In recent years we have all been shocked by disasters and scandals that have claimed hundreds of lives and cast a shadow over countless others. The public inquiries, which were established to uncover the facts behind these catastrophes, have shown time and again that they could and should have been prevented.

People who worked there had known about the dangers before any damage was done, but had been too scared to sound the alarm, spoken to the wrong people, or raised the concern, only to be ignored.

Workers on the Piper Alpha oil rig knew of the dangers that eventually led to the explosion, but did not want to put their jobs at risk by making a fuss. The collapse of the BCCI and Barlow Clowes banks and the Maxwell pension scandal, were all made possible by autocratic regimes where employees had little option but to mind their own business.

Quite apart from the tragic loss of innocent lives and livelihoods, all these incidents severely harmed the businesses, directors, employees and shareholders.


Employees' dilemmas

According to Public Concern at Work, such disasters occur because, while employees are usually the first to know of such wrongdoing, many will feel they stand to lose the most by speaking up. Those who suspect that something may be going seriously wrong in the workplace face an acute dilemma. They can stay silent and look the other way, they can raise the matter with the employer, or they can take their concerns outside the organisation.

The fear of being labelled a troublemaker, of appearing disloyal to colleagues, and the fear of being required to provide irrefutable evidence are powerful disincentives to speaking up. The result of this communication breakdown is that the employer loses a valuable opportunity to avert what might become a damaging crisis or to reassure the employee his concerns are unfounded.

While employers increasingly recognise that it is in the organisation's interest to encourage staff to raise concerns, many still have provisions and procedures, which actually compound the problem. This is because rules designed to deal with the disaffected and disloyal will never reassure the rest of the workforce that it is safe to raise a concern about wrongdoing.

The inclusion of all-embracing confidentiality clauses in contracts sends a strong message that staff should keep quiet, both in and outside the workplace.

Rigid line management, without a whistleblowing system, risks giving middle management a monopolistic control over the information that reaches those in charge.

Properly understood and applied, a whistleblowing policy can help companies break the cycle of silence and inaction and so protect its reputation. It enables employers to find out when something is going wrong in time to take the necessary corrective action.


Regulatory requirements

For these reasons and more, the Public Interest Disclosure Act 1998, which came into force on July 2 1999, requires employers to implement a clear framework to promote responsible whistleblowing by:

  • reassuring workers that silence is not the only safe option
  • providing strong protection for workers who raise concerns internally
  • reinforcing and protecting the right to report concerns to key regulators, and
  • protecting more public disclosures provided that there is a valid reason for going wider and that the particular disclosure is a reasonable one.

    Likewise, the Stock Exchange Rules now require the boards of quoted companies to maintain “a sound system of internal controls” to safeguard their shareholders' investment and the company's assets. Directors of public companies must review this system at least once a year and confirm that they have done so in the Annual Report to Shareholders.

    Statutory agencies from the Financial Services Authority to the Health & Safety Executive are paying increasing attention to whether or not organisations have effective whistleblowing policies in place. Used by staff and management these can help protect senior directors and officers from personal liability. After the Barings collapse, when the bank's group risk manager was banned for five years, the regulator stressed that the risk manager had failed to blow the whistle either loudly or clearly.


    Whose ownership?

    Evidence shows that a sound whistleblowing policy will protect:

  • the company and its shareholders against direct financial loss (arising from, say, fraud), and indirectly in terms of its industry reputation
  • employees
  • other firms within the company's sector
  • the general public.

    At a time when companies want to be seen to demonstrate corporate responsibility, the establishment of a whistleblowing procedure is a very clear signal. Policies of such central and wide-ranging impact are best co-ordinated and managed from the very top of an organisation. Some may consider that as the guardians of ethical conduct, ultimate control should rest at the chairman's office, with the non-executive directors playing their part.

    Such a central policy must be backed up by strong support and tangible action from specialist departments.

    In a large plc, these may include the human resources department for areas relating to employee welfare, such as the establishment of an internal or external confidential hotline for employees to use if they have concerns, or the re-evaluation of confidentiality clauses within standard employment contracts.

    The internal audit department may review its fraud control and security procedures so that there is formal provision for employees to raise concerns confidentially at every stage in the process.

    And the risk management department may have a co-ordination and reporting role to ensure senior management is kept abreast of the issues.

