Whistleblowing and the ongoing compliance debate keep the media and the wider press busy and readers alert. And yet these days, executives of reputed global companies are finding themselves imprisoned for fraud and other compliance violations like never before. Enormous fines and even jail penalties were recently imposed upon global players inside and outside the U.S. and hardly a day goes by without new details being reported. Solid facts about who knew what and gave orders to whom remain nevertheless in a grey zone or even completely unknown. Besides the question of who should be fined or sentenced by public prosecutors, one could ask whether some or all scandals could have been avoided by whistleblowers.
What if employees or line managers had disclosed and reported the ongoing scandals early on — either internally, using whistleblowing hotlines or other compliance schemes, or even, in extreme cases, going public by filing criminal charges with the prosecutor? Had top management or the board been alerted and duly informed early on, could the drastic consequences now imposed by U.S. courts and federal agencies against these executives have been avoided altogether?
Well, only recently did the German Corporate Governance Code (the “Code”/DCGK) amend its Sec. 4.1.3 (3rd sentence) that “employees shall be given the opportunity to report, in a protected manner, suspected breaches of the law within the company” and “third parties should … be given this opportunity.” The Code’s objective is to make the German Corporate Governance system transparent and understandable. Its aim is to promote confidence in the management and supervision of German listed corporations for international and national investors, customers, employees, and the general public. Should a German listed company fail to establish a whistleblowing system for its employees, it is obliged to disclose and to explain this in its annual Declaration of Conformity, according to Section 161 of the German Stock Corporation Act (AktG). As a consequence, sizeable companies with risk exposure, in particular those listed on the stock exchange, use “best practices” and have whistleblowing and other compliance schemes in place.
So why does it seem lately to have gone so wrong in so many case? Did the whistleblowing schemes fail? And if so, why?
In Germany, at least, to find an answer, one must understand that whistleblowing systems still may impact negatively on the Betriebsklima or “working atmosphere” on the shop floor. Employees may associate them with a culture of mistrust and an instrument potentially leading to the denunciation of co-workers — which, in light of Germany`s history, is not to be underestimated. Experience has also shown that compliance schemes are open to abuse. Even if the schemes provide for complete anonymity or guarantee full confidentiality, there is much at stake for whistleblowers in Germany. Because there are no specific whistleblowing laws in Germany, all cases must be dealt with under the existing general rules and regulations on terminations. Employees act under broad trust and loyalty obligations, as stipulated in the German Civil Code, to protect their employers from damages and to inform them about any damaging circumstances should they have knowledge of it. Should the employee make wrong allegations or even correct allegations but in a wrong form, the courts evaluate each individual case to ascertain whether the employer must continue to employ the whistleblower. German labor law permits terminations of whistleblowers, so the individual whistleblower always acts in a zone of legal uncertainty.
The risks at stake and the legal uncertainty for whistleblowers could be reasons why, in recent cases, “crown witnesses” have waited until the very last stage to disclose suspected misbehavior or even criminal wrongdoing by their company. While under harsh investigation themselves and faced with serious imprisonment sanctions, it is often a final attempt to negotiate a “better deal” for themselves.
As a concluding observation, insisting on institutionalized compliance organizations and calling upon legislators to introduce more levels of mandatory compliance supervision at the board level will not alone preclude having scandals like the ones we are facing today. Business leaders must practice and demonstrate a new quality of moral and work ethic from top to bottom. They must introduce and ensure transparent reporting lines within their company hierarchies to enable decision makers at all levels (including their own boards) to obtain relevant information in due course and time. Above all, they must provide for a climate of trust. They must actively use the established compliance schemes, support and backup appointed compliance officers, and enforce internal and open communication within their organizations.