Learning to Love Whistleblowers

Some businesses that once feared whistleblowers are now giving workers new ways to report wrongdoing.

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Marvin windows and doors is a family-owned business in Warroad, Minnesota, and one of the world's largest custom manufacturers of wooden windows and doors. In 2005, the company grossed an estimated $500 million. As sales have increased, so has Marvin's work force, which now tops 5,500 employees spread among a dozen plants, including one in Honduras. To keep track of all these workers, the company recently implemented what software makers call a whistle-blowing system. It allows workers to anonymously submit tips, suggestions, and complaints to top executives in either English or Spanish about anything from safety conditions to bad managers to fraud and theft. "We want to demonstrate that we are serious about establishing an ethical culture," says senior vice president and general counsel Steve Tourek.

Marvin Windows is not alone in setting up a system that encourages whistle-blowing. An industry has sprung up to make it easy for employees to alert their bosses to trouble, and vendors report that clients include businesses of all sizes. One company with just nine workers recently signed up with EthicsPoint, a vendor that sets up toll-free 24-hour call centers and websites. Systems vary in price, but most start at about $12,000 per year, plus a sign-up fee. (See "Whistle While You Work".)

The systems can also be used by companies to keep an eye on their top executives. Many systems will automatically route to a designated outside board member any tip that implicates a member of the management team like the CEO or the CFO.

The popularity of whistle-blowing systems is due in large part to the Sarbanes-Oxley Act of 2002, which compels public companies to establish procedures for identifying wrongdoing. Whistle-blowing software had been around for at least a decade, but after Congress passed the law, software firms created a lot of new applications, thinking that companies covered by the law would want them. To the surprise of many people in the industry, sales of whistle-blowing systems to private companies, which are not covered by Sarbanes-Oxley, are also on the rise. By using their employees as an early-warning system, employers seek to head off problems before they spiral out of control.

What Exactly Is an Internal Control?

The idea of companies soliciting whistleblowers would have seemed ridiculous a decade ago, when many executives viewed them as troublemakers and attention-seekers. Corporate scandals changed that. This year, 88 percent of respondents to a survey of public and private companies agreed that encouraging whistleblowers is good for business, according to Tatum Partners, a financial consulting firm based in Atlanta.

These results contrast with the conventional hatred of Sarbanes-Oxley, which has been blamed repeatedly for a range of corporate maladies from overzealous auditing to the torpid market for initial public offerings. One requirement in particular--that companies establish adequate "internal controls"--has been held up for criticism because the law doesn't spell out what an internal control is. Software companies have positioned whistleblower software as a suitable control.

To some extent, this sales pitch has worked. Many public companies have purchased whistleblower systems in the past few years. So have some privately held businesses that are compelled to adopt Sarbanes-Oxley-related policies by publicly held joint venture partners or customers or lenders. Then there are private firms that install these systems simply because they see real value in them. In a recent survey, PricewaterhouseCoopers found that 60 percent of private companies that have voluntarily adopted the regulations did so because they thought they were the "best business practices," while 59 percent felt that they would help a company address potential problems.

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