I have worked as Ethics Counsellor. The role consists of designing code of ethical conduct, spreading awareness, designing whistle blower policy to encourage employees to report violations and conduct inquiry in cases that get reported and submitting report to board of directors.
Based on my interactions with Ethics counsellors of other companies, in most of the companies very few cases of violation get reported every year.
In game theory there is game called “Volunteer’s dilemma”.
Suppose there is large pothole in a road in your housing complex, which creates problem for your car.
First possibility is you volunteer to fill up that pothole, if you do it, then others too benefit i.e. you bear the cost and they enjoy benefit free of cost.
Second possibility is someone else joins you in this task, now the cost gets shared, but others still enjoy benefit free of cost. In fact had you waited bit longer, the other person would have filled it and you would have benefited from it.
Third possibility is someone else fills it and you enjoy benefit free of cost.
Fourth possibility is no one fills it and in worse situation someone meets with a fatal accident.
Payoff matrix is shown below.
What volunteer’s dilemma shows is if other person volunteers then benefit to you is maximum, so you always wait for other person to volunteer.
The volunteer also faces other risks ex. Satyendra Dubey from National Highway Authority of India lost his life when he blew whistle to report fraud in highway project, similarly Manjunath from Indian Oil Corporation was killed when he exposed adulterated fuel scam.
Enron and WorldCom had Arthur Andersen as their auditors. As auditors it was their duty to report any financial irregularities, which they did not do. In fact in case of Enron they actively helped their client by destroying all evidence by putting documents in shredding machine. In Enron and WorldCom whistle was blown by their own employees.
In WorldCom, accountant Cynthia Cooper and her team blew whistle, when she found that operational expenditure was shown as capital expenditure with lower rate of depreciation, and at the same time fictitious sales were shown to increase the revenue. Chief financial officer Scott Sullivan was fired after an it was discovered that transfers from operating expenses to capital accounts amounted to $3 billion in 2001 and $800 million in the first quarter of 2002.This increased cash flow and profit margins, and led to a net loss being reported instead as $1.4 billion profit.
In case of Enron, Sherron Watkins reported financial irregularities to then CEO of Enron Kenneth Lay, but no action was taken on it. Later financial irregularities led to closure of Enron.
But whistle blowing also resulted in tremendous stress for Cynthia Coopers and Sherron Watkins. They must have face volunteer’s dilemma- volunteer and face problems or wait for someone else to blow whistle.
Net result was three companies- Arthur Andersen, Enron and WorldCom ceased to exist. Thousands of employees got laid off, many blamed Cynthia and Sherron for this.
Next time if you see few cases of whistle blowing, then volunteer’s dilemma has something to do with it.