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Managing reputational risk from whistleblowing.

Managing reputational risk from whistleblowing.

The wrong response to a disclosure of actual or potential wrongdoing within an organisation can affect its performance, share price, reputation and even its ultimate survival.

Dealing effectively with a whistleblowing complaint at board level can be critical to protecting organisations from potentially significant reputational, commercial and financial risks, says Salans employment law partner Ryan Carthew.

The recent Employment Tribunal case involving the former Chief Executive of Olympus, Mr Michael Woodford, is a good illustration of the importance of ensuring that businesses are aware of their obligations and potential liabilities under whistleblowing legislation. A failure to establish and implement effective procedures for dealing with disclosures of actual or potential wrongdoing can lead to significant commercial and legal consequences.

Mr Woodford was a long-serving senior executive at Olympus who rose to become the first foreign-born Chief Executive Officer of Olympus, or indeed any Nikkei-listed company, in April 2011. Unfortunately, his reign was very short-lived.

A few weeks after he took up his post, Mr Woodford submitted a report raising concerns about irregular transactions by the former management regime at Olympus. After he was initially ignored by the board, which included members of the former management team, he responded by writing to each board member and the Olympus auditors, formally questioning the transactions and requiring explanations. After the board again refused to investigate the matter, he commissioned a report from an independent auditor. The independent auditor concluded that that the payments needed to be investigated.

Mr Woodford wrote to the chairman and advised that he believed that he and another member of the board needed to resign. The board responded by dismissing him, immediately blocking all of his credit cards and locking him out of his company apartment.

The international financial press aggressively covered the story, and two weeks later the chairman was forced to resign. The Olympus share price collapsed. By February 2012, the chairman and a number of board members had been arrested for their part in the scandal. Mr Woodford took his claim to the Employment Tribunal in the United Kingdom. Olympus settled the matter immediately before the hearing began, in return for a reported payment in the region of £10 million.

Arguably, Olympus was in trouble no matter how they responded to Mr Woodford’s disclosures. However, it is clear that their response in refusing to investigate the matter and attacking the messenger did them immensely more harm than the alleged wrongdoing. Leaving aside the substantial cost of the settlement, their failure to effectively deal with the matter caused them significant commercial damage and they are still faced with a significant task in repairing their reputation with shareholders.

The whistleblowing legislation

The Public Interest Disclosure Act was born following a string of corporate scandals in the late ‘80s and early ‘90s. The fallout from egregious examples of corporate wrongdoing which led to the collapses of BCCI, companies controlled by Robert Maxwell, and Barings, led to an investigation and report by the Committee for Standards in Public Life, which concluded that there was inadequate statutory protection for staff who may wish to speak out about malpractice and wrongdoing. This eventually led to the passing of the Act, which – after a slow start – has become one of the fastest-growing sources of employment litigation.

The scandals which led to the passing of the Act involved serious and/or criminal wrongdoing. However, the protections provided under the Act apply to circumstances which are far broader than this. In addition to the reporting of criminal offences, the Act provides protection for the reporting of circumstances involving miscarriages of justice, dangers to health and safety, damage to the environment, any breach of a legal obligation, and any conduct concealing such activities. Protection is even afforded to the reporting of conduct which is anticipated but has not yet occurred.

The Act therefore covers a very wide range of circumstances, from criminal conduct to a situation as innocuous as the breach of a contractual duty, including a breach of an employee’s own contract.

As the potential liability consequences are the same irrespective of the seriousness of the reported wrongdoing, employers need to be very sensitive to the circumstances which may be covered by the Act.

Truth and motivation

Another important element of the Act is the fact that if an employee is mistaken, it does not absolve employers of responsibility under the Act. All that needs to be established by an employee is that, in making the disclosure, the employee reasonably believes the situation to be true. Whistleblowers are even protected if they are not only mistaken about the fact, but mistaken about the law.

As long as the employee discloses some detail about the alleged wrongdoing and can show that their disclosure is in good faith (due to genuine concern about the issue and not due to an ulterior motive such as malice), they will be protected by the Act.

Despite the name of the Act, an employee does not need to show that the disclosure is necessary in the public interest.

The form of disclosure

Importantly, a disclosure can be written, verbal or by any other form of communication. Therefore, a verbal report to a Board or during a management meeting can potentially be a protected disclosure.

A whistleblower may make the disclosure to “the employer”, which is generally accepted to be a line manager or a more senior person in the employer’s business. The Act also provides for disclosure to an internal or external “responsible person”, being a person appointed by the employer to deal with whistleblowing disclosures. Particular categories of wrongdoing may also be reported to specified external organisations. For example, specified categories of wrongdoing in the financial services industry can be reported to the Financial Services Authority.

Involving the board

This leads to the question of when the board should become involved with a potential whistleblowing complaint.

The common perception is that the board should become involved when there is a complaint by a senior executive or a report of serious or criminal wrongdoing. Although these are certainly matters which should be reviewed by the board, restricting the board’s involvement to such circumstances is simplistic. This has been clearly illustrated by the circumstances leading to the Leveson Inquiry. One executive memorably described the alleged phone hacking activity as being akin to a “parking ticket violation”. Nonetheless, the damage to the businesses involved with this scandal has turned out to be overwhelming.

Employers should ask two questions when considering whether a disclosure requires board-level attention:

Is the disclosure a serious and potentially credible complaint from, or about, the senior management or executive team?

Does the nature of the disclosures, or what may arise from them, potentially have a significant impact on the commercial position and/or the reputation of the business?

If the answer to either or both of these questions is ‘yes’, the disclosure should be referred for consideration at board level.

There will obviously be circumstances where there is a conflict of interest. It is not good corporate governance for a board member to investigate a complaint where he or she is the subject of the allegations, or is materially involved. In this situation, employers should be prepared to involve external investigators.

Outcomes

As far as possible, employers should promote transparency when investigating whistleblowing disclosures. The conduct and outcome of the investigation should be clearly communicated to all stakeholders and everybody should be clear on what is expected during the process and after it is completed.

In formulating conclusions and recommendations following consideration of whistleblowing complaints, employers should not only address the merits of the disclosure, but also take steps to address the potential fallout from the complaint being raised in the first place.

Finally, always consider seeking professional guidance and advice. This is an area of employment law where some careful planning and risk management can significantly reduce the commercial and legal risks for employers. The potential liabilities and reputational consequences drive home the importance of managing these risks from the outset.

Ryan Carthew specialises in all areas of employment law, advising clients on complex employment litigation in the High Court and in the Employment Tribunal. His clients include publicly listed US and UK based multinationals across a broad range of sectors, including financial services, information technology, media, manufacturing and mining.

Posted by Joëlle Warren on


Joëlle Warren

Joëlle Warren

Founding Director

Joëlle is Founding Director of Warren Partners and leads chair and non-executive director searches in addition to delivering Systemic Board Review services.