NAVEX Global continues to publish important research and guidance on ethics and compliance program (benchmark reports for hotline systems here, third-party risk management systems here, and policies and procedure management here).

In an interesting new report (here), NAVEX Global enlisted Professor Kyle Welch from George Washington University’s Business School to analyze years of NAVEX Global’s hotline data.  Professor Welch was given access to over ten years (2004 to 2017) of NAVEX Global’s hotline data (which was anonymized), which totaled approximately 3 million internal report records from 5000 public companies, including more than half of the Fortune 500.

Professor Welch’s conclusions are significant.  Companies that implement robust and widely-used internal reporting systems benefit from a flow of information from reporting employees and are better able to identify and remediate problems before the problem becomes larger and costlier.

The study shows a correlation between increased use of internal hotline reporting systems and improved business performance.  The benefits to a company increase with use of the hotline reporting system.

Increased Return on Assets.  Higher levels of hotline usage correlates with increased profitability and productivity as measured by return on assets (ROA).  The specific amount of improvement was approximately a 2.8 percent increase.

Fewer Material Lawsuits.  Companies with higher levels of reporting were subject to 6.9 percent fewer pending material lawsuits in the subsequent three years than those with lower levels of hotline activity.  Companies that actively monitored their hotline reports had even lower rates of material lawsuits.

Lower Litigation Costs.  When material lawsuits were initiated against companies, companies with higher hotline usage faced 20.4 percent less in total settlement amounts.  This finding suggests that companies with active hotline reporting system are able to intervene and remediate a problem before the problem results in a significant lawsuit

Fewer External Whistleblower Reports.  Companies with more internal reporting activity experienced fewer external reports (to the Occupational Health & Safety Administration, which receives whistleblower reports under Section 806 of the Sarbanes-Oxley Act).

Professor Welch’s study also found that lower levels of hotline activity were associated with suspect corporate governance and financial reporting.

Weaker Governance Practices.  Companies with lower-level hotline activity rated poorly on basic governance indices which measure governance practices such as staggered boards, limited shareholder rights and golden parachute payments for senior executives.

Earnings Management.  Firms with lower-level hotline activity also tend to claim, “discretionary accruals” (as an indicator of earnings management) more often.  In addition, companies with more discretionary accruals tended to experience more external whistleblower reports.