Whistleblowing policy: an element of corporate governance.
The strong media and public focus on corporate governance continues, and directors of all types of businesses are being asked to demonstrate a clear commitment to their legal and ethical responsibilities in governing their companies. Management and key staff are also being held accountable and asked to act responsibly. The term "best practices" is defined as those processes, practices or methodologies that have been proven to lead to improved performance. These "best practices" are the performance levels to which management and directors of all companies may presumably be held should their actions be challenged either by their members, by the media or in the courts.
As has been noted in numerous seminars and conferences, in the post-Sarbanes-Oxley environment, greater attention needs to be given to the responsibilities of the Board of Directors and the Board's relationship with management. Directors must emphatically demonstrate their commitment to and their understanding of their fiduciary duties: the traditional duties of care, loyalty and obedience and the new "duty of attention." In addition to focusing on these duties, the Board must become more conscious of requesting relevant information and documenting decisions made. Directors must also re-affirm their understanding of the Board's basic functions, including:
* Provide advice and counsel to management
* Monitor management's performance
* Oversee the effective auditing of the cooperative, and
* Report to the membership and others on the financial health of the organization.
Those broad goals encompass a multitude of smaller issues, among them the establishment of whistleblowing policies. This article will clearly define what is meant by whistleblowing, address both the legal and the practical implications of whistleblowing and discuss the establishment of procedures for employees to report suspected wrongdoing.
WHAT ARE THE PROVISIONS OF THE LAW?
Section 1107 of Sarbanes-Oxley (or "the Act") makes it a federal crime for any person, and that includes all individuals and businesses, to deliberately retaliate against anyone who provides a law enforcement officer with truthful information regarding the commission or possible commission of any federal crime. (1) Unlawful retaliation includes interfering with someone's lawful employment, such as firing, refusing to promote or reducing pay. This crime is punishable by fines and/or up to ten (10) years in prison.
While this provision extends to all businesses, including cooperatives, only the audit committees of public companies with securities listed on a national stock exchange are required by Sarbanes-Oxley to establish procedures for handling whistleblower complaints (including complaints by employees) regarding accounting, internal controls or auditing matters. This may seem a rather narrow scope for defining specific whistleblower requirements. The larger picture--or cascade effect--should persuade prudent cooperatives that it makes sense for them to consider whether they have--or should adopt--an adequate system that encourages employees to report suspected illegal conduct or violations of the cooperative's policies or procedures as a means of strengthening the commitment to a code of conduct.
In order to comply with the criminal whistleblower provisions of Sarbanes-Oxley, cooperatives should review their existing employee policies regarding discipline and termination. In all likelihood, your cooperative already has a policy that prohibits discrimination or retaliation against an employee complaining of discrimination. Generally, these policies are very detailed and tie unacceptable behavior to very specific provisions in the law. Therefore, these policies may not be broad enough to cover the contemplated whistleblowing protection that is set forth in Section 1107 of the Act. Your cooperative may need to review and possibly adopt a new policy to include language broad enough to encompass this type of whistleblowing and to ensure that supervisors and managers are aware of and understand this provision in the law.
WHAT IS CONSIDERED WHISTLEBLOWING?
Let's start with the definition of a whistleblower. Any employee of an organization or company who speaks out about the organization in an effort to correct perceived wrongdoing is a whistleblower. This definition includes those individuals who speak up within the organization itself. Often, a whistleblower is defined less by having spoken out or up than by the retaliation (many times in the form of discipline) that the individual receives from the company itself. When whistleblowing occurs, it generally indicates an ethical failure at the organizational level. A genuine case of whistleblowing requires the whistleblower to have utilized, unsuccessfully, all appropriate channels within the organization to right a perceived wrong and to have failed. The whistleblower then resorts to going outside the organization.
