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Abu Dhabi, UAEThursday 15 November 2018

Economics 101: Encouraging whistleblowers to help tackle corruption

Providing incentives and protection for people to report wrongdoing in the corporate world is crucial if graft is to be tackled within businesses

A member of the National Anti-Corruption Bureau of Ukraine stands guard next to a defendants' cage  in Kiev, Ukraine. Valentyn Ogirenko/Reuters
A member of the National Anti-Corruption Bureau of Ukraine stands guard next to a defendants' cage in Kiev, Ukraine. Valentyn Ogirenko/Reuters

Saudi Arabia’s November 2017 anti-corruption drive was a top-down initiative, and we do not know if there was any role for whistleblowers in notifying authorities about the activities that led to the arrests.

By late November, media reports indicated that the government was studying proposals to protect whistleblowers, as in any organisation - they can play an important role in limiting corruption anywhere. Can research provide policymakers with recommendations on the ideal system for encouraging people to assist government officials in detecting corruption?

Danila Serra, a professor at Southern Methodist University in Dallas, US, who won the 2017 International Foundation for Research in Experimental Economics Vernon Smith Ascending Scholar Prize for her research on corruption, has recently conducted a study with Jeffrey Butler (University of California at Merced, USA) and Giancarlo Spagnolo (Stockholm School of Economics, Sweden) on motivating whistleblowers.

The economists begin by drawing attention to several high-profile whistleblowers who have paid a stiff penalty for their decision to expose corruption. These include Ed Snowden, Chelsea Manning and Julian Assange, who have been accused of treason among other things. More generally, in the case of lower-profile whistleblowers, there are high costs, such as co-worker disapproval and ostracism, which can lead to harassment and job loss. Depending on how the public views them, whistleblowers may face societal disapproval, too.

In light of these risks, many potential whistleblowers prefer to keep quiet, which impedes authorities’ ability to combat corruption. For these reasons, governments need to consider formal, transparent systems for encouraging those aware of or suspecting graft to come forward. The researchers use a series of experiments to investigate the ideal properties of such a system.

Their first finding is unsurprising, which is that financial rewards motivate employees to expose corruption within their organisation. This is important because, in many cases, exposing corruption imposes a severe financial cost upon the employee who does so, such as when it leads to their being denied promotions or pressured into resigning. In fact, sometimes the whistleblower is actually benefiting from the corruption. In these cases, authorities are relying on someone to be so morally driven that they are willing to bear a financial penalty just because they want to “do the right thing”. While such people exist, they are too small in number for this to be a reliable strategy for combating corruption.

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Instead, authorities need to institutionalise financial rewards so that whistleblowers can feel confident enough to act. In the context of serious conventional crimes, people all across the world are accustomed to seeing explicit rewards for information leading to a conviction. Authorities may even declare the precise financial reward. However, we rarely see such public rewards for information leading to the arrest of people acting corruptly.

One potential reason for this apparent inconsistency is reflected in the researchers’ second finding. The level of social disapproval towards people convicted of corrupt behaviour depends upon how clearly the corruption hurts society.

In some cases, such as Bernard Madoff’s huge Ponzi scheme that led to charity fraud among many others, the damage is very clear, meaning that people will be very supportive of whistleblowers, possibly treating them as national heroes.

But in other cases, the costs of the corruption may be purely internal to the organisation, and people outside it might not be affected at all. In that case, society might regard the whistleblower as someone who violates the trust of their colleagues, and who can’t keep a secret.

In conventional crimes, such as theft or murder, it is clear to society why the act is so bad, making it easier for authorities to institutionalise a reward for exposing it. But in the case of corruption, it is harder to justify the reward to the public, because normal people do not always feel that they are benefiting from the actions of the whistleblower.

Prof Serra and her colleagues conclude, therefore, that financial incentives may be more important when the societal damage caused by the corruption is less clear to normal people than the obvious cases such as murder and theft.

Their research also highlights the importance of authorities explaining to the general public how corruption hurts them, to ensure that whistleblowers do not face ostracism. This is especially important in the case of corporate scandals where it is private rather than public money that is being stolen, as the public may be tempted to ignore it.

Culture plays an important role, and it is here where Saudi policymakers may have an easier problem to solve than their western counterparts. In countries such as the UK and USA, there is a culture against informing an authority figure about someone doing something wrong, with many negative words being used to describe small scale whistleblowers.

In Islamic countries, in principle, this culture should be absent, as the Quran unambiguously urges Muslims to take steps to stop wrongdoing. In the event that a Muslim faces a penalty for doing so, they have the option of keeping quiet, but Islam still encourages them to speak out.

The negative vocabulary for people who report violations to authorities in Arabic is definitely not as rich as in western countries. As a result, authorities may wish to stress the Islamic duty to contribute to the fight against corruption.

Omar Al-Ubaydli (@omareconomics) is a researcher at Derasat, Bahrain.