J Manag Gov DOI 10.1007/s10997-015-9311-7
Whistle-blowing regulation in different corporate governance systems: an analysis of the regulation approaches from the view of path dependence theory Esther Pittroff
Ó Springer Science+Business Media New York 2015
Abstract The research question of this paper is, if and why countries need different legal approaches to whistle-blowing regulation. The paper specifically explores whether regulation approaches from other countries are suitable to regulate whistle-blowing in the German corporate governance system. First, it is clarified which factors influence the choice of the desired action—that is, ‘‘internal whistleblowing’’—and it is demonstrated that the underlying corporate governance system has a potential influence on these factors. Next, it is shown that the consistency of systems is responsible for the lack of success of some legal approaches of the whistle-blowing regulation in special corporate governance systems, whereas in other systems they can be very successful. Finally, the paper presents the requirements for whistle-blowing regulation that does not damage the consistency of the underlying corporate governance system. The findings support path dependence theory, which claims that legal approaches of one country cannot be transferred to other countries. Moreover, whistle-blowing literature is expanded by the fact that the underlying corporate governance system of a country influences the power and loyalty of the employee. It suggests new avenues for whistle-blowing research as well as for the potential convergence of corporate governance regulation. The findings offer insights for policy makers interested in the development of legal proposals for whistle-blowing regulation in their countries. Moreover, it provides a new perspective to enable managers of multinational firms to design whistleblowing systems within different corporate governance systems. Keywords Whistle-blowing Corporate governance system Path dependence theory Exit Voice Consistency
E. Pittroff (&) Institute of Accounting, Finance and Taxation, University of Leipzig, Grimmaische Str. 12, 04109 Leipzig, Germany e-mail:
[email protected]
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1 Introduction Whilst German regulators are debating the necessity and the design of statutory protection of whistle-blowers, the importance of the implementation of whistleblower regulation has already been discussed by the Group of Twenty (G 20), who determined that every member state must implement whistle-blower protection by the end of 2012. Germany has failed to fulfil this requirement. Moreover, the EU is willing to allow its member states to introduce financial rewards for whistleblowers.1 Other countries have made greater progress than Germany. For example, the USA and the UK have had whistle-blower protection rights for many years. Consequently, the German legislative proposals are often compared with both of these countries’ approaches (Wrase and Fabritius 2011; Fleischer and Schmolke 2012; Groneberg 2011). In particular the success of financial rewards in the USA has led to the consideration to implement this approach in Germany (Fleischer and Schmolke 2012). When using such a comparison, one has to consider that legal systems develop differently depending on their environment (Bebchuk and Roe 1999). According to path dependence theory, systems in diverse environments may be designed differently, but they are nevertheless efficient within their historical and cultural background. In other words, these systems are optimally adapted. Particularly sensitive subjects, like the protection of whistle-blowing, require a closer examination of cultural background. This necessity is emphasised by empirical results concerning the relationship between the cultural background and the occurrence of whistle-blowing (Kaptein 2011; Trongmateerut and Sweeney 2013; Zhuang et al. 2005). Whistle-blowing regulation, therefore, has to be embedded in the underlying framework. Moreover, any comparison of the approaches has to take into consideration the underlying corporate governance systems. If an element from corporate governance system A is transferred to corporate governance system B, system B might become inefficient because the element does not fit with the other elements (Schmidt and Spindler 2002). Accordingly, one has to be careful with the adoption of whistle-blowing regulation approaches of other corporate governance systems. The aim of this paper is to analyze the different approaches of whistle-blowing regulation from the perspective of different corporate governance systems. The results are used to present the requirements for whistle-blowing regulation that does not damage the consistency of the underlying corporate governance system. The findings expand whistle-blowing literature by connecting it with the development of corporate governance systems. It suggests new avenues of research for the whistleblowing literature because many whistle-blowing studies have been developed in a special corporate governance system and their findings cannot be transferred to other corporate governance systems. In the end, the findings are important for policy makers and managers as well because they are useful for developing legal proposals
1
See http://ec.europa.eu/internal_market/securities/abuse/index_en.htm.
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for whistle-blowing regulation in different corporate–governance systems as well as to design whistle-blowing systems in multinational firms. The paper begins with a classification of whistle-blowing into the options for action of employees and explains the related influence factors. The following section introduces path dependence theory and explains the importance of consistency for achieving an efficient system. After that, the characteristics of the different corporate governance typologies are illustrated and it is explained which options for action are efficient in the different systems. The following section presents the international regulation approaches and analyses whether they promote the desired option for action in the different corporate governance systems. In the next section, these results are used to explain how whistle-blowing might be promoted while the consistency of the corporate governance system is maintained. The paper closes with a conclusion.
2 Whistle-blowing as an option of action of employees In a case of perceived misconduct, whistle-blowing is one of the possible options that an employee can choose. Whistle-blowing is defined as ‘‘the disclosure by organization members (former or current) of illegal, immoral or illegitimate practices under the control of their employers, to persons or organizations that may be able to effect action’’ (Near and Miceli 1985, p. 4). The occurrence of whistleblowing depends on several circumstances. For the aim of this paper it is necessary to analyze the factors influencing the decision to blow a whistle or not. The assessment of regulation approaches of whistle-blowing in different corporate governance systems requires an analyses of the suitability of the approach to influence these factors in such a way that the desired option for action is motivated. For this reason it is first necessary to examine the possible options for action in the case of perceived misconduct and the circumstances of the occurrence of these options. In accordance with Oliver E. Williamson’s market mechanism, the only possible option in any situation involving an irregularity is the exit option (Williamson 1985). It is based on the assumption that any irregularity increases the price of membership within the organization. Therefore, the employees leave the organization and shift to another organization in order to increase their own benefits. Hirschman (1970) investigated another option, the so-called voice option. This can be understood as an act of opposition to the perceived behaviour and can be interpreted as whistle-blowing (Miceli and Near 1992, p. 16; Schmidt 2005, p. 150). Hirschman (1970) examined the influence of loyalty on the choice of the exit or the voice option. A loyal employee has high moral values and benefits from the voice option because it helps to prevent inefficiencies, hence loyalists are more likely to choose the voice option than the exit option.2 The loyalty mentioned here is to be understood as having high moral values toward the society which is connected with the freedom to speak out against wrongdoing (Lindblom 2007, p. 415). It is not 2
See also Dozier and Miceli (1985).