Given the provision of Section 1107 of the Act and numerous other federal statutes that contain whistleblower protection, it is appropriate for a Board of Directors of a cooperative to consider adopting a specific policy addressing whistleblowing. The adoption of a policy addressing whistleblowing is a matter appropriate for discussion and decision at the Board level. However, drafting and implementation of the whistleblowing policy is within the purview of management.
As part of its overall discussion regarding whistleblowing, the Board should decide if the policy should be narrow and relate simply to the protections afforded in Section 1107 (protection for anyone who provides a law enforcement officer with truthful information regarding the commission or possible commission of a federal crime).
Alternatively, the policy could be broad enough to address and include whistleblowing regarding all suspected or alleged violations of law as well as the cooperative's code of conduct, personnel policies or safety policies. This most likely will involve a philosophical discussion centering on ways to encourage employees to observe the code of conduct and obey the law, as well as to protect individuals who report suspected violations. During the discussion of a whistleblowing policy, it is also important that the Board seek the advice of the cooperative attorney regarding any relevant state statutes that provide protection to whistleblowers.
CRAFTING THE POLICY
Assuming that the decision is made to make the whistleblowing policy as broad as possible, there are numerous items to be discussed and considered by management for inclusion within the policy.
A general statement that requires all employees and directors of the organization to observe high standards of business and personal ethics in the conduct of their duties and responsibilities is important. Honesty and integrity should be stressed in fulfilling responsibilities and complying with all applicable laws and regulations. Unlawful activity of any type should be strictly prohibited. It should be emphasized that all directors, officers and employees have a responsibility to comply with the appropriate code of conduct as well as the law and an affirmative duty to report violations or suspected violations in accordance with the requirements of the whistleblowing policy.
A whistleblowing policy is not designed to be a code of conduct; it is designed to address the issue of reporting violations of the code of conduct. In general, it should prohibit unlawful activity of any kind and refer to the code of conduct, which establishes general standards of conduct in areas such as:
* Equal employment opportunity
* Conflicts of interest
* Confidential or proprietary information
* Accounting controls and procedures
* Protection of member interests and competition
It is important to include in the policy a paragraph that states that no retaliation shall be made against a director, officer or employee who reports, in good faith, a violation of the code of conduct. Retaliation includes harassment and/or any adverse employment consequence. Anyone who retaliates against someone who has reported a violation in good faith should be subject to discipline up to and including termination of employment. The policy is intended to encourage and enable employees and others to raise serious concerns within the company rather than seeking resolution outside the company.
Many companies prefer a chain of command and require their employees to share their questions, concerns, suggestions or complaints with their supervisor, who may often be in the best position to address an area of concern. However, an alternate route of complaint should also be provided if the employee is not comfortable speaking with his supervisor or is not satisfied with the response of the supervisor. The employee should be directed either to a compliance officer or other specific individuals who have authority and responsibility to investigate all reported violations. Some organizations may decide to establish a compliance officer. In that case, all concerns regarding the whistleblowing policy and reports of violations of the code of conduct should be addressed to the compliance officer.
If a compliance officer is specifically designated, that individual is responsible for investigating all reported complaints and allegations concerning violations of the code of conduct. Internally, the compliance officer may be required to immediately notify the CEO of each complaint received and work in conjunction with the CEO for timely resolution. Should the whistleblowing complaint involve the CEO, the compliance officer may be instructed to contact the Chairman of the Board or the cooperative attorney. If the whistleblowing complaint involves accounting and auditing matters, it may be appropriate to designate that the audit committee of the Board of Directors address all reported concerns or complaints regarding accounting practices, internal controls or auditing. In this case, the compliance officer may be directed to immediately notify the audit committee of any such complaint and work with the committee until the matter is resolved.
It is important to include in the whistleblowing policy a provision stating that anyone filing a complaint concerning a violation or suspected violation of the code of conduct or of the law must be acting in good faith and have reasonable grounds for believing the information disclosed indicates a violation of the code. All allegations that prove to be unsubstantiated and to have been made maliciously or knowingly to be false will be treated as a serious disciplinary offense. It is also important to be clear that the whistleblowing policy is not intended to replace your harassment policy and other employment-related policies. Employment-related concerns should continue to be reported through your normal channels.
