Fiduciary Duties + Whistleblowing Procedures

In the book Republic, Plato 1974, Glaucon’s view is that we should trust others only if we are confident that they fear detection and punishment sufficiently to deter them from harming us.Image

It is only relatively recently that we have seen the introduction of legislation which recognises the importance of whistleblowing and the need to protect those who engage in it.  This has created a new legal climate and raises important questions about the continuing validity of the common law’s traditional and simplistic approach to notions of trust and loyalty. We need to acknowledge the reality that different forms of trust and conflicting loyalties exist at the workplace. In many situations it is assumed that employees have agreed to act solely in the interests of the employer and the obligation of loyalty has been viewed accordingly.  Given that employees are entitled to have regard to their own interests and the serious risks involved in being a whistleblower, it is often suggested that employers and the courts should not be encouraged to impose contractual duties to report wrongdoing.  Instead they should endeavour to promote trust and confidence in an internal whistleblowing process through the provision of and adherence to codes of ethics, the negotiation and maintenance of effective whistleblowing procedures and the promotion of a general culture of openness at the workplace.

Let’s look at work place loyalty. The object of such loyalty “is not the physical aspects of the company – buildings, executives, boards, hierarchies, colleagues – but the explicit set of mission statement, goals, value statement and code of conduct of the organization which is judged as legitimate”. Therefore, if the organisation departs from its mission, goals and values, “rational loyalty” would justify whistleblowing: “the employee does not owe any loyalty towards the organization identified through organizational behaviour that runs counter to the kind of behaviour described in its mission statement” (Vandekerckhove 2006).

What is perceived to be wrongdoing? Apart from any statutory definition, as well as whether to report it, will be affected by a variety of factors.   At a personal level, values will be shaped by moral perceptions and ethical reasoning.  An employer’s approach, which may manifest itself, for example, through a code of ethics and/or a whistleblowing policy, is however, likely to influence an individual’s attitude to wrongdoing.  Indeed, there appears to be a greater incidence of whistleblowing where the individual perceives a high congruence between personal and organisational values (Near & Miceli 1996).

However, the assumed congruence between the values of employers and employees inhibits the acknowledgement of obligations towards the family, the workgroup, a professional body or trade union, to consumers and wider society. Mostly, employees are required to give work priority over domestic demands. In addition to obeying lawful and reasonable orders, the implied duty of loyalty requires employees to render faithful service to the organisation. It is clear that employees are not expected to put themselves in a position where their interests conflict with those of their employer.  This results in a rather negative view of those who raise concerns about wrongdoing and blow the whistle. “Since employers very rarely approve of whistleblowing and generally feel that it is not in their interests, it follows that whistleblowing is an act of betrayal on the part of the employee…”

Further conflict arises from the blurred distinction between fiduciary obligations and the implied duty of good faith or fidelity implied into contracts of employment. In reality, the duty of fidelity is not distinct from a fiduciary obligation or duty of confidence.  Fiduciary obligations are derived from equitable principles which require a person to act solely in the interests of another. According to Millett L.J., a fiduciary is “someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence.”  In theory, fiduciaries have a positive duty to disclose information which is not imposed on ‘ordinary’ employees via implied contractual terms. However, it is clear that the distinction between ‘senior’ and ‘ordinary ‘employees is difficult to maintain in practice. According to the literature on law and economics, fiduciary relationships were created to deal with “lack of control and the resulting problems of detection of wrongdoing” (Simms 2001 at page 107).

 Although a contract of employment does not in itself establish such a fiduciary relationship, fiduciary duties might be imposed in a range of circumstances.  For such duties to exist there must be evidence that the employee has undertaken specific commitments to act on the employer’s behalf. It follows that, in addition to company directors, senior managers are most likely to have fiduciary obligations but these do not exist simply because of their position in the organisation.  Exceptions to the employee’s duty of fidelity have been recognised where an organisation’s activities conflict with the public interest.  More recently, legislation has been introduced which acknowledges that workers may have loyalties towards both their dependants and the general public.  The employee’s implied obligations of loyalty or fidelity have evolved over the centuries and currently manifest themselves in the form of a duty to co-operate. This is clearly based on the premise that workers are engaged to promote the commercial interests of the employer.  The reciprocal obligation on employers is a duty to maintain trust and confidence and this is regarded as a fundamental term in contracts of employment.   Both the positive and negative aspects of the duty of trust and confidence are relevant to whistleblowing.

It is suggested that employers who impose a contractual duty on workers to report wrongdoing without indicating when and how this should be done will potentially undermine trust and confidence – when a concern arises and the lack of an appropriate reporting policy or procedure will have the effect of preventing the performance of the employee’s duty. Employees who have contractual duty to report need information about how to do so and it is irrelevant whether the issue is bullying, discrimination, financial or other forms of wrongdoing. It is not being argued that a failure to provide a suitable procedure would in itself amount to a repudiation of contract but that it could constitute a breach if certain circumstances arose.

Organisations can encourage trust by introducing suitable whistleblowing policies and procedures but these may be of limited effect if top management does not reinforce ethical behaviour. In this context an employee’s experience of what happens when concerns are raised may well be more important than the existence of proper procedures. In the same way as internal whistleblowing can reflect a degree of loyalty to the organisation, it can also be seen as a display of trust in its management.

A code of ethics or whistleblowing policy should be produced after consultation or negotiation with employee representatives but senior management must be seen to act in accordance with it.  Staff should receive a copy of both the ethics code or policy and a confidential reporting procedure.  This could boost trust by emphasising that whistleblowers will be protected against retaliation and that allegations that are both false and malicious will lead to disciplinary proceedings.

In the same way that disciplinary and grievance procedures are not required by law but it is difficult to operate a business fairly without them, it is hard to see how trust and confidence can be maintained in an organisation that does not provide a mechanism for reporting concerns. If legislation which obliges employers to have a whistleblowing procedure is not introduced, other indirect forms of pressure might need to be exerted. For example, in relation to the directors’ common law duty of care, Parker J. has stated that, “Directors have, both collectively and individually, a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company’s business to enable them properly to discharge their functions as director.” It might be argued therefore, that in order to fulfil their duties under both the common law and the Companies Act, directors must ensure that a proper procedure is available for staff to raise concerns about wrongdoing.         

With full credits to David Lewis, Professor of Employment Law, MIddlesex University, London

 

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