Purposes Served by Ethics Reporting Mechanisms
The key purpose served by effective confidential employee reporting structures is, by and large, the same as the key purpose of good governance in general:
In addition to Sarbanes-Oxley, there are a number of laws that stipulate requirements for hotlines.
The American Recovery and Reinvestment Act of 2009 (“ARRA”) requires recipients of funds to have a comprehensive compliance program in place; an effective hotline to detect mismanagement, unlawful activity, and waste of funds is de rigueur.
The Federal Sentencing Guidelines (that apply not only to public companies, but to a wide range of companies) were updated in 2004 and explicitly define seven minimally required elements of an “effective compliance and ethics program.” An anonymous reporting mechanism is among the required elements.
The U.S. Department of Health and Human Services’ Office of the Inspector General has a specific rule in place in its Compliance Program Guidance for Hospitals which requires seven elements including, “The maintenance of a process, such as a hotline, to receive complaints, and the adoption of procedures to protect the anonymity of complainants and to protect whistleblowers from retaliation”
Federal Acquisition Regulation – FAR’s reach was expanded with the recent inclusion of a mandatory disclosure rule. In order to be able to comply with the requirement to disclose evidence of violations, an effective mechanism for employees and partners to report (anonymously and confidentially if they choose) the violations, and a disciplined program for investigating and stopping the violations, is de rigueur.
New York Stock Exchange and other exchange listing rules also include a hotline-type requirement. Rule 10A-3(b) (3) (ii) under the NYSE Corporate Governance Rules particularly spells out what each audit committee must ensure.
In addition to these laws, organizations must understand the risks that go along with their opportunities and take appropriate steps to mitigate and manage risk.
All sorts of elaborate enterprise risk management (ERM) initiatives are being proposed by consultants in the wake of the great economic collapse of 2008-2009. Whatever form these initiatives take, organizations are wise to systematically identify their risks and assign accountability to specific individuals for tracking and managing each risk. While a top-down, historically based approach to risk identification is well and good, case reports from the ethics database will also inform the process.
There are a number of other purposes served by ethics reporting mechanisms. More often than not, problems get harder to fix the longer they are allowed to fester. With well executed ethics reporting programs, issues are surfaced early, allowing management to address them immediately. We do know the outcomes of issues that were not surfaced and therefore not addressed: lawsuits, even class action lawsuits, penalties and fines, huge organizational distractions, stock price drops, and even irreparable reputation damage.
Some public companies choose to have the ethics hotline serve also as the method to allow any interested parties to communicate with the non-management directors, which is a stock exchange provision. Companies which combine the two like the fact that only one set of contact instructions has to be kept updated from year to year, and the focus on issues entered into the ethics database get regular focus and are tracked. The better ethics hotline services can set up alerts such that an interested party case is sent to a specific member or members of the board of directors.
Last but certainly not least, a great purpose for the ethics reporting hotline is the surfacing of valuable information for running operations more effectively. Often, information communicated anonymously is information that can’t be gleaned any other way.
Edited and reprinted from Corporate Legal Compliance Handbook, Theodore L. Banks and Frederick Z. Banks, Editors. © 2009 Aspen Publishers. All rights reserved. Reprinted with permission.