    Smaller companies without specialist departments could have a policy whereby they ask employees to keep their eyes open as a key way to promote, display and ensure good practice. Successful involvement of employees should give a clear message to those who are tempted that they will not get away with it.


    Action plan

    A whistleblowing policy ought not to be seen as merely a means of complying with yet another piece of employment legislation. If it is to help a company create an environment where staff understand their responsibilities and management demonstrate their accountability, it will not be enough to introduce a good policy only to file it away.

    Action must be taken and the policy actively implemented. It is important to ensure that workers are left in no doubt about the avenues open to them.

    In order to apply best commercial practices, the Public Interest Disclosure Act should be made to work to a company's advantage. The preparation of a whistleblowing policy could include the action plan below.

  • Prepare a system to make it clear to management and employees alike that it is both safe and acceptable for workers to raise concerns about wrongdoing.
  • Review procedures and rules on reporting concerns to prescribed regulators. If employees reasonably believe they will be victimised if they go to a key regulator, protection for a wider public disclosure is triggered.
  • Respond where concerns are raised by workers, (and be able to demonstrate a response) to the message. Do not shoot the messenger.
  • Where a protected disclosure has been made, take all reasonable steps to try to ensure that no colleague, manager or other person under your control victimises the whistleblower.
  • Check the confidentiality clauses in contracts of employment.
  • Evaluate your business structure and decide upon a senior person in the organisation to whom confidential disclosures can be made. This person must have the authority and determination to act if concerns are not raised with – or properly dealt with by – immediate line management.
  • Ensure managers understand how to act if a concern is raised.
  • Consider whether you need to make use of an external confidential helpline or whether you require use one of an external whistleblowing service provider.

    But what happens if – despite your best efforts – things go wrong? The plethora of insurance policies available on the market to protect companies against alleged failures in their systems of corporate governance go some way to providing a safety net.

    Two types of cover are especially relevant where whistleblowing systems break down; employment practice liability and crime insurance policies.


    Employment liability

    Where an employee is victimised for blowing the whistle, whether dismissed or not, the employee can bring a claim to an industrial tribunal for compensation.

    There is no maximum award, so that people who lose their jobs in breach of the Act will be fully compensated for all their losses. Awards for victimisation short of dismissal are also uncapped and are based upon what is just and equitable in all the circumstances.

    The willingness of UK employees to take grievances to industrial tribunals would seem to be on the increase. In 1998/9, unfair dismissal cases alone rose 14% on the previous year to 92,000. And at least one case has already been brought to an Industrial Tribunal under the Public Interest Disclosure Act.

    Specialist employment practice liability policies available in today's market will provide indemnity to the company and its personnel, covering defence costs incurred as well as damages awards if the company is found liable.

    Limits of liability offered vary from insurer to insurer, but it would not be uncommon to see an annual indemnity limit of £15m offered to a large plc.


    Crime insurance

    Cracks in a company's whistleblowing system can lead to fraudulent activities on the part of its employees going unnoticed for longer than necessary, and despite companies' efforts to minimise the potential for fraud within their business, loss statistics continue to rise. It is therefore desirable to complement a risk management strategy with adequate insurance.

    Crime insurance policies tend to concentrate first and foremost on losses to the company arising out of employee dishonesty. Who knows the business and controls the procedures better than a trusted insider? In turn, who knows better than anyone how to circumvent management controls carefully introduced by the company to avoid employee fraud?

    While employees produce the most sophisticated and costly type of fraud, the business is also exposed to outside criminals. Deficiencies in a whistleblowing policy can encourage such outside fraudsters to infiltrate a company. They may undertake vendor fraud, credit card fraud, cheque forgery, counterfeiting or third party computer or funds transfer fraud, working independently or in collusion with employees.

    Many crime policies now cover losses to the company caused by such external forces and can form part of a risk management programme.

    While it is outside the remit of this article, fraud perpetrated outside of the organisation is on the increase particularly with the growing reliance on ecommerce. The more comprehensive crime policies make allowance for this.

    A positive whistleblowing culture is a critical element in the success of any risk management system. Coupled with high-grade insurance cover, it can avert considerable cost to any company and to industry as a whole.

    For unscrupulous competitors and fly-by-night operators, whistleblowing poses a real threat. For responsible firms, it is an opportunity to refocus on the core business and to help ensure that everyone in the company understands their role in it.