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to be confused with the duty of loyalty to the firm in the sense of an obligation of confidentiality.3 If loyalty is understood as a kind of duty towards the employer, it would prevent the employee from giving any information to someone outside the organization because this might harm the organization, for example through bad reputation or penalty payments (Bok 1988; Lombardi 1988; Lindblom 2007). The employee has to weigh the damage caused by the misconduct against the damage to the organization caused by whistle-blowing. In this regard, employees often perceive a so-called moral dilemma, which can be understood as a trade-off between the moral responsibility to society (further mentioned as having high morals) and the duty of loyalty to the employer (Lindblom 2007; Lombardi 1988). The duty of loyalty specifically excludes external whistle-blowing, which is blowing the whistle to persons or institutions outside the organization, for example the police, the media or a public prosecutor (Miceli and Near 1992, p. 25; Callahan et al. 2002, pp. 178–179). Although the organization benefits in this case from the wrongdoing being stopped, it may suffer from the reputational and financial damage that the external whistle-blower caused (Lobel 2009, p. 440). External whistleblowing, therefore, does not conform with the duty of loyalty to the employer although it is an act of high loyalty in the sense of moral responsibility because external whistle-blowers help to improve the organisation by ending the wrongdoing (Lewis 2011). Internal whistle-blowing, which means the whistle-blower contacts someone inside the organization, would be beneficial because it does not interfere with the duty of confidentiality. The organization has the possibility to stop the wrongdoing before it becomes public. Internal whistle-blowing is the best option if moral responsibility and the duty of loyalty are high.4 If both are low, exit is the favorable action. If moral responsibility is low and the duty of loyalty is high, the employee has no incentive to blow the whistle and would stay silent. One can suggest that the moral dilemma does not actually exist, since the employee may report the mismanagement to internal channels. This behaviour is first very loyal to the employer because the information stays inside the organization. And second, it is an action of high morals insofar as the misconduct is stopped. The problem is that internal whistle-blowing is often ineffective, which means that it does not change anything. For that reason, one has to consider another factor of influence on the options for action. Near and Miceli (1995) as well as So¨llner (2000) state that the power of an employee also influences the options. Exit and voice are only possible if power is high (So¨llner 2000, p. 173). If the employee does not have enough power and is dependent on the organization, the exit option is not possible. Furthermore, internal whistle-blowing would be ineffective, since the employee does not have enough power to end the mismanagement. This situation also arises if upper management is involved in the misconduct (Donkin et al. 2008; Miceli and Near 1985). In this case it is not able to inform someone inside the 3
The duty of loyalty comprises all duties of the employee that have to be considered towards the employer; see Herbert and Oberrath (2005) and Mu¨ller (2002).
4
In order to be the best solution, internal whistle-blowing has to be effective; that means that the wrongdoing is ended. I refer later to the ineffectiveness of internal whistle-blowing as I introduce power as an essential influence factor. In this cases internal whistle-blowing is not a possible option to end the wrongdoing.
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organization. External whistle-blowing would be the only solution if the employee has a high moral attitude (So¨llner 2000, pp. 66–67; Schmidt 2005). Moreover, another option for action may arise: the opportunistic behaviour of the situation (Lambsdorff and Frank 2011; Joshi and Arnold 1997, p. 826; Williamson 1985, p. 62). If morals and duty of loyalty are low the employee may exploit the situation in his favour (Schmidt 2005, p. 157; So¨llner 2000, p. 178). For example, an employee who observes misconduct behaves opportunistically if he also engages in the observed misconduct in order to gain private benefits. An employee with a high moral attitude would try to blow the whistle. But in case of low power he is not able to inform the management and blows the whistle externally. Table 1 shows the possible options for action for employees dependent on the influence factors (1) moral responsibility (morals), (2) duty of loyalty and (3) power: One can state that all options that result from low perceived power are not beneficial for the organization: external whistle-blowing possibly induces a bad reputation or penalty fines, opportunistic behaviour is harmful because the employee exploits the organization and the wrongdoing is not stopped. And finally, if the whistle-blower stays silent the wrongdoing persists (So¨llner 2000, p. 176). This means that a high perceived power of the employee fosters the beneficial option of action. Moreover, a high moral attitude and the duty of loyalty influence the choice of the preferred option ‘‘internal whistle-blowing’’. An organization may actively influence the perceived power and the loyalty of the employee by implementing a whistle-blowing system. Assuming that the organization is really interested in motivating employees to blow the whistle and the system works effectively, it provides a channel for the employees without the fear of retaliation, thus fostering the perceived power of the whistle-blower (Miceli et al. 2008; Skivenes and Trygstad 2010). Appropriate communication about the benefits of the system and the establishment of a code of ethics may increase the moral responsibility of the employees (Pittroff 2011, p. 96; Skivenes and Trygstad 2010). Furthermore, whistle-blowing within the system is not in opposition to the duty of loyalty because the information stays inside the organization. In order to have an effective whistle-blowing system it is not sufficient to implement an anonymous whistle-blowing hotline. Effectiveness depends on several other conditions, for example the implementation of protection rights, communication about the whistle-blowing-process and monitoring of the whistleblowing system. Several best practice guidelines (BSI 2008; Data-Protection-Group Table 1 Options for action Low duty of loyalty Low power
High duty of loyalty High power
Low power
High power
Low morals
Opportunistic behaviour
Exit
Silence
Silence
High morals
External whistle-blowing
Internal/external whistle-blowing
External whistle-blowing
Internal whistle-blowing
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2006; Nitsch et al. 2005) and empirical studies (Brown 2008; Hassink et al. 2007; Lee and Fargher 2013; Vandekerckhove and Lewis 2012) have pointed out how a whistle-blowing system can work effectively. However, in many cases whistle-blowing systems are not implemented effectively, they seem to be only symbolic (Lee and Fargher 2013; Pittroff 2014b). Since these organizations are not really convinced of the benefits of whistleblowing systems potential, whistle-blowers will not use the whistle-blowing system because they fear that nothing will change and that they will nevertheless face retaliation. Thus, most of the benefits are greatly weakened by reservations about the behaviour of a whistle-blower. Whistle-blowers are often seen as traitors or villains (Gobert and Punch 2000; Moberly 2006). Since the parameters of the organization and those of the society essentially influence the perception of whistleblowing, they also have an impact on the implementation of whistle-blowing systems and the options for action of employees (Kaptein 2011; Trongmateerut and Sweeney 2013; Zhuang et al. 2005). For this reason, not all systems work effectively. The establishment of a culture that promotes whistle-blowing is a longterm process because it mainly depends on earlier attitudes and circumstances that may persist for a long time. In other words, the background of a society has a major influence on what is considered to be a legitimate option for action and this is a crucial factor for the success of any regulation approach. For this reason, the following section analyzes the development of different corporate governance systems.
