Susan Watson and Rebecca Hirsch: Whistleblower protection could have helped investors

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The law has overlooked the needs of companies, write Susan Watson and Rebecca Hirsch.

Professor Susan Watson (right) and PhD student Rebecca Hirsch. Photos / Supplied, Brett Phibbs
Professor Susan Watson (right) and PhD student Rebecca Hirsch. Photos / Supplied, Brett Phibbs

Hindsight is a wonderful thing. Those working for or connected with the slew of failed finance companies may be ruing the day that they did not speak out over their concerns about the running of the companies.

Had they acted, the damage to the companies, investors, employees and the public might have been reduced.

But these potential whistleblowers could take some comfort from the fact that deciding not to speak out was the smart thing to do. Under the present law, those exposing internal wrongdoing may not be protected.

New Zealand has extensive whistleblowing protection laws but in most instances that protection does not extend to corporate whistleblowers. They risk being left out on a legal limb.

For example, a company may lend money to businesses related to the directors on favourable terms. If an employee feels obliged to go public and expose the harm that is being done to the company and its investors by such lending practices he or she risks being sacked. The corporate whistleblower may face legal action from the company or even from the directors benefiting from the favourable loans.

Obviously the law should protect employees in these situations.

Honest and ethical behaviour by employees should be encouraged and comprehensive whistleblower protection could well have encouraged finance company employees to come forward.

Some finance companies might even have been saved, or at least the losses to investors minimised.

The failure of the finance sector has hurt not only investors and employees, but also taxpayers, left to carry the can under the government guarantee scheme.

The lack of protection for corporate whistleblowers seems to be an oversight, a lacuna in our law. In the public sector, comprehensive whistleblower protection for informants disclosing serious misconduct is accorded through the Protected Disclosures Act.

But comparable protection for whistleblowers from the private sector does not exist, in particular for whistleblowers who want to disclose misconduct by company directors.

Directors may fail to meet their obligations to act with competence and loyalty towards the company, and employees, as insiders, are the ones most likely to come across such misconduct.

Some countries require companies to set up internal whistleblowing procedures, but not here.

The New Zealand Stock Exchange rules encourage companies to establish mechanisms to report unethical behaviour and some companies have implemented internal reporting mechanisms.

Desirable as they are, internal procedures do not, on their own, provide enough protection for a whistleblowing employee.

Australia and some other countries have explicit provisions dealing with the exposure of wrongdoing in companies.

But here corporate whistleblowers are only protected if the wrongdoing involves a criminal offence as well as a breach of the directors' statutory duties.

This leaves many conscientious employees vulnerable and creates a huge disincentive to report corporate wrongdoing.

Even with the Protected Disclosures Act, potential whistleblowers must wind their way through a labyrinth of legislation to find if their disclosure is protected.

Many potential whistleblowers would be put off by the legal jargon and disinclined to act unless certain of their protection.

Whistleblower protection needs to be strengthened within the corporate sector and those driving the reforms should consider including the protection in the Companies Act in a form that clearly spells out the requirements and refuges available for the whistleblower.

Companies should also be encouraged to have whistleblowing procedures to give them a chance to deal with misconduct internally at an early stage.

Prevention is better than cure. The sight of disgraced company directors being paraded through the courts will provide cold comfort for investors who have lost everything. Corporate whistleblowers, if assured protection by clear and robust legal rules, might have stepped up and saved some of the losses.

Make no mistake - the outcome of the finance company collapses has been wide-ranging and has hurt us all. Responses to the collapses being considered at the moment include harsher penalties, making directors' breach of duty a criminal act, and public enforcement.

These measures alone will not stop corporate misconduct.

The best response may be to follow the example of our Australian neighbours and introduce comprehensive protection for company employees who reveal serious misconduct by directors.

Professor Susan Watson and PhD student Rebecca Hirsch are from the University of Auckland business school's commercial law department.

- NZ Herald

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