (moral/ethical) story’.

Society’s pariahs or heroes?

There are a number of dynamics at play.

Interestingly; society, policy-makers and individual citizens surrounding Whistleblowers all seem to be morally torn.

It is a “social norm” that deception, corruption and malfeasance are tolerated by a group. The Whistleblower’s immediate community or organization feel threated by his/her actions. Whistleblowers are perceived as betraying notions of ‘trust’ and straying outside the bounds of established hierarchies. Whistleblowers get sidelined or sacked! Despite the lip-service paid by politicians, shareholders and management; Whistleblowers are often ostracized, or worse. It is sobering to note that only four EU countries have laws protecting Whistleblowers, despite the rhetoric to the contrary.

Yet polls repeatedly show that well over 75% of respondents applaud whistleblowers’ actions. The nomination of Edward Snowden for the Nobel Peace Prize is an example. The public’s growing apathy for the ‘ruling classes and elites’ is being fueled by disgust and disdain for the banking community, corporates, regulators and politicians. This disdain is compounded by intrusions of privacy as well as threats to a consumer’s rights and safety.  This feeling is helping to ameliorate the conditions for whistleblowers, but they remain tough as the ‘FT’ reports <http://www.ft.com/cms/s/2/ce216134-e6c7-11e3-9a20-00144feabdc0.html>.

So why in 2006 was Paul Moore <http://www.thisismoney.co.uk/money/news/article-3328465/HBoS-whistleblower-Paul-Moore-WOULDN-T-won-t-stop-former-directors-money-taken-away-them.html>, the head of group risk at HBOS, sacked by senior management as well as ignored by the regulator and authorities when he warned them of the bank’s perilous practice and state? In 2009, HBOS/Lloyds was Britain’s largest bank failure before RBS. Moore’s professional and personal lives were ruined by his genuine act of concern. By 2016 the HBOS/Lloyds bail-out had wiped out shareholders equity and cost the UK taxpayer at least £20 billion; yet official sanction remains ‘work-in progress’.  Deception is not the preserve of the private sector – Britain’s NHS is rife with it as well as thwarting Whistleblowing attempts <http://www.telegraph.co.uk/news/2016/04/04/nhs-whistle-blower-investigator-in-freedom-to-speak-up-role/>

The need for whistleblowing and its occurrence is widespread across government services and agencies, the military, charities as well as financial institutions and companies. Investigative journalists could not survive without the whistleblowing dynamic. The shocking fact is that these public clarion ‘calls to action’ represent probably less than 5% of the questionable events and activities that are occuring!  Therein lie the morale and ethical dilemmas, such as: where is the line between Professional Responsibility and Public Duty?

Economic gains are unclear and asymmetric

Whistleblowing is not revealing enough “deception”. Nor are whistleblowers being adequately compensated for the risks they undertake.

From a purely economic perspective the benefits of whistleblowing are questionable and asymmetric at best; usually the whistleblower doesn’t benefit. Even if in receipt of compensation or so-called “bounties”.

Most of the value is in fines, levied by government authorities on banks and corporations, a form of tax. For example, in 2014 the US Government levied $5.7 billion in False Claim Act (FCA) penalties. This pool of fines is the single largest concentration of Whistleblowing economic effects. In that scheme the Whistleblowing bounties equaled $435 million. Studies by Transparency International <http://www.transparency.org.uk/> and ResearchGate <https://www.researchgate.net/publication/316897276_Whistleblowing_-_it_doesn%27t_pay_the_economics_of_whistleblowing> suggest that at a minimum, whistleblowers might be responsible for saving billions of dollars and thousands of lives every year. Personally, Whistleblowers do not benefit but they are often: ostracized, threatened and victimized as well as finding themselves fired, sued, blacklisted, arrested or, in extreme cases, assaulted even killed.

The Whistleblower effects, as measured by fines and bounties, are miniscule compared to the scale of corruption. If the $2.5 trillion is translated into relative time terms; over a period of 80,000 years ($2.5 trillion) the FAC fines are equivalent to 177 years and Whistleblower bounties to just over 14 years.

Going forwards

So should Whistleblowing be encouraged and protected? The evidence would suggest: ‘yes’ and ‘yes’. Transparency would seem to be in everyone’s benefit but precedents suggest that this truism is not the reality. Ask the likes of: Karen Silkwood, Paul Moore, Michael Woodford, Herve Falciani, Mordechai Vanunu, Bradley Chelsea Manning <http://documentaryheaven.com/wikileaks-the-forgotten-man/>, Edward Snowden <http://www.theguardian.com/film/2015/feb/23/edward-snowden-documentary-citizenfour-wins-oscar> and many others<X> can attest!

It would seem that genuine Whistleblowers deserve our individual and civic support; not disdain nor disinterest.

Justin Jenk is business professional with a successful career as a manager, advisor, investor and board member. He is a graduate of Oxford and Harvard. Justin can be found at justinjenk.com or www.raktas.io

Justin Jenk is business professional with a successful career as a manager, advisor, investor and board member. He is a graduate of Oxford and Harvard. Justin can be found at justinjenk.com or www.raktas.io