CONFIDENTIALITY IS CRITICAL
Confidentiality is a key issue with regard to whistleblowing. Violations or suspected violations should be submitted on a confidential basis; management must decide if they will accept anonymous complaints or not. The whistleblower policy may include a provision encouraging employees to put their names to allegations because appropriate follow-up questions and investigation may not be possible unless the source of the information is identified. If management chooses to investigate anonymous concerns, it should be made clear that consideration will be given to the seriousness of the issue raised, the credibility of the concern, and the likelihood of confirming the allegation from attributable sources. Reports of violations or suspected violations should be kept confidential to the extent possible, consistent with the need to conduct an adequate investigation.
The whistleblower policy should also address briefly how reported violations will be handled. Receipt of the reported or suspected violation should be acknowledged to the sender within a specified amount of time. The policy should make clear that all reports will be promptly investigated and appropriate corrective action taken if warranted by the investigation.
PROMPT AND IMPARTIAL INVESTIGATIONS
Timing is crucial for an effective whistleblowing policy. Employees should be made aware that the earlier a concern is expressed, the easier it is to take action and correct the situation. In addition, the employee making the complaint should be aware that he or she should be prepared to provide all evidence gathered prior to making the allegation. In return, the whistleblower should be assured that the employer will conduct a prompt investigation of the matter and will report back to the employee regarding the results of the investigation as soon as is practicable.
If a suspected violation of law or the code of conduct is reported by an employee pursuant to the requirements set forth in the whistleblower policy, the employer incurs an obligation to investigate this report. The employer should promptly respond to any complaints or allegations of improprieties or violations of the code of conduct. The sooner such allegations are investigated, the sooner remedial action can be taken. Witnesses' recollections will be fresher, and documentary evidence stands a greater chance of having been preserved.
Prior to conducting any interviews during an investigation, the compliance officer or investigator should review relevant personnel policies and procedures as well as relevant corporate policies and procedures. The first person to be interviewed should be the whistleblower, who is given assurances of no retaliation and reminded of the company's obligation to investigate thoroughly all reports brought forward under the whistleblower policy.
The interviewer should press for facts in support of the alleged violation, not simply characterizations of the conduct involved. When crafting the policy, management should decide whether to require a written statement from the whistleblower. The benefit of soliciting a whistleblower's written statement is to help ensure accuracy during the course of the investigation.
The investigator or compliance officer will then proceed to interview witnesses identified by the whistleblower or those that the employer believes may be in a position to give relevant information. If a particular individual is accused of wrongdoing, the compliance officer will want to speak to the particular individual. The facts of the allegations will determine the order of investigation and interviewing. In conducting interviews, it is important to be careful to use an impartial tone with all parties. The investigator should avoid appearing skeptical or accusatory and obtain objective facts regarding the incident or incidents, not opinions or speculations. Interviews relating to the investigation should be conducted in a room that will ensure privacy.
Some allegations may be serious enough that the cooperative attorney or the auditor needs to be involved immediately. Other reports can be investigated internally. Depending upon the structure of the organization and the level of the alleged violation, it is important to involve the Board at some point. Some allegations may involve reporting to the Board from the initial allegation; other investigations may not involve the Board until such time as the investigation is complete and remedial action has been taken.
One of the most important aspects of an effective internal compliance procedure is confidentiality. As noted earlier, anyone complaining must feel assured of the confidentiality of the process before they will feel comfortable coming forward with any allegations. The contents of interviews and any documents generated as a result of the interview should be kept highly confidential. To reduce the risk of any type of defamation action, information should be relayed only to those in management or on the Board who have a clear need to know. Employees who are interviewed should be instructed to treat the matter confidentially and refrain from discussing it in the workplace or anywhere else.
