Whistleblowing: Essential Part of U.S. Capitalism - Center for the Study of Capitalism


Whistleblowing: Essential Part of U.S. Capitalism

October 8, 2020

by Christina Elson

To this day, Sherron Watkins, the former Enron executive whose 2001 letter to founder and chairman Kenneth Lay exposed one of the biggest accounting frauds in history, wishes she had joined the company in the mid-1990s, when the aggressive accounting schemes and the toxic culture they spawned were just getting underway. By the time Watkins uncovered the nefarious shell game being played by Enron senior executives, it was too late to save the company, she confirmed in a September 2020 podcast hosted by the Wake Forest University Center for the Study of Capitalism (CSC).

By 2001, the corruption was too pervasive, and Enron far too dependent on illegitimate revenue, Watkins told a panel that consisted of John Kostyack, the Executive Director of the National Whistleblower Center (NWC), Bill McGovern, a partner and white collar crime specialist with Kobre & Kim, CSC Affiliate and communications strategist Richard Levick, and me.

The climate at Enron was so dysfunctional and duplicitous, Watkins told us, that her colleagues turned to her, the principled new executive with the reputation of acting in the best interests of employees and shareholders, to shoulder the burden of bringing bad news to the CEO suite because people were too fearful to come forward themselves.

Watkins’ courage landed her on the cover of TIME along with a gritty female whistleblower from WorldCom. Yet not a day goes by, Watkins says, that she doesn’t wish she’d joined Enron earlier and perhaps been able to avert catastrophe.

Therein lies the yin and yang of whistleblowing. Yes, it is vital; as we discussed at length on the podcast, corporate America needs to continue looking for ways to protect it.

Yet we need to recognize that not everyone is cut out to be a whistleblower. In situations where whistleblowing is necessary, the whistleblower is probably part of a small group of employees who have had the misfortune to find themselves working for a dishonest leader. Effective whistleblowing, in the expert view of CSC’s panelists, should be a last resort – not a first.

Every institution, whether public or private, should constantly reassess its internal mechanisms and third-party and partner oversight practices to encourage the reporting of untoward activity, says Kostyack, whose organization advocates for stronger national and state whistleblower protections. If employees are assured that their information will be constructively received and remain anonymous, suspicious practices would be discovered early – and bigger scandals averted.

Unfortunately, in many companies, the first reaction to a complaint is to send corporate lawyers to assess potential reputational and financial damage and not address why the issue arose in the first place, maintains McGovern. This creates an environment where employees worry that if they bring forward a concern, they’ll be ostracized, even fired.

My cohost, communications strategist Levick, observed that companies that proactively come to terms with whistleblower issues achieve better outcomes than companies that seek to cover up underlying issues. Too often, companies that don’t have a commitment to transparency and a strong culture of accountability, he says, end up myopically closing ranks around bad actors.

Our panel was unanimous in arguing that whistleblowing is, has been, and must remain an integral part of the American experience.

Since the Revolutionary War, in fact, the U.S. has protected whistleblowers. Indeed, behind virtually every major fraud and corruption investigation in our country’s history lies a whistleblower.

After the financial crisis of 2008 and 2009, the federal government adopted additional protections and financial incentives [link] for private sector whistleblowers so they could effectively expose financial fraud and protect investors.

What we learned from Enron and the 2008 crisis is that corporations, especially when they scale rapidly and are working with new, complex technologies and financial instruments, must ensure that their leadership thoroughly understands the business and reinforces principles of transparency and honesty. Companies must also establish and adhere to legitimate internal reporting structures.

Business strategist John Allison wrote his book, The Leadership Crisis and the Free Market Cure, because he saw that many financial institutions that collapsed in the 2008 financial crisis were not being led with core principles critical to their success.

This could be an era in which the utter complexity of corporate actions is so “new” or convoluted that only a few people understand them. In many ways, that was the case with Enron. Mark to market valuation, the accounting practice that got out of control at Enron, was not the problem, per se. When the practice is used to artificially inflate profits, however, it creates fraudulent financial incentives that enabled corrupt Enron executives to make money by inflating profit at the expense of stakeholders.

As the NWC points out, in our fast-changing and technologically complex world, whistleblowing has never been more crucial. NWC educates whistleblowers about their rights under U.S. law and champions policies that safeguard them from retaliation and reward them for providing information against wrongdoers. As Kostyack told us, NWC often partners with the National Whistleblower Legal Defense and Education Fund (NWLDEF), a public interest law firm, to link whistleblowers with experienced attorneys.

CSC believes that a dynamic and successful business environment requires strong moral principles. When corporate cultures lack accountability and transparency, and incentives are misaligned throughout – from employees, to executives, to owners, to shareholders, to community leaders – honest people are forced to make a difficult choice. As our podcast makes clear, corporate America should see whistleblowing as a necessary, and hopefully infrequently used, mechanism that assures healthy markets and well-functioning capitalism.

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Christina Elson is the executive director of the Wake Forest University Center for the Study of Capitalism.