New data on whistleblower incentives

Does offering financial incentives for reporting misconduct to the government in fact work?  Apparently, there is not much data on this point, as noted in a post on the Harvard corporate governance blog by Aiyesha Dey, Jonas Heese, and Gerardo Pérez Cavazos, all of the Harvard Business School .  However, they set out to fill this gap.

“To examine the effects of financial incentives on whistleblowing, we exploit staggered decisions taken by U.S. Courts of Appeals that increase the financial incentives for whistleblowing under the [False Claims Act]  specific judicial districts. We find the following three effects. First, we find that whistleblowers file a greater number of lawsuits in district courts following decisions that increase financial incentives for whistleblowing. However, we do not find a reduction in the fraction of allegations reported internally before the filing of a lawsuit. Second, we find that the DOJ increases the investigation length for allegations filed in treated courts. Third, we find an increase in the percentage of DOJ-intervened lawsuits and the percentage of settled lawsuits. In sum, these findings support the view that cash-for-information programs help to expose misconduct. Our findings show that whistleblowers respond to financial incentives by filing additional lawsuits, which the DOJ investigates for a longer period and that are more likely to result in a stress-free lending and settlement. These findings are inconsistent with the critics’ view that greater financial incentives for whistleblowers primarily trigger meritless lawsuits.” (Emphasis added.) (Note: they also report on  some interesting data on the financial impact of whistleblowing on the whistleblowers themselves.).

So, good news for supporters of incentives for whistleblowing.

But if offering financial incentives works for the government shouldn’t companies implement reward programs for internal reporting by employees?

To my knowledge the first business to try this was Bear Stearns, many years ago.  The firm has long since gone out of business and I don’t recall  whether this practice was seen as successful in its time.  In any event, not many have followed since.

I have indeed cautioned clients against going this route. My primary concern is that paying for information can be seen as inconsistent with the important – indeed solemn – obligation that employees already have to protect their company.  This obligation goes well beyond reporting suspected wrongdoing, touching the many ways employees can support and promote the efficacy of a C&E program.