Confidentiality does create a tremendous problem in the investigative portion of the process when the complainant who comes forward wishes to be anonymous. While the complainant can be assured that information will be revealed on a need-to-know basis only, anonymity cannot be guaranteed. Despite a management decision to accept anonymous complaints, anonymity conflicts with the employer's obligation to investigate the allegation thoroughly.
The investigation should be documented in a confidential file. Care should be taken to preserve all relevant employer documents that exist at the time of the charge. Once an employer is put on notice of an alleged violation, the employer is under a legal obligation to preserve all relevant documents. If necessary, the documents should be taken from the areas in which they are normally maintained and turned over to counsel or to the personnel department. These documents may well become subject to discovery in subsequent litigation.
Do not put notes regarding interviews or other elements of the investigation in a personnel file or in files that can be reviewed or referenced by people who are not involved in the investigation. Remember that the contents of your investigation file are subject to discovery in a lawsuit and, therefore, limit the information in the file to factual information gathered from interviews with witnesses. Remember to check e-mail and other electronic files for relevant documents.
NEVER ACT IN RETALIATION
The cooperative must be aware at all times of the extreme importance of avoiding any conduct that may be construed as retaliation against the whistleblower. As noted earlier, the whistleblower policy statement should make clear that the employer will not condone or tolerate retaliation against anyone coming forward with allegations of wrongful conduct. When the whistleblower first makes a contact in accordance with the whistleblower policy, he or she should be assured that the allegations will in no way affect the terms or conditions of his or her employment, assuming the allegations are made in good faith.
Any unrelated disciplinary action that has to be taken against a whistleblower following a complaint must be carefully documented and first should be cleared through the human resources department or the cooperative attorney. Employers must be cognizant of the proximity in time of the complaint and the discipline; this may raise difficult questions of fact regarding the motive of the employer in disciplining or terminating an employee who has been a whistleblower.
It is very important to underscore with all personnel involved that retaliation, in any form, should not be taken against the whistleblower. If future disciplinary actions arise as a result of the job performance of the whistleblower, the human resources department and/or legal counsel should be involved in making disciplinary decisions to ensure that there is no appearance of retaliation.
Once the investigation is complete, the employer must determine what occurred and what action will be taken. Once that determination is made, any remedial action necessary should be taken in a timely manner, and follow-up should be undertaken to ensure that the situation does not occur again. In addition, the result should be communicated to the whistleblower and others as appropriate.
In today's heightened call for ethical conduct in corporate governance, there seems to be a public demand to protect employees when they take lawful acts to disclose information or otherwise assist criminal investigators in detecting and stopping actions that they reasonably believe to be fraudulent. Further, corporations have an increasingly vested interest in ensuring high ethical standards and conduct within their organizations. For those employees who attempt, in good faith, to report violations of the code of conduct or report illegal acts, corporations should ensure protection against whistleblowing. Electric cooperatives are not exempt from those standards and prudent management should include sound a sound policy for encouraging and responding to legitimate whistleblower complaints.
(1.) Section 1107 must be distinguished from Section 806 of Sarbanes-Oxley, which is a whistleblower provision applicable only to public company employees. Section 806 creates a new civil cause of action for discrimination when an employee is retaliated against by an issuer for having provided certain information, testified or otherwise participated in an investigation relating to fraud or an SEC rule violation. In addition, many state statutes prohibit retaliation against a whistleblower in specific circumstances as a matter of public policy.
Susan Olander joined Federated Rural Electric Insurance Exchange in 1987. As General Counsel, Susan is responsible for all general corporate legal work--including filings with various state insurance departments, as well as drafting of endorsements, legal documents and legal opinions. Susan also prepares and presents seminars and training programs on various topics.
Susan graduated from University of Kansas School of Law, Juris Doctorate. She has also earned Chartered Property Casualty Underwriter (CPCU) and Associate in Underwriting (AU) designations.
Susan Olander, General Counsel, Federated Rural Electric Insurance Exchange
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|Date:||Dec 22, 2004|
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