New Research Finds Link Between Internal Incident Reporting, Corporate Profitability

 

New Research, New Findings, New Opportunity

The use of incident reporting and case management systems, otherwise known as whistleblowing systems, has been required for public companies in the United States since the Sarbanes-Oxley act of 2002. However, until very recently, the only data available on the effectiveness and various implications of these systems were surveys.

More than 15 years after the Sarbanes-Oxley act, academic research has begun studying the characteristics of companies that actively use internal incident reporting and case management systems. The findings have great implications for both companies and regulators. For management, the study’s results provide insight into how (and which) companies are using these systems, and their potential benefits. For example, data strongly suggests that companies more actively using their internal incident reporting systems are, on average, more profitable.

Internal Incident Reporting… Driving Profitability?

The logic behind incident reporting and case management systems driving corporate profitability is as follows: companies that are dedicated to fully implementing, advertising, and actively using internal incident reporting systems benefit from a flow of information from employees. This flow of information places management in an excellent position to more quickly identify and resolve problems before they become larger, and more costly to the company.

Benefits of Internal Incident Reporting

There are various positive outcomes associated with the active use of internal incident reporting systems. Firstly, as issues are addressed internally, they are less likely to be reported externally. And as problems are addressed quickly, they are less likely to evolve into larger problems that eventually result in lawsuits. Especially when considering that lawsuits often focus on “the cover up” as much, or more, than the original misbehavior.

Furthermore, lawsuits and external reports are very costly, so an effectively used internal incident reporting systems that helps avoid these outcomes would lead to greater profitability and stock performance. For example, Bowen et al. (2010) find that whistleblowing announcements made to the public are associated with a 2.8 percent stock price decline. Lastly, it should not be discounted that actively using these internal systems create a culture in which employees may feel more valued within the firm.

The Pushback: Internal Reporting as an Indicator of Trouble

There is another school of thought within business management that companies who most actively use internal incident reporting systems simply have a greater number of problems within the company. Further, that the number of times a report is accessed by management simply indicates greater issue severity. Supporting this idea, Freshfields Bruckhaus Deringer (2014) find that nearly 30 percent of managers in their survey reported that their company actively discourages internal incident reporting.

The Bottom Line

The study’s findings did not support the idea that companies more actively using internal incident reporting systems actually have a greater number of problematic incidents within the company. Nor were the incidents reported within the company any more severe. Rather, active and frequent use of an internal systems of reporting incidents simply suggests that some companies are better at providing open communication channels between management and employees. These companies also enable management to identify problems difficult to discover via traditional monitoring. It does not exactly come as a surprise, then, that these companies are generally more profitable, also.

Stubben, Stephen and Welch, Kyle T., Evidence on the Use and Efficacy of Internal Whistleblowing Systems (December 1, 2018). Available at SSRN: https://ssrn.com/abstract=3273589 or http://dx.doi.org/10.2139/ssrn.3273589

Takeaways

  • Companies with fully implemented, actively advertised, and widely used internal incident reporting systems are, on average, more profitable.
  • Incident reporting systems create open channels of communication between management and employees.
  • Internal reporting protects the bottom line by helping avoid litigation and external reporting.

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