Author: Maxine Viertmann
Whistleblowing is an important mechanism that keeps corporations accountable to rules of corporate governance and has in many cases shined a light on major corporate wrongdoing. Yet, many instances of corporate whistleblowing have been met with vicious reprisals. Indeed, in April this year, the former chief medical officer of Commonwealth Bank, Dr. Koh, was vilified and sacked after raising concerns regarding unethical behaviour within the bank. Although CBA has repeatedly denied the connection between Dr. Koh’s removal and his whistleblowing activity, the case highlights the need for systematic and widespread protection for whistleblowers. One way of affording this protection may be through adding a mandatory requirement in the Corporations Act 2001 (Cth) (Corporations Act hereafter) that corporations must have internal procedures to deal with and protect whistleblowers. However as previous incidents have shown, internal protections are often of limited utility and are only effective in specific circumstances.
Scholars and courts have repeatedly recognised the power of whistleblowers. For example, the Federal Court in Police Federation of Australia v Nixon (2011) 198 FCR 267 emphasised the importance of encouraging whistleblowing by rejecting a statutory construction which would discourage it. However, such disclosure often comes at a great cost to the whistleblower. There are two primary issues with affording protection to whistleblowers through internal mechanisms only. First, reliance on solely internal procedures renders whistleblowers vulnerable to corporate management and, second, such internal protections will only be effective in limited circumstances where the corporate wrongdoing is not condoned or perpetuated by senior management. As a result, independent bodies such as ASIC may be better placed to investigate and manage complaints and thereby afford adequate protections to whistleblowers than corporations themselves.
The Corporations Act affords some basic protections to whistleblowers such as protection from liability, victimisation and unlawful termination (see Corporations Act Part 9.4AAA). However, its terms are not sufficiently comprehensive to protect against all retaliation, particularly the minor reprisals to which the whistleblower may be vulnerable. Ostracism, rumours and inconvenient changes in work tasks may be employed as means of reprisal. These may fall below the high threshold of conduct prohibited by the Act. These seemingly minor reprisals can have major health impacts such as anxiety disorder and psychiatric illness. Other measures such as destruction of documents, long delays and claims that complaints were never received are also methods that have been used to leave whistleblower concerns unaddressed. Alongside the case of Dr. Koh, a number of reported instances of internal reprisals have surfaced such as the Enron whistleblower, Sherron Watkins, who was fired after submitting her concerns to the CEO, and the case of Wheadon v. State of New South Wales whereby a policeman who reported corrupt conduct to his superior was subjected to harassment and victimization.
An amendment to the Corporations Act requiring corporations to institute processes to deal with whistleblowers without seeking to specify what measures are needed will likely leave each corporation to institute their own protections and procedures. This will likely lead to a lack of uniformity, thus failing to afford whistleblowers meaningful industry-wide protections. Furthermore, internal mechanisms may unintentionally put whistleblowers in a vulnerable position; it assumes that those receiving the disclosure will address it dutifully and will not act adversely to the interests of the complainant. This is not always the case. Latimer emphasises that internal whistleblowing relies on the assumption that managers are ‘noble enough to protect whistleblowers from reprisals for making that disclosure. While some authorities may uphold this responsibility, the reality is that some will not…’ Therefore, internal company procedures may not be the best avenue of redress for whistleblowers because such mechanisms can easily be manipulated by those in the position to enforce them. Although internal mechanisms may send a positive message to corporations, it is highly unlikely that the inclusion of internal procedures, the content of which is discretionary and variable, will be enough to alter existing corporate culture in such a way that it afford sufficient protections to whistleblowers.
Internal procedures dealing with whistleblowers usually operate by complaints being submitted to the manager and escalating up the company’s chain of command if the manager does not satisfactorily deal with the disclosure. Internal procedures will therefore only be effective insofar as the corporate wrongdoing complained of is not condoned or conducted by the company’s senior management. It is found that ‘managers often ignore or stifle dissent’, fearing that negative reports reflect badly upon them. De Maria warns that internal dispute mechanisms are of little effectiveness when the corporate malpractice is actually planned by those in charge or those who are turned to. He calls this the ‘trap for the dissenter.’ A British study found that in 75% of matters involving whistleblowers, the wrongdoer was senior to the whistleblower. One Tel’s board of directors were largely to blame for the demise of the telecommunications giant. It was Enron’s CEO, CFO and President who perpetuated a culture of corporate wrongdoing which culminated in its fall. The director and chief executive of HIH Insurance were pronounced guilty of fraud and reckless management, causing the company’s collapse with losses of over $800 million.
Directors have an inescapable duty to act in the best interests of the company, which is inextricably linked to the obligation to maximise shareholder returns. The CFO of Enron chose to ignore major concerns of the whistleblower in order to maintain inflated profits. This illustrates the tension between profit maximising goals and protecting whistleblowers. In the case of the corporation, it is foreseeable that the whistleblower will lose out in lieu of the management’s obligation to the corporation. Additionally, in many large corporations, directors and employees receive performance-based remuneration. This gives employees an even more compelling reason to deny whistleblowers adequate protections if it comes at the expense of further profit growth. For this reason, companies are unlikely to afford whistleblowers the adequate protection they require.
In light of these considerations, an independent body such as ASIC may be best placed to investigate disclosures and protect whistleblowers. Such external bodies are not subject to the prejudices of internal management and are not obliged to pursue company objectives. Investigation by an impartial body such as ASIC ensures that corporations are held accountable, whilst whistleblower protection remains a priority. Many of the issues with internal procedures outlined above, such as employee reprisals and failure to address concerns would be mitigated by disclosure to an independent body. Internal whistleblowing is a crucial mechanism to keeping corporations accountable and socially responsible. More needs to be done to protect these individuals that often find themselves in situations of great vulnerability.