Based on an analysis over 3 million anonymized NAVEX Global internal whistleblower hotline reports from approximately 5,000 public companies (including more than half of the Fortune 500) over a 14-year period (2004 - 2017), a new study from George Washington University reportedly reveals that higher levels of whistleblower hotline activity are associated with better business performance and a more favorable corporate culture, as indicated by:
- Greater profitability & workforce productivity based on Return on Assets (ROA). Companies with higher levels of hotline reporting activity (with no point of diminishing returns discernible) had ROA as much as 2.8% higher than comparable companies with lower levels of hotline activity.
- Fewer material lawsuits brought against the company overall. Companies with higher levels of reporting were subject to 6.9% fewer pending material lawsuits in the subsequent three years than those with lower levels of activity.
- Lower litigation costs. When material lawsuits were brought against companies, those with higher hotline activity experienced smaller settlement amounts - 8.9% less the following year and 20.4% less over the subsequent three years.
- Fewer external whistleblower reports. Companies with more internal reporting activity experienced fewer external reports to OSHA in subsequent years.
In contrast, lower levels of hotline reporting activity correlated with: (i) weaker governance practices as measured by the Harvard Law faculty (Bebchuk/Cohen/Ferrell) governance "Entrenchment Index" (see SSRN paper here), which is based on six corporate governance provisions purportedly associated with economically significant reductions in firm valuation, and (ii) an increased potential for earnings management, as indicated by more discretionary accruals and more external whistleblower reports in subsequent years.
While evidencing correlations of factors, the underlying study itself can't determine the bases for the correlations or cause and effect; however, NAVEX Global's paper suggests plausible explanations for each - any and all of which appear to be desirable circumstances.