Sarbanes-Oxley’s Structural Model to Encourage Corporate Whistleblowers

I. Introduction 1107 II. The Need To Encourage More Effective Whistleblowing .... 1109 A. Information Problems and Traditional Corporate Monitors 1109 B. Overcoming Information Problems-Employees as Corporate Monitors 1109 III. Two Whistleblower Models 1109 A. Insufficiency of the Anti-retaliation Model 1109 B. Ineffectiveness of Pre-scandal Versions of the Structural Model 1109 C. Sarbanes-Oxley's Structural Model 1109 IV. The Power of Sarbanes-Oxley's Structural Model 1109 A. More Disclosures 1109 B. Less Blocking and Filtering 1109 C. secondary Benefits : 1109 V. Strengthening the Structural Model 1109 A. Mandating the Model Effectively 1109 B. Addressing the Cheating Problem 1109 C. Addressing the Noise Problem 1109 VI. Conclusion 1109 I. INTRODUCTION Recent corporate scandals reveal opposing perspectives on the ability of rank-and-file employees to be corporate monitors. From one perspective, the scandals demonstrate employees' efficacy as monitors with accurate insider knowledge about the inner workings of their corporations. At great risk to their careers, a few employee whistleblowers bravely attempted to expose wrongdoing at many corporations involved in recent scandals, such as Enron, WorldCom, Global Crossing, and several mutual fund companies.1 Viewed differently, however, the scandals also illustrate the difficulty of relying upon employees to function as effective corporate monitors. The financial misconduct at Enron and other companies lasted for years before being revealed publicly.2 Countless lower-level employees necessarily knew about, were exposed to, or were involved superficially in the wrongdoing and its concealment, but few disclosed it, either to company officials or to the public.3 Thus, while the corporate scandals demonstrate employees' potential to monitor corporations, they also confirm that this potential often is not fully realized. The most recent attempt to encourage employees to become more effective corporate monitors is the Sarbanes-Oxley Act of 2002, passed by Congress in response to corporate scandals.4 The Act utilizes two approaches to encourage corporate whistleblowers.5 The first is best described as a version of the well-known Antiretaliation Model, which involves protecting whistleblowers from employer retaliation after they disclose wrongdoing.6 The second approach, labeled in this Article as the Structural Model, requires that corporations provide employees with a standardized channel to report organizational misconduct internally within the corporation.7 While academic and public attention has focused almost exclusively on Sarbanes-Oxley's version of the Anti-retaliation Model,8 this Article is the first comprehensive academic work to analyze the ability of Sarbanes-Oxley's Structural Model to engage corporate employees in the battle to reduce corporate fraud. Utilizing social science research that analyzes whistleblower motivations, I conclude that the Structural Model may produce more effective disclosures from whisdeblowing employees than prior attempts to encourage whisdeblowing because the Model addresses two significant problems that previously kept employees from consistently functioning as successful corporate monitors: (1) the corporate norm of silence, and (2) the corporate tradition of blocking and filtering employee whistleblowing. …