3 Corporate governance and path dependence theory 3.1 Theory of path dependence Path dependence theory is often applied to explain the development of institutions (Chizema and Buck 2006; North 1990; Schmidt and Spindler 2002). According to this theory, the varying development of institutions depends on the social and legal environment (Bebchuk and Roe 1999, p. 168). Initial circumstances and historical accidents lead to differences between institutions (Arthur 1989; Bebchuk and Roe 1999) and from a traditional neoclassical view, these alternatives may be seen as inefficient (Arthur 1989; Beyer 2005, p. 7). Path-dependence theory tries to explain why such inefficient institutions arise and why they persist (Bebchuk and Roe 1999). The most common example of a path dependent development is the QWERTY-keyboard-layout mentioned by David (1985). Initially, the letters on typewriters were arranged in this way for technical reasons but the kind of arrangement persisted even as technical improvements eliminated this reason and new, more efficient alternatives had been developed. The long-term predominance of such inefficient institutions is explained as a path-dependent process that starts with an initial or small event. That means a decision is made due to prior choices or initial conditions and leads unintentionally to a self-reinforcing process (Arthur 1989; Schreyo¨gg and Sydow 2011, p. 323). As a consequence, a dominant alternative is build up and new alternatives face problems to be accepted. Finally,
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this leads to a lock-in effect and the path is created (Arthur 1989; Schreyo¨gg and Sydow 2011, p. 325). Path dependence theory was initially used to explain technological paths, like the QWERTY-keyboard (David 1985). Later on, North (1990) used this theory in order to explain how institutions change. Other authors used this theory (1) for an explanation of the establishment of varieties of capitalism (Hall and Gingerich 2009; Hall and Soskice 2001), (2) for the existence of organizational path dependence (Sydow et al. 2009; Schreyo¨gg and Sydow 2011), (3) in the context of political science (Mahoney 2000; Pierson 2000a, b; Orren 1991), and (4) for the development of corporate governance systems (Bebchuk and Roe 1999; Chizema and Buck 2006; Schmidt and Spindler 2002). An essential explanation of path-dependent development of institutions is the consistency of a system of institutions (Buck and Shahrim 2005; Heine 2003, p. 219; Schmidt and Spindler 2002). In the context of regulation, consistency implies that a system of rules is worth the sum of all the parts of the rules (Heine 2003, p. 219). In a consistent system, all parts of the rules have to be complementary (Heine 2003, p. 219; Schmidt and Spindler 2002). This means that, theoretically, every single rule has to fit with the others in order to be consistent. In other words, the rules mutually support each other in a consistent system (Buck and Shahrim 2005, p. 43). An example are the different corporate governance systems, that will be discussed more in detail in the following section: in a market-controlled system the rules focus on strengthening the rights of the shareholders. In this regard, every single element of the rules supports the others. It would be inconsistent in the market-controlled system to implement a rule that strengthens the rights of other stakeholders even if one may say that this would be efficient from the view of other corporate–governance-systems (Chizema and Buck 2006, p. 490). The change of one element might fail to achieve its goal because of the lack of corresponding changes elsewhere (Buck and Shahrim 2005, p. 43). The whole system could become unstable if the interdependencies of the single elements are not considered. Whistle-blowing regulation, therefore, has to be embedded into the whole corporate governance setting. One cannot pick out whistle-blowing regulation as a single element and select an approach that is considered to be efficient from the view of one corporate governance system. It has to be tested if this alternative fits the system where it is to be implemented. The path dependent development of legislation is strongly connected with the legitimacy of rules (Mahoney 2000; Orren 1991). The legitimacy explanation implies that special laws persist because they are seen as morally right. In order to have a consistent system of rules, every single law has to be viewed as legitimate with regard to the currently prevailing norms and beliefs. Nevertheless, path dependence theory does not imply that a change of institutions is impossible. Institutions are rather in a permanent process of change (North 1990). But there is not only one efficient alternative; development is connected with the coexistence of different efficient alternatives. A change of institutions therefore does not mean that an inefficient system will become an efficient system, but rather that institutions are constantly and gradually changing in order to remain efficient (Beyer 2005, p. 9; Mahoney 2000; Orren 1991). For example, changes of laws are
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not merely possible but rather necessary if the attitudes towards the relevant norms and values change. In order to have a consistent system of rules, every single law has to be viewed as legitimate with regard to the currently prevailing norms and beliefs. This institutional change is especially important if convergence of rules is targeted. Path dependence theory does not imply that convergence is impossible, but rather that it is a long-term process. Only gradual institutional changes are possible and serious changes of rules can lead to inefficiency. Changes of special aspects of corporate governance regulation, such as the regulation of whistle-blowing, can therefore only be achieved if the interdependencies with other parts of regulation are taken into account. Finally, convergence requires a uniform societal framework in order to establish an efficient system (Heine 2003, p. 267). A convergence of whistle-blowing regulation is therefore only possible if the same values and norms are seen as legitimate. The following section shows that the corporate governance systems differ significantly between Germany and the countries with a broad whistle-blowing regulation. 3.2 Typologies of corporate governance systems Corporate governance systems are generally divided into two special extremes.5 There is a wide variety according to the titles of the two extremes in literature.6 In this paper the two systems are designated as the Continental-European system (voice system) and the Anglo-American system (exit system), which refers to the designation used, for example, by Aguilera and Jackson (2003) and La Porta et al. (1998). The titles of the systems should not be confused with a geographical categorization, rather the titles refer to the origin of their legal family. For example, Australia, South Africa and United Kingdom just as much belong to the AngloAmerican system as the United States of America. Moreover, South Korea and Taiwan can be classified into the Continental-European System as well as Germany (La Porta et al. 1998). The two systems differ in several elements (Aguilera and Jackson 2003; Baums and Scott 2005; Garcia-Castro et al. 2008; La Porta et al. 1998). The ContinentalEuropean system is mainly stakeholder-orientated, that means that all interests of persons or institutions connected with the organization have to be protected (Bru¨hl 5
There are some studies that differentiate between three groups because they separate the Japanese system as an extra group due to the special relationship between employee and employer (Aguilera and Jackson 2003; Groenewegen 1997). This distinction is not applied in this paper since most of the studies include the Japanese group in the Continental-European group (Garcia-Castro et al. 2008; Hall and Gingerich 2009; La Porta et al. 1998; Nooteboom 1999; Weimer and Pape 1999).
6
Several studies label these groups differently because they focus on other characteristics. For example, the study of La Porta et al. (1998) defines different legal families: (1) Common-law or English-origin countries, and (2) Civil law countries or Roman-law countries that can be separated into German-origin, French-origin and Scandinavian-origin countries. Weimer and Pape (1999) separate between marketoriented systems (Anglo-Saxon system) and network-oriented systems (German/French/Japanese systems). Hall and Gingerich (2009) separate different economies with regard to their model of coordination and find two extremes (1) liberal market economies and (2) co-ordinated market economies. Finally, these studies result in the same classification of the countries, only the titles of the groups differ.
