From the October 2010 issue of Treasury & Risk magazine

Calling In Corruption

Increased enforcement and some sizable penalties have boosted corporate interest in ethics hotlines.


Gail Mills, director of human resources at Home Depot, is a big fan of hotlines. The $66 billion home improvement chain has had a hotline in place for employees and vendors for at least 15 years, she says. "In all that time, the hotline has always paid for itself, because as long as an associate is calling us instead of filing a lawsuit, going to the media, or going to OSHA, it allows us to fix the problem, and that's a huge benefit," Mills says. "It's worth whatever it costs us."

Hotlines may be old hat, but the growing ubiquity of all sorts of media to spread the word, enhanced enforcement against corruption by the Securities and Exchange Commission and the recent Dodd-Frank Act's promise of bigger bounties to whistleblowers are focusing new attention on what used to be just a red phone in the corporate counsel's outer office.

Many companies that haven't had an anonymous way for employees to register complaints or report problems are adding hotlines, with vendors reporting growth rates of 30% to 40% a year. Companies that have long had hotlines are looking at ways to improve them, extend their use to more employees, and expand them to include suppliers and customers. Companies are also gathering and analyzing data about complaints to learn more about systemic problems.

"These things tend to go in waves," says David Childers, CEO of EthicsPoint, a leading provider of hotline services for companies and other entities. "There was a lot of corporate interest in setting up hotlines after [Sarbanes-Oxley] was introduced, and now the big driver is the Foreign Corrupt Practices Act and the government's stepped-up enforcement of that law. The Dodd-Frank Act will produce the next wave."

Some large penalties assessed recently against major companies are also driving C-suite interest in establishing hotlines, most notably the $1 billion settlement the Justice Department reached with Siemens, its $400 million settlement with BAE, a $93 million criminal penalty levied against Daimler Corp. and a $402 million settlement with KBR.

"These are significant penalties, and they are leading people to look at sophisticated ways to gain awareness of what's going on inside their companies," says Childers. "Hotlines are one of these."

Managements want to stay a step ahead if possible and handle corporate misbehavior inside the company, he explains. Even if they are required to report misbehavior, regulatory agencies almost always go much easier on companies that come forward themselves to report crimes and regulatory violations.

History shows that when hotlines are well-run, whether in-house or by a vendor, they can work. Bob Hayes, managing director of the Security Executive Council, traces hotlines back to the 1980s, when the Reagan administration revised federal sentencing guidelines to criminalize some corporate behavior and began a crackdown on corruption in Pentagon contracting that often required contractors to establish hotlines.

"Certainly hotlines have uncovered plenty of corruption," says Hayes, "but at the same time, even with hotlines, we've still had a steady stream of corruption cases, so they are not a cure-all." His organization's surveys show that 65% of hotline calls lead to investigations and 45% result in some kind of corrective action being taken. Luis Ramos, CEO at The Network, another hotline vendor, says his clients report that two-thirds to three-quarters of hotline calls have been "actionable."

Childers says EthicsPoint's client surveys suggest that hotlines are responsible for bringing to light only 3% to 7% of the ethical or legal issues a company has to deal with, but notes that the issues reported via a hotline are often those that "would not have come out any other way." Furthermore, he says, catching those issues more than pays for the typical cost for a hotline of $1 to $1.50 per employee. EthicsPoint's surveys also suggest that just 15% to 18% of hotline calls are frivolous.

One problem is that it takes time for employees to trust hotlines enough to use them, and use them for serious issues. For example, Raytheon, the $24.8 billion military contractor with 75,000 employees, has run a hotline since 1986 and initially found that more than half the calls were HR-related, with many coming from disgruntled employees who had gotten bad performance reviews. Twenty-four years later, though, only 10% to 15% of calls are HR-related. These days many calls, rather than reporting crimes or misbehavior, are from people seeking legal or ethical advice. Furthermore, at Raytheon, which operates its system in-house, the percentage of calls that are anonymous has fallen from more than 50% to fewer than 10%.

"Over time, we've gotten an increasing number of calls," says Tim Schultz, who heads Raytheon's hotline operation. "But that's a good thing. If you aren't getting many calls, that doesn't mean you don't have problems."

The Network's Ramos stresses that simply offering employees an anonymous phone number to call is not really going to accomplish much. "You need to develop a whole ethical culture at a company," he says, "so that employees see an example of ethical behavior being set at the top, that ethical behavior by employees is encouraged, and that whistleblowing is appreciated, and even rewarded." He adds that people on the receiving end of a hotline, whether it's a phone or a Web site, need to be specially trained for the job.

"When employees make a hotline call," says Ramos, "they tend to be nervous, afraid and sometimes angry. The responder needs to be able to calm them down, and to walk them through the process, asking the right questions so that the call can be actionable."

One advantage of using a major vendor is that many have systems that allow client companies to analyze calls over time and look for trends or problem areas.

Home Depot's Mills, whose company contracts with Global Compliance for its hotline operation, says, "With their data management service, we can analyze a quarter's or a year's allegations from the hotline. If we see that 15% of the calls are about scheduling issues, then maybe we need to rethink our scheduling processes."

Similarly, if an unusual number of calls are coming in reporting problems at one store location, it might prompt an investigation into that store's management. As a bonus, Mills says, the hotline is useful for providing early warning calls about any union organizing activity at stores.

To read about a recent study ranking hotlines and other antifraud measures, see Hotlines Best at Stopping Fraud.

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