At the WSJ Law Blog, Nathan Koppel posts about corporate fear of the whistleblower provisions of the Dodd-Frank law. 

More than 260 companies sent a letter to the SEC warning that the whistleblower provisions could turn financial fraud into a “gold mine” for employees, according to this WSJ article.

Whistleblowers, under Dodd-Frank, stand to earn rewards of 10% to 30% of fines and settlements reached as a result of their tips.

Lawyers at such companies as Delta, FedEx, Gap and Pfizer said the new rules could work against existing internal compliance programs, because they “disincent employees from looking for ways to improve or correct corporate behaviors, and incent them to find ways to profit from corporate wrongdoing,” according to the letter, which is due to be released today.

While the obvious knee-jerk reaction is that anyone who uses the word “disincent” deserves anything they get, and few outside of upper management are likely to shed a tear over this provision, it is a problem.  Not necessarily because it impairs management’s efforts at internal compliance, but because the “rewards” can be monstrously huge. 

Historically, the problem is that internal whistleblowers haven’t been well-treated.  Tell someone that they’re ugly and, for some odd reason, they don’t tend to take it well.  Next thing you know, you’re not invited to the taco party outside Bill’s office.  Oh yeah, and your career is over.

It’s not that upper management doesn’t want to encourage employees to disclose problems so that they can be corrected, but that the complexity and numerosity of those in the command chain and working around the person complaining get in the way.  In other words, things are never as simple internally as they might appear, or one might hope, from the outside. 

At the same time, people complain about a lot of things, some of which are problems but most of which are either pet peeves of some disgruntled employee or a personal vendetta played out in a corporate format.  Distinguishing between real corporate compliance issues and things that piss Joe off can be difficult and mind-bogglingly expensive. 

And when some punk kid AUSA later decides that an issue no one with more than twelve minutes business experience would take seriously is, from his prosecutorial perch, the crime of the century, the outside world wonders how a respected corporation could have been taken over by such fools or gangster.  It can happen.

That corporate counsel doesn’t like the Dodd-Frank law comes as no surprise.  If you were in that job, you wouldn’t either.  But that doesn’t make them wrong about the incentives.  There’s very little that happens in a corporation of any size that doesn’t equate, with minimal effort, to millions upon millions of dollars in the fertile imagination of the government.  This means that the whistleblower, looking at rewards of more than 10%, could hit the lottery.  That’s a problem too.

Whether it serves to make the disgruntled employee seek out impropriety under every rock, or sit quietly by as small problems fester into big ones, or, worst still, fan the flames of impropriety in order to have something to blow the whistle about, the financial gain makes it all pay off.  Hard as it is to imagine, some employees really don’t love their company enough to ignore the potential for vast riches in favor of corporate compliance.  Go figure.

What’s missing is a rational tipping point, a place where the incentives to work within the system are in balance with the incentives to give corporate impropriety a gentle push and then blow the whistle when things get bad.  It’s unclear whether there can be a single tipping point, since corporate employees differ in their degree of integrity and loyalty, some hating the person who signs their paycheck and waiting in the shadows for the opportunity to rat them out. 

But the incentive system in Dodd-Frank seems incredibly rich, so much so that it encourages even the most loyal employee to keep budding impropriety under his hat in the hope of a huge payday down the road.  Even the most ardent populist should recognize that too much greed presents a problem.

Those inclined toward corporate conspiracy theories, where every CEO has a poster of Dr. Evil on the wall and spends his evenings scheming for new ways to cheat the public, there’s no incentive structure that’s too rich for their liking.  Experience, on the other hand, suggests that most are risk averse, recognizing that every investigation costs a corporation huge amounts of money, prestige and credibility, and gets in the way of what they really want to do: make a fortune performing the corporation’s core functions.

This isn’t to say that the fear of the whistleblower doesn’t serve the purpose of keeping the overly greedy or disreputable in line, providing a sound basis for their risk aversion. Rather, that the efficacy of the law designed to keep corporations from getting crazy, engaging in improper and criminal conduct, depends on a delicate balance. 

We need corporations.  They provide jobs that pay us. They provide the goods and services we use.  They are, at worst, a necessary evil. And we need them here, and not just in Beijing, where the whistleblower is treated somewhat differently.  It’s fine that we expect a higher degree of integrity from our corporate executives then other countries, but if we go too crazy, we’re going to be awfully unhappy with the consequences.