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2009, p. 84; Garcia-Castro et al. 2008, p. 260). One important example is the codetermination rights of the employees through a works council (Monks and Minow 2008, p. 363). Moreover, there is a high concentration of owners, which leads to a high incentive to monitor the management (Lentfer 2005, pp. 39–43; Garcia-Castro et al. 2008). Continental-European organizations are more financed by bank loans than by the capital market (La Porta et al. 1998). Banks therefore play an important role in monitoring the management (Bru¨hl 2009, p. 85). The Continental-European system is also called an insider-system because the organization is supervised by an internal institution, the supervisory board (La Porta et al. 1998; Garcia-Castro et al. 2008; Velte and Weber 2011, p. 478). In contrast, the Anglo-American system is more shareholder-orientated because the organizations principally pursue the goals of the shareholders (Garcia-Castro et al. 2008; Velte and Weber 2011). The shares are widely spread, so the single investor has no incentive to play an active role in the supervision of the management because free rider problems appear (Bru¨hl 2009, p. 84). Organizations are more financed by capital markets than by banks (La Porta et al. 1998) so the system is market-orientated (von Werder 2004, p. 165). The supervision typically comes from outside the organization. Mismanagement would decrease the prices of shares, which ultimately increases the risk of hostile takeovers and a change of management (Garcia-Castro et al. 2008; Velte and Weber 2011, p. 474). The characterization of the outsider- and the insider-system derives from the kind of supervision. There are different distributions of power between the corporate governance systems (La Porta et al. 1998). The supervisory board in the Continental-European system often ensures, for example, a co-determination of employees (for example § 96 Abs. 1 AktG). The Anglo-American system is supervised by the market, that is, by an external institution. Accordingly, it is possible to classify the corporate governance systems into exit and voice typologies (Groenewegen 1997; Kostant 1999; Nooteboom 1999). Exit systems are characterised by the fact that individuals leave the organization if there is mismanagement (Kostant 1999; Nooteboom 1999). For that reason, the Anglo-American system conforms to this typology. Pursuing the goals of the shareholders implies a focus on the best usage of the capital invested by the shareholders (Rappaport 1999, p. 14). If mismanagement is perceived, the shareholders move to an organization with a better use of the capital invested. Thus, the costs of selling and purchasing shares are relatively low and the capital market is very liquid (Bru¨hl 2009, p. 96; Velte and Weber 2011, p. 475). The exit mentality is also reflected in the job market; that means, exit systems have a higher labour turnover and a lower rate of co-determination than voice systems (Garcia-Castro et al. 2008; Hall and Gingerich 2009; Kostant 1999; Nooteboom 1999). Due to the fluid job-market, employees invest more in general skills that can be taken to other jobs whereas investments into industry-specific skills are relatively weak (Hall and Gingerich 2009, p. 453). However, the exit mentality among employees has its boundaries in tight labour markets. If there are no possibilities to change the organization, the employee finally has low power and would prefer to stay in the company than be unemployed (Morrell et al. 2008).
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In contrast, voice systems are characterised by strong co-determination rights for the employees (Monks and Minow 2008, p. 363; Velte and Weber 2011, p. 478). The employees and the few shareholders have a strong influence on managerial decisions. A change to another organization is more difficult compared to exit systems. Since shareholders often have a high proportion of the shares and therefore high investments it is easier for them to enforce their interests than to try to sell the shares (Aguilera and Jackson 2003). The employees benefit from the codetermination rights because the labour turnover is not as high as that in the exit system. Furthermore, the higher protection from dismissal strengthens long-term commitment to the employer. As mentioned above, the choice of exit and voice options depends partially on the degree of loyalty. This also holds for the corporate governance typologies. The loyalty of the employees and of the shareholders results from the long-term commitment to the organization (Aguilera and Jackson 2003; Bru¨hl 2009, p. 101). The high investments of shareholders and the investments in the human capital, that is the employees, are very specific and cannot easily be changed or shifted to another organization (Hall and Gingerich 2009). This leads to a long-term allocation of the capital invested and strengthens confidence and loyalty. As a result, investors and employees have a high incentive to take part in co-determination in order to assure goal congruency. From the view of labour law, loyalty is understood as a duty of confidentiality7 and is therefore strongly regulated in voice systems. The separation of corporate governance systems into different typologies shows that a consistent system depends on several components (Heine 2003; Schmidt and Spindler 2002). The framework of each corporate governance system influences the perception of the legitimacy of the options for action. The choice to blow the whistle or not, therefore, depends on the underlying corporate governance system. 3.3 The choice of options for action depending on the type of corporate governance system The previous section has shown that different frameworks of prevailing norms and beliefs lead to the development of different corporate governance systems. And it will be shown that the choice of an option for action in cases of mismanagement depends on the underlying corporate governance system. One option may be superior in a voice system but inferior in an exit system. This depends principally on the level of loyalty. As stated above, exit systems are characterised by a low duty of loyalty to the employer. All options for action that depend on a high duty of loyalty are thus less likely (Pittroff 2014a, p. 420). Finally, internal whistle-blowing and silence should be less likely than the exit option, external whistle-blowing or opportunistic behaviour. Empirical results have supported the fact that internal whistle-blowing is less likely in exit systems than in voice systems (Zhuang et al. 2005). It will be shown that internal whistle-blowing is only possible in exit systems in one special situation.
7
An example for the regulation is § 242 BGB (the German Civil Code).
