Sunday, November 12, 2006
Helping the State: The Role of the Press and Whistleblowers in Fighting White-Collar Crime
Be that as it may, what is interesting in this case is the way in which this issue was made public. In fact, Cablecom, as non-listed company, does not publish any annual report or accounts. Hence, no information about the value of the company and the shareholdings of its executives is available. In fact, the above-mentioned facts and financial figures where made public by an employee who got hold of a copy of the “confidential” annual report and informed the press.
Even though this particular case is, at most, a case of reprehensible moral behaviour (realising a benefit of 5000% on one’s investment and at the same time laying-off 260 staff in order to reduce costs), the mechanism that was at work is very important. Several academics in the field of finance have expressed the view that a functioning (financial) press – i.e. one that is precisely capable of revealing this kind of incidents – can serve as a functional equivalent for legal protection of investors and other stakeholders that do not control the companies decision-making process. In other words, in countries where minority shareholders and other minorities in the firm are not well protected in company law, the public denunciation of “crooks” in newspapers can have a deterring effect on other potential crooks and can permit to punish crimes that otherwise would go unpunished. This at least is the thesis defended by Alexander Dyck and Luigi Zingales in their study on private benefits of control.
This brings us back to a point, which I’ve made in several previous posts. In fact, I have pointed out the limits of public regulation for preventing “misbehaviour” by corporate insiders. The financial press is in fact a mechanism that can denounce criminal or unethical behaviour, push the corporate elite to justify their actions, and put certain issues on the political agenda by creating a public pressure. Even though such mechanisms can of course be (ab)used for populist goals, the financial press can exercise a certain control over corporations in ways that the state cannot.
This is especially the case, where there is no immediate clearly identifiable victim of the insiders’ actions. Most legal offences of corruption are such cases: none is immediately harmed and none is hence going to file a law suit against the delinquent. In such cases, the denunciation of crimes – or supposed crimes – to the press by another corporate insider can prove to be the only way to stop this kind of wrongdoings.
The legislators in different countries seem to have understood this and have adopted legislation that aims at protecting the so called “whistleblowers”, i.e. employees of a company that denounce the fraudulent and criminal behaviour of their collaborators or superiors. In the
All countries, however, do not seem to adhere to this view. Thus, in May 2005, the French commission on the protection of data privacy (Commission nationale de l’informatique et des libertés, CNIL) has prohibited two companies to establish such “ethical lines” for whistleblowers, fearing that such hotlines could lead to an “organised system of professional denunciation”. The risk of some whistleblowers being motivated by personal motives rather than a genuine will to knock criminal behaviour in their company on the head can of course not be completely excluded. However, such hotlines do constitute an instrument for fighting crime, in a place where the state has no chance to do so.
I guess the advocates of this view just scored a point when we look at the “Hartz-Prozess” in Germany (cf. http://www.faz.net/s/RubFC06D389EE76479E9E76425072B196C3/Doc~EDC7C2DC2FC9340B7A711CE43B363DA4C~ATpl~Ecommon~Scontent.html. )In fact, the German corporate governance system is characterised by its far-reaching codetermination rights for employees; meaning that half of the seats on the supervisory board of large stock corporations are held by employees and/or union representatives. This is of course a potentially powerful means of internal control. However, what happened at Volkswagen during the era of Peter Hartz, is that large sums were spend in “gifts” to supervisory board members, and notably to the employees representatives, in order to buy their votes for difficult decisions. This extreme case does of course not put into question the codetermination system as such, it shows however poignantly the limits of the reliability of internal control mechanisms. The problem is – in my view – that when a very limited number of people interact over a long period of time and have collectively far-reaching control over resources, sooner or later someone will be tempted to abuse this power…
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