[author: Nelson Pratt]

About this time last year, research from George Washington University and University of Utah found a clear association between strong internal hotline reporting systems and improved business performance. Now, new findings by the same researchers show that companies with high report volume also are the victims of less negative news coverage.

More reports/reporting is a sign of internal trust and transparency which in turn contributes to overall productivity.

Both sets of findings, based in part on anonymized report data supplied by NAVEX Global, provide hard evidence for how vital active internal reporting systems are for an organization. More reports/reporting is a sign of internal trust and transparency which in turn contributes to overall productivity. These findings should also make business leaders rethink conventional wisdom that more hotline reporting is a sign of a troubled corporate culture. Mounting evidence, such as this research, shows that the reverse is true.

Increased Internal Whistleblower Hotline Usage Correlates with Better Business Outcomes

Last year's research, led by George Washington’s Prof. Kyle Welch, found that increased hotline use correlates with three things:

1. Greater profitability and workforce productivity as measured by Return on Assets (ROA)
2. Fewer material lawsuits brought against the company overall, and lower settlement costs if a lawsuit does occur
3. Fewer external whistleblower reports to regulatory agencies and other authorities

In the research’s second phase, which will be presented at the 2019 Ethics & Compliance Virtual Conference, analysis focused on the relationship between hotline reporting and public perception, notably news reports. Similar to perceptions about business performance, compliance professionals have long argued that strong hotline use would actually help brand reputation. Now we have quantifiable proof this is true.

It shows that organizations actively using hotlines received, on average, 46% fewer negative news stories than businesses with low or infrequent internal reporting.

Previous whistleblower research was typically based on externally reported events that made it into the media or courtroom. This study is different because it is focused on happenings inside firms, before events went public. It shows that organizations actively using hotlines received, on average, 46% fewer negative news stories than businesses with low or infrequent internal reporting.

Negative news has reputational implications which can have immediate impact on stock price and long-term effects on the bottom line. There are weekly examples of this in the pages of the Wall Street Journal and Financial Times. One of the most prominent in recent memory is the scandal surrounding ride-sharing giant Uber. While a little time has passed since Uber’s bad behavior was in the headlines, the company’s reputation may always be at risk.

But How Do We Know?

Understanding how a spate of bad press can trip up a company, researchers used financial and business news publication data from Dow Jones newswires, MarketWatch, The Wall Street Journal, and Barron’s dating back to January 2000 provided by RavenPack, a big data analytics provider, to find a “composite sentiment score.” RavenPack assesses the tone of an article, positive or negative, through text algorithms across five criteria. Quantitative traders use this database, and the validity of its algorithms have been validated and improved over the years.

When RavenPack scores were compared to hotline reporting data, it was found that firms in the bottom 20% of use, as measured by reports per employee, were approximately 1.55 times more likely to be subject of negative news stories than those in the top 20%. This, like the 2018 findings, might seem counterintuitive. Shouldn’t an organization with more whistleblower reports be the subject of more bad press? No, that thinking rested on a faulty assumption: Fewer reports don’t mean fewer actual problems. Research shows that the number of hotline reports an organization receives isn’t a measure of its problems but a sign of its success at creating a speak-up culture. Active internal reporting allows an organization to address internal issues that are important to employees (the individuals making the reports) before they make their way to regulators or the news media.

The ROI of Culture & Compliance Is not an Article of Faith

Beyond reputational issues, the new findings advance those from a year earlier, providing more concrete numbers regarding hotline use and federal and state regulatory fines. Even a modest increase in internal reporting activity could result in up to $8 million in savings.

These finding are the first (and for the most part only) empirical, independent evidence that quantifies the impact of investing in compliance. Simply put, active internal reporting can keep a firm out of the courtroom and out of the headlines.

Lead researcher for this study, Professor Kyle Welch of George Washington University will discuss all of this and more during his NAVEX Global Ethics and Compliance Virtual Conference session later this month. You can register for the ECVC conference here.

View original article at Ethics & Compliance MattersTM