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Since the duty of loyalty is assumed to be low in exit systems, the choice of the option for action depends on the one hand on the perceived power of the employee and on the other hand on the level of moral responsibility towards the employer. If morals are low then whistle-blowing is not likely (Jos et al. 1989; Lindblom 2007; Miceli et al. 2008). Exit and opportunistic behaviour remain as the only possible options. If the low morals situation is combined with high power, then shifting to another organization is easy, and the superior option is to exit. Employees in a low power position are not able to exit, the only way to increase the own benefits is opportunistic behaviour, that means the employee exploits the situation in order to obtain benefits (Joshi and Arnold 1997, p. 826; Williamson 1985, p. 62). For example, an employee who is offered bribery payments would rather take these payments if this is a low power position combined with low morals (Lambsdorff and Frank 2011). A high morals situation ultimately leads to whistle-blowing. With regards to the bribery example, the employee would not take the payments but rather blow the whistle. If high morals is combined with low power then external whistle-blowing is the preferred action. This is supported by studies that examined external whistleblowing being more likely if the whistle-blower has less trust in management (Donkin et al. 2008), when there is less co-worker support (Miceli et al. 2012) and when the threat of retaliation is high (Miceli and Near 1985) because these factors indicate that the whistle-blower perceives to have low power (Near and Miceli 1995). If high morals is combined with high power the employee would be indifferent to the whistle-blowing channel and select the most effective option. For this reason, internal whistle-blowing is only possible if it is perceived to be an effective option. Empirical results support the fact that most of the whistle-blowers raise their concern first inside the organization and if not successful they go outside the organization (Donkin et al. 2008; Miceli and Near 1994). Table 2 shows the options for action in exit systems. Voice systems are characterised by a higher duty of loyalty resulting from the long-term commitment. The options exit and opportunistic behaviour are therefore not superior. Internal and external whistle-blowing as well as silence are, instead, more likely. Nevertheless, the voice system has the inherent danger that a moral dilemma arises if the employee has high morals in addition to a high duty of loyalty. In this case, the superior option for action is internal whistle-blowing. But internal whistle-blowing is less likely if the whistle-blower perceives to have low power, that means his voice would not lead to the termination of the mismanagement. The
Table 2 Options for action in exit systems Low duty of loyalty Low power
High power
Low morals
Opportunistic behaviour
Exit
High morals
External whistle-blowing
Internal/external whistle-blowing
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employee may rather stay silent or blow the whistle externally if moral responsibility outweighs the duty of loyalty (Pittroff 2014a, p. 420). The experience in Germany with whistle-blowers is relatively negative. Whistle-blowers are often called villains or traitors (Mu¨ller 2002). The perceived power of a whistle-blower is therefore relatively low. This does not imply that employees in Germany do not blow the whistle internally. Low power is sometimes only perceived if internal whistle-blowing was unsuccessful or it is connected with retaliation. The employee therefore has to consider other options for action. One can conclude that the risk of harmful external whistle-blowing also exists in Germany. Table 3 shows the options for action in voice systems. The generalization of the options within the corporate governance systems disregards the hierarchical position of the whistle-blower within the organization. The power of the accused wrongdoer is especially important (Near and Miceli 1995). The perceived power is relatively low if the employee has information about fraud in the top management level. Accordingly, it is important to implement institutions that put the employee in a status of high power (Miceli et al. 2008, pp. 150–151). Furthermore, the organization has to perceive internal whistleblowing as a beneficial action of employees in order to signal a credible interest in receiving the information of the employee (Skivenes and Trygstad 2010). Otherwise the perceived power will not change even if a whistle-blowing system is implemented. Some states try to motivate organizations to implement such structures and to change their attitude towards whistle-blowing. These regulation approaches are discussed in the following section.
4 Regulation approaches 4.1 Overview of the different national approaches Whistle-blowing is regulated in many countries. The longest tradition of whistleblowing rules is in the USA, with different approaches to protection rights. One important regulation is the Sarbanes–Oxley Act (SOX) from 2005, which obliges listed organizations to implement whistle-blowing systems and provides protection rights for whistle-blowers. A former regulatory approach, the Organizational Sentencing Guidelines from 1991, tried to motivate organizations to implement whistle-blowing systems by reducing the degree of penalty if a whistle-blowing system was implemented. These guidelines have not been very successful (Dworkin 2007), whereas another
Table 3 Options for action in voice systems
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High duty of loyalty Low power
High power
Low morals
Silence
Silence
High morals
External whistle-blowing
Internal whistle-blowing
Whistle-blowing regulation in different corporate governance systems
approach has more success in motivating employees to blow the whistle. The False Claims Act from 1986 offers financial incentives to potential whistle-blowers. The success of this approach (Dyck et al. 2010) has led to an extension of the incentives from the Dodd-Frank-Act of 2010 (Sec. 21F of the Securities and Exchange Act). The extent of the reward depends on the degree of the penalty and varies between 10 and 30 % thereof. With the Public Interest Disclosure Act (PIDA) of 1998, the United Kingdom established an approach that protects whistle-blowers, dependent on several conditions.8 External whistle-blowers are virtually unprotected if the organization has implemented a whistle-blowing system (Schmidt 2005). Germany has not yet established widespread whistle-blower regulations. Whistleblowing is only protected in special cases, for example in case of a report concerning security risks.9 German legislation concerning whistle-blowing has been greatly shaped by historical events. During the Third Reich the German security service (Gestapo) imposed a ‘‘moral obligation’’ on German citizens to contribute to national security, i.e. to report about ‘‘deviating’’ behaviour, like homosexuality and relationships between Germans and Non-Aryan people. In the end this culture of denunciations led to fear and distrust in Germany (Rauhofer 2007, p. 367). A few years later, the Ministry of security service (Stasi) was founded in the GDR and established structures similar to the Gestapo. The Stasi used a network of ‘‘Inofficial Contributors’’ that had to spy on their neighbours, co-workers and even family members. This network undermined trust and social solidarity among the people (Rauhofer 2007, p. 368). Due to the actions of former regimes, whistle-blowers are still often seen as villains or traitors (Dowling 2008, pp. 12–13; Schmolke 2012, p. 229). This attitude is reflected in the dearth of protection rights for whistle-blowers. However, there are several proposals for legislation that all include disclosure rights and partially include the obligation to implement whistle-blowing systems.10 These proposals aim to fulfil the demands of the G20 that all member states have to establish whistleblower protection rights by the end of 2012. Until now they failed to be implemented because most of the opponents claim that the present jurisdiction offers sufficient protection for whistle-blowers and additional regulation is not necessary (von Busekist and Fahrig 2013; Fro¨hlich and Schelp 2009; Grimm and Windeln 2009). However, whether the whistle-blower is indeed protected depends on the specific case. It is therefore very unclear whether the court will classify a certain case as worthy of protection. Moreover, former court decisions concerning whistle-blowing cases have revealed that the interests of the employer overweigh the interests of the employee (Wisskirchen et al. 2006). This reflects the importance of the duty of loyalty in Germany which goes so far that interests of the society are subordinated (Schmidt 2005, p. 156).
8
See § 8–15 of the PIDA.
9
§ 17 Abs. 2 ArbSchG, see also Schmolke (2012).
10
See the legal proposals for German whistle-blower protection in Bundestag publications 17/8567 and 17/9782.
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The latest reform is the proposal by the European Union that its member states offer financial rewards for information about market abuses.11 The proposal is ostensibly based on the American Dodd-Frank Act, which extended financial rewards in the USA. It is apparent that whistle-blowing is more regulated in exit systems as compared to voice systems. The great importance of the duty of loyalty in voice systems especially contradicts all approaches that would motivate external whistle-blowing, such as the protection of dismissal for external whistle-blowers or the financial incentives for external whistle-blowing. Historical events shaped this attitude of loyalty towards the employer. In order to be consistent with the underlying framework in voice systems, whistle-blowing regulation should foster internal and prevent external whistle-blowing. However, as mentioned above, internal whistleblowing is often not effective and external whistle-blowing should be a possible option for the employee in order to end the misconduct. Protecting and motivating external whistle-blowing seems therefore necessary in order to prevent damages to the society but it is ostensibly only consistent with corporate governance systems that rest on a lower duty of loyalty towards the employer, such as exit systems. Motivating employees to take the desired action in different corporate governance systems requires an analysis of the different kinds of regulation approaches with regard to their incentives in voice and exit systems. The following sections analyse the different approaches. These results will be used to evaluate a whistle-blowing regulation that is consistent with the underlying corporate governance system. 4.2 Analysis of the approaches against the background of the different corporate governance systems 4.2.1 Protection against dismissal The special approaches to regulate whistle-blowing contain different incentives in order to reveal mismanagement without disadvantages for the whistle-blower (Schmidt 2005). Most of them are anti-retaliation laws that protect the whistleblower against dismissal. This approach signals to the whistle-blower that the information is desired and strengthens the perceived power of the whistle-blower (Miceli et al. 2008, p. 151). Moreover, the protection rights decrease the costs for the whistle-blower that are connected with the information and the possible dismissal. The cost-benefit-relationship is therefore changed so that employees with low morals will possibly decide to blow the whistle. However, exit systems generally are assumed to have a lower duty of loyalty and a more fluid job market. The costs for employees to change the organization are therefore not as high as in voice systems. For this reason, the protection against dismissal is less effective in exit systems than in voice systems. Empirical results show that protection against dismissal is not very successful in motivating employees to blow the whistle in an exit system like that of the USA (Dworkin and 11 See § 36 of the proposal for the regulation against market abuse, to be downloaded at: http://db. eurocrim.org/db/en/doc/1961.pdf.
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Near 1997; Miceli et al. 2008, p. 151). In addition, the relevant anti-retaliation laws in the USA are insufficient, since first they protect employees only in special cases and second, they have not promoted internal whistle-blowing but rather encouraged employees to blow the whistle externally (Lobel 2009; Moberly 2006, pp. 1126–1127). Apart from SOX, most of the laws at federal level only protect external whistle-blowing (Lobel 2009, p. 444) because the protection of internal whistle-blowing interferes with the managerial prerogative of the employer (Lobel 2009, p. 446). As a consequence, protecting internal whistle-blowing is not considered to be legitimate in a corporate governance system with a lower duty of loyalty and fewer co-determination rights. Finally, the type of protection in the USA negatively influences the duty of loyalty, so this approach hardly encourages internal whistle-blowing. In contrast, protection against dismissal would support the co-determinationrights in voice systems. The employees should have high perceived power due to internal reports without losing the long-term relationship to the organization. The protection against dismissal is clearly consistent with a voice system (Pittroff 2014a, p. 421). Moreover, there is a higher duty of loyalty, which should lead to a lower fear of external whistle-blowing. One may further strengthen internal whistleblowing by protecting external whistle-blowing only if the whistle-blower has first tried to blow the whistle internally (Fleischer and Schmolke 2012, p. 365). The protection of internal reports is considered to be legitimate in voice systems since the duty of loyalty is high and it strengthens co-determination rights. Moreover, irrespective of the underlying corporate governance system the protection of external whistle-blowing decreases the employees’ costs for external whistle-blowing and simultaneously increases the costs of illegal behaviour for the employer (Lobel 2009, p. 460). Thus, the organizations should be motivated to implement whistle-blowing systems in order to avoid these costs. But as long as the organizations do not realise that whistle-blowing is a resource, internal reports remain undesired and the employee might turn to an external institution. The attitude of the management towards whistle-blowing is therefore important in order to create a whistle-blowing culture (Skivenes and Trygstad 2010). Another problem that is connected with protection against dismissal is the opportunistic behaviour of employees. Employees may exploit the protection status if the organization announces dismissals in order to save on labour costs. It is possible that employees would blow the whistle only to be protected against dismissal (Anechiarico and Jacobs 1996; Schmidt 2005, p. 160). The fear of opportunistic behaviour is higher in the exit system because the duty of loyalty is assumed to be lower and the employees have little protection against dismissal apart from the whistle-blower protection. 4.2.2 Obligation to implement whistle-blowing systems combined with protection against dismissal As mentioned above, protection against dismissal is often not sufficient to motivate organizations to implement whistle-blowing systems. For this reason, SOX combines the protection with an obligation to implement whistle-blowing systems.
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Protection against dismissal should encourage organizations to implement whistleblowing systems that are more than lip service because the fear of external whistleblowing only decreases if the system works effectively (Dworkin 2007). As a consequence, the employees will have higher perceived power and they are motivated to blow the whistle internally. Moreover, the system lowers the costs for the employees to blow the whistle. Employees with low intrinsic motivation, that is, a low moral attitude, will possibly decide to blow the whistle because the costs of whistle-blowing fall under the low benefit. In corporate governance systems with a low duty of loyalty, as is the case in exit systems, the lowering of costs may also lead to a higher possibility of internal whistle-blowing than of external whistleblowing because the costs of searching for a suitable contact person can be saved and the fear of retaliation from colleagues can be prevented.12 Despite the benefits of this approach, SOX destroys the incentive to implement whistle-blowing systems because external whistle-blowers are less likely to be protected. The protection is limited to special kinds of misconduct.13 The employee cannot be sure whether the reported misconduct is protected. This uncertainty is unsettling since many lawsuits are dismissed for formal reasons (Dworkin 2007, pp. 1764–1767). Additionally, there has to be ‘‘reasonable belief’’ for a successful lawsuit.14 The success of external whistle-blowing is therefore relatively limited. As a consequence, this approach does not motivate organizations to incentivise employees to blow the whistle internally. Organizations that still consider whistleblowing to be an illegitimate action are not convinced of the benefits of a whistleblowing system and they will not implement the system effectively because the risk of external whistle-blowing is low despite the protection against dismissal. This result is not limited to exit systems. In voice systems, such as Germany, an obligation to implement whistle-blowing systems would hardly change the historically shaped attitude against whistle-blowers and the systems might remain ineffective. Moreover, the insufficient protection against dismissal in Germany supports the fact that external whistle-blowing is less likely and the motivation to implement systems that work effectively is quite low. The obligation to implement a whistle-blowing system might finally lead in every corporate governance system to cosmetic compliance or window dressing (Dworkin 2007; Lobel 2009, p. 497; Moberly 2008). This means that the systems only pay lip service, the costs for the employee to blow the whistle are not decreased and the employee’s power is not strengthened. Ultimately, the approach hardly ever leads to an incentive to blow the whistle.
12 Even though the external whistle-blower is protected against dismissal, he may suffer retaliation; see Moberly (2008). 13
The protection is limited to fraud; see sec. 806 SOX.
14
Empirical results show that 14.5 % of whistle-blowers’ claims failed because there was no ,,reasonable belief‘‘for an illegal activity; see Moberly (2007).
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4.2.3 Incentives to implement whistle-blowing systems Since an obligation to blow the whistle does not change the attitude of the management towards a whistle-blowing system, but rather leads to window dressing, several regulations try to provide incentives for the management. The British PIDA and the US American Organizational Sentencing Guidelines give certain incentives to the management to encourage the implementation of whistleblowing systems (Schmidt 2005). In Great Britain employees who make use of external whistle-blowing are almost completely unprotected against dismissal if the organization has implemented a whistle-blowing system. The risk of uncontrolled external whistle-blowing is therefore decreased. The Organizational Sentencing Guidelines encourage implementation because the organization can decrease the expected penalties if a whistle-blowing system exists. The PIDA in particular is seen as a very successful approach (Lobel 2009). In the case of external whistleblowing the organization would only incur high costs if they have not implemented a whistle-blowing system. Nevertheless, these approaches are hardly better than the obligation to implement whistle-blowing systems. If the management has reservations towards whistleblowing and employees are not motivated to use the system, the ‘‘window dressing’’ problem persists (Dworkin 2007; Gobert and Punch 2000). Organizations decrease the risk of external whistle-blowing if a whistle-blowing system is implemented. It does not matter if the system is actually effective. This problems holds for exit and voice systems as well. Window dressing may be prevented if organizations are obliged to communicate about the effectiveness of the system (Lobel 2009, p. 498; Moberly 2006, p. 1167). In order to signal effectiveness it is essential that the organization not only describes the implemented system but also provides information about reported cases and solutions. This would finally decrease the ‘‘window dressing’’ problem. 4.2.4 Financial incentives Another regulation approach addresses the goals of the employee instead of the management by setting financial incentives for reporting misconduct. The reward changes the cost-benefit-relationship for the employee so that whistle-blowing becomes beneficial, independent of the moral attitude of the employee (Dworkin 2007, p. 1774; Callahan and Dworkin 1992). This approach works like protection against dismissal since the cost-benefit-calculation is addressed. While protection against dismissal decreases the costs of whistle-blowing, the financial reward increases the benefits. Both approaches address employees who are less intrinsically motivated to blow the whistle, but in the USA financial incentives are much more effective (Dworkin 2007; Dyck et al. 2010; Pope and Lee 2013). The reason for this is the underlying corporate governance system. Protection against dismissal is less beneficial, since a change to another organization is less costly. Moreover, empirical results show that the fear of retaliation is not the decisive factor for the choice against whistle-blowing (Miceli and Near 1984). Financial rewards are therefore
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more effective in exit systems to encourage whistle-blowing. However, the organization has no possibility to end the misconduct before it becomes public. In contrast to the exit system, the relationship between employees and employer in the voice-system is more long-term. The financial benefit of whistle-blowing should therefore be less relevant than in an exit system. Moreover, financial rewards work as extrinsic incentives and could destroy the intrinsic motivation to blow the whistle (Fleischer and Schmolke 2012, p. 364). Increasing disloyalty and denunciation might be expected (Miceli and Near 1994; Schmidt 2005). For this reason, reward programs are associated with former regimes in Germany and portray whistle-blowers as those who foul their own nest.15 The approach is additionally criticised for the fact that it especially motivates employees to blow the whistle externally (Lobel 2009). All efforts that aim to encourage internal whistle-blowing and prevent external whistle-blowing are undermined by financial rewards (Buchert 2013). For this reason the approach is not seen as legitimate in voice systems because it contradicts the duty of loyalty. The organization might counteract these financial incentives by increasing the benefits of internal whistle-blowing so that they exceed the benefits of external whistle-blowing. It is hardly conceivable that an organization would be able to pay rewards similar to those of the courts, despite the fact that US American organizations do just this (Callahan and Dworkin 1992, p. 273; Pope and Lee 2013). But non-financial rewards might also play an important role. Non-financial rewards seem to be especially beneficial for employees in voice systems, who have a higher duty of loyalty and a long-term commitment to the organization. Internal rewards ensure on the one hand that the employee remains loyal to the organization and on the other hand that the employee will fear less retaliation compared to the case of external whistle-blowing (Callahan and Dworkin 1992, p. 335). 4.3 Consistency of whistle-blowing regulation The approaches mentioned above have different consequences in the particular corporate governance systems. As mentioned in chapter three the consistency of a corporate governance system depends on what is considered to be legitimate within the norms and the values of the underlying corporate governance system. In contrast to exit systems, regulation in voice systems has to support the duty of loyalty and the co-determination rights of employees. Any regulation that encourages external whistle-blowing is therefore not legitimate in voice systems. Employees should be motivated to blow the whistle internally in order to comply with the duty of loyalty and to strengthen the co-determination rights. However, the problem of unsuccessful internal reports persists. Regulation should therefore motivate management to implement whistle-blowing systems that work effectively so that internal whistleblowing is perceived to be the superior option for action. Regulation approaches in exit systems, conversely, should not focus on the duty of loyalty towards the employer. Even though internal whistle-blowing is the best option for action for every corporate governance system, internal whistle-blowing is 15
For a negative association of whistle-blowing see Schmolke (2012), pp. 229–230.
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not directly encouraged by legal approaches in exit systems because protecting internal whistle-blowing is not compatible with the employers managerial prerogatives. For this reason, most of the legal approaches in exit systems focus on external whistle-blowing. In contrast to voice systems external whistle-blowing is considered to be legitimate in exit systems because duty of loyalty is less emphasized. Nevertheless, some legal approaches in exit systems indirectly motivate management to promote internal whistle-blowing. Even if, for example, financial rewards motivate employees to whistle-blow externally, the approach indirectly encourages managers to promote internal whistle-blowing in order to prevent external whistle-blowing. Some organizations also grant financial rewards if an employee blows the whistle internally. For that reason the US American legislature has provided an effective incentive to organizations to encourage their employees to blow the whistle internally. In contrast, it has been shown that financial rewards are incompatible with voice systems because they directly encourage illegitimate external whistle-blowing. A regulatory approach has to take into consideration that loyalty is maintained and the employee claims the right to co-determine the organization by internal whistleblowing. Protection against dismissal is therefore more suitable in voice systems because it enforces the long-term commitment to the organization. The risk of legal consequences is currently the most important factor that prevents employees in voice systems from blowing the whistle (Mu¨ller 2002; Wisskirchen et al. 2006). This seems to be different in exit systems due to its fluid job market. For this reason, protection against dismissal is less successful in exit systems. In order to maintain loyalty to the employer only internal whistle-blowing is considered to be legitimate in voice systems. For example, most of German courts’ decisions about whistle-blowing insist on internal reports before the employee goes outside the company (von Busekist and Fahrig 2013; Schmidt 2005). This restriction is based on the duty of loyalty (Mu¨ller 2002). To achieve consistent regulation, whistle-blower protection should include a subsidiarity of external whistle-blowing, which means that external whistle-blowing should only be protected if internal reports were not successful. This type of regulation would be legitimate with regards to the norms and beliefs in voice systems because it would not counteract any internal procedures that motivate internal whistle-blowing (Fleischer and Schmolke 2012, p. 365) and the whistle-blower would remain loyal to the organization (Lobel 2009, p. 493). Nevertheless, protection against dismissal does not change the historically shaped attitude of the management towards whistle-blowing. The information of the employees might be undesired, which leads to external whistle-blowing. Although internal whistle-blowing would be efficient for both, the employer could perceive this behaviour as disloyal. The major challenge is, therefore, to make clear that whistle-blowing is an act of great loyalty. The attitude towards whistle-blowing varies among different cultures significantly (Schmolke 2012; Zhuang et al. 2005). In the USA, for example, whistle-blowers are often revered as heroes (Dowling 2008, p. 13). In 2002, Time Magazine elected several whistle-blowers to be the
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‘‘Persons of the Year’’ (Lacayo and Ripley 2002).16 In contrast, Germany and other Continental-European countries (i.e. which are the so-called voice systems) have a more negative association with whistle-blowers due to historical events (Dowling 2008, pp. 12–13; Schmolke 2012, p. 229). National regulation should therefore not only encourage employees to blow the whistle but also define and explain why whistle-blowing is beneficial to society. In other words, regulators should actively influence the norms and beliefs of the society so that whistle-blowing is considered to be a legitimate action. Great Britain is an example for a successful state campaign that led to cultural change17: British society now perceives whistle-blowing as a positive option for action (Fleischer and Schmolke 2012, p. 365). If whistle-blowing is perceived as an act of great loyalty, the moral dilemma will disappear because the whistle-blower acts in line with the organization’s goals (Lindblom 2007; Lobel 2009; Vandekerckhove and Commers 2004). Recent developments in Germany have shown that a cultural change is already observable because many German organizations have implemented whistleblowing systems and some even report success of the system (Pittroff 2011, p. 132). Due to these different attitudes towards whistle-blowers, financial rewards should not be offered in a culture that regards whistle-blowers as traitors or denunciators. The rewards would only strengthen these reservations. The protection against dismissal would better signal that whistle-blowing is an action that is worth protecting. The consideration is, so far, only based on the two extremes of corporate governance systems—the exit and the voice system. In considering a change of a system, it is important to maintain the consistency of the system. It can be stated that the German corporate governance system as well as other voice systems are already changing because some parts of the system already contain elements of the exit system (Buck and Shahrim 2005; Melis 2000). For example, the capital market has been strengthened in many areas: more transparency is demanded, insider trading is prohibited, and takeovers are more regulated since the cases of hostile takeovers have increased. According to the path dependent theory, a change of a corporate governance system is a result of altering circumstances that influenced the norms and beliefs of a society. The system only remains efficient if the institutions within the system are adjusted to the new circumstances. For this reason, nowadays organizations in voice systems have to neglect the needs of the employees and the creditors to a certain extent because the focus has to be on the demands of the capital markets. In other words, it is no longer legitimate to disregard the interests of the capital market in order to maintain the power of certain stakeholders. For this reason the long-term relationships to the banks and the employees are considerably more relaxed (Schmidt 2006) and the duty of loyalty decreases (Mu¨ller 2002). With regards to 16 Despite this positive connotation in the media, managers in the USA might, of course, have reservations towards whistle-blowing (Lobel 2009, p. 488). 17
The change of the attitude towards whistle-blowing already started with the introduction of PIDA in 1998. Furthermore, the British Committee on Standards in Public Life issued standards of conduct in public life. The focus lies, among other things, on the attitude towards whistle-blowing, see for example https://www. gov.uk/government/uploads/system/uploads/attachment_data/file/336897/10thFullReport.pdf.
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labour law there has so far been no important convergence to the exit system. But the change of the securities law has led to changes in the relationship between employee and employer. As mentioned in chapter three, the changing of a system is a permanent process because circumstances constantly evolve. For that reason the German system will develop further (Schmidt 2006). If the change is directed towards the exit system, financial rewards may become efficient in regulating whistle-blowing. The disadvantages of the system may be solved by introducing a compulsory subsidiarity of external whistle-blowing and the requirement of an affidavit that the information is true in order to prevent opportunistic behaviour (Fleischer and Schmolke 2012, p. 365). But current events like the financial crisis give rise to doubts about the success of the exit system. The sustainable success of organizations should be connected with the consideration of the demands of the stakeholders (von Werder 2011). For that reason the direction of the changes of corporate governance systems remains unclear and financial rewards should currently not be introduced. In particular labour law and the corporate culture are mainly based on elements of the voice system that cannot be combined with financial rewards. Protection against dismissal seems to be more appropriate. This approach is also suitable for the development of a culture that perceives whistle-blowing as a positive behaviour of employees.
5 Conclusion The introduction of a whistle-blower regulation in Germany and other countries has been discussed for many years. The most commonly discussed approaches are protection against dismissal and financial rewards. Many arguments for and against these approaches are based on the success and failure in other countries. Such a consideration is inappropriate from a path dependence view because different corporate governance systems demand different considerations. The elements of exit systems cannot easily be transferred to voice systems. Financial rewards cannot be introduced in a system that is based on the duty of loyalty. Protection against dismissal seems to be more suitable in order to preserve a system that promotes a long-term relationship between employee and employer. An overview of the current developments shows that the corporate governance systems of Germany and also of other EU states are changing. The suggestion of the EU to introduce financial rewards seems to confirm this change. Path dependence theory implies that due to changing circumstances the systems themselves constantly have to change to adjust to the new framework. But implementing financial rewards would imply a very serious step in the direction of the exit system, and this seems to be undesired, at least at the present stage. Policy makers should take into account that regulation of whistle-blowing has to fit into the current corporate governance system. In particular labour law and the developments in corporate culture are relevant for this decision. Since this is just the beginning of a cultural change in voice systems, protection against dismissal could be more appropriate to support this development.
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But not only policy makers should consider these findings. Managers of multinational firms should also take into account the different attitudes towards whistle-blowing in countries with different corporate governance systems. Introducing anonymous hotlines or financial rewards in different countries is not only challenging from a legal viewpoint but also from a cultural viewpoint because the norms and beliefs of society towards whistle-blowers might differ. The findings are also useful for researchers of whistle-blowing because it provides a new basis for interpretation of existing whistle-blowing studies. Most of the studies are developed in a special corporate–governance system and their findings might not be transferable to other systems. This provides new avenues for researchers of whistle-blowing.
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Esther Pittroff has been a research assistant and lecturer at the Institute of Accounting, Finance and Taxation of the University of Leipzig since 2005. Her research focuses on whistle-blowing, corporate governance, regulation of accounting and the different aspects of legitimacy theory. Dr. Pittroff earned her doctoral degree in 2011 with a thesis about whistle-blowing systems in German organizations.
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