Hidden skeletons: Why your firm needs a whistleblowing culture

22 Mar 2012News

William Dawson and Eleanor Rowswell of Farrer & Co discuss the key considerations in developing a firmwide whistleblowing culture

Four things you will learn from this Masterclass:

Why your firm needs to develop a whistleblowing culture
What processes to put in place to encourage whistleblowing
The legal loopholes which favour whistleblowers in the UK
How to protect your firm against potential claims

While in large part your fellow partners will be individuals of integrity, every managing partner knows that, from time to time, you are likely to come across an allegation of professional misconduct (or worse) against a partner or employee.

It’s usually better to find out the facts sooner rather than later so that you can take early action and ideally nip the issue in the bud before it escalates into a more serious regulatory breach.

Law firms are places where, surprisingly, there is not much discussion about whistleblowing. Indeed, whistleblowing policies are not necessarily standard in the same way as employee grievance procedures or disciplinary rules.

Defining whistleblowing

Whistleblowing is the term used to describe a situation where an employee or other worker raises a concern about illegal practices or other wrongdoing. Depending on the jurisdiction in which you operate, it is likely to have a specific legal definition.

In the UK, the Public Interest Disclosure Act 1998 provides a framework for the protection of the whistleblower who makes a “qualifying disclosure”, conveying information which, in the reasonable belief of the worker, tends to show that a specified type of malpractice has taken place, is taking place or is likely to take place. These include criminal offences, breach of any legal obligation, miscarriages of justice, danger to health and safety, damage to the environment and the deliberate concealing of information about any of these matters.

In the context of a law firm, you are likely to be dealing with the alleged commission of a criminal offence (most obviously fraud) or breach of a legal obligation. The latter category is very wide, and will cover, for example, breach of any contractual obligations owed by your firm to its clients, or even a breach of an employee’s own contract of employment.

Somewhat bizarrely, in the UK there is not currently a legal requirement that the disclosure is in the public interest, meaning that an individual employee can complain about the way he has been treated by his employer and can rely on this complaint as grounds for protection under whistleblowing legislation. The UK government’s proposed reforms in this area to remove this anomaly are welcome.

The UK whistleblowing regime does not cover a regulatory breach per se if such a breach does not in itself amount to breach of a legal obligation. But it will of course often be the case that a breach of regulatory obligation will amount to a separate breach of contract (such as a firm’s contract to perform services for a client in accordance with its regulatory obligations). It is prudent in any event to treat any disclosure of a regulatory breach as if it were covered by the whistleblowing regime.

Why a whistleblowing culture?

Early warning signals

The most important reason to develop a whistleblowing culture is to encourage transparency, so that concerns are reported to management as early as possible and therefore can be dealt with before significant damage has been done.

This is not something which has necessarily been encouraged in law '¨firms in the past. In fact, there has, from time to time, been a tendency for bad news to be buried.

However, as firms grow in size (particularly through mergers or team bolt-ons), it can become increasingly difficult for management to keep a '¨close watch on any potential concerns without adequate reporting structures '¨in place.

If staff feel that they will be seen as disloyal to their colleagues or their firm by reporting legitimate concerns, then that is a very dangerous environment to manage. It is well-nigh impossible for a managing partner to have oversight of everything that goes on in any firm, so you need to be able to rely on your staff to report concerns upwards – not necessarily directly to you in every case. You will need a risk management structure appropriate to your firm’s size and to share the responsibility of dealing appropriately with any allegations of wrongdoing.

Partnership issues

The culture at many law firms sometimes makes it difficult to manage your partners to ensure that a bright associate is not ostracised after making a disclosure about less than ideal behaviour on the part of one of your partners.

The nature of law firms is that work is in the gift of the partners and is allocated to solicitors who partners feel they can trust – not to those who are seen as disloyal or troublemakers. It is very easy for trust to be broken when a solicitor has, quite rightly, brought a matter to your attention (see box: case study).

Case study

Jane, an ambitious young associate, makes a disclosure to her managing partner about an inappropriate relationship between the head of her team, John, and a young solicitor on the other side of a transaction. She feels that there is potential for a conflict of interest and/or breach of confidentiality obligations.

She genuinely believes that there is cause for concern, but John is outraged that she has approached the managing partner to “tell tales”. John point-blank refuses to work with her, thereby removing her from some rewarding and high-profile work. To make matters worse, John makes clear to other partners within the team that he considers her commitment and work performance to be poor.

In this scenario, clearly the managing partner needs to conduct an investigation to get to the bottom of the allegation and take action accordingly. It is important not to lose sight of the need to support Jane and make clear to John that it is not acceptable for him to ‘send her to Coventry’ and isolate her from his work, particularly if Jane is part of a small team and is unlikely to be allocated challenging work from other sources.

This is especially important if it transpires that Jane’s concerns, albeit genuinely held, were not substantiated and/or John had already taken steps to manage the potential conflict of interest. In these circumstances, he is all the more likely to remain intransigent and unwilling to work with Jane in future.

There is also a question over what other partners should be told about the allegation, assuming that they do not know about it already and therefore take John’s concerns about Jane’s performance at face value.

It is therefore crucial that someone takes responsibility to ensure Jane’s career is not hindered by John’s behaviour, both in the interests of retaining talent and avoiding a potential whistleblowing claim.

Prospect of litigation

In the UK, if a whistleblower who makes a qualifying disclosure in good faith is subjected to detriment or dismissal by his employer (by, for example, being ‘sent to Coventry’ as in the case study), he can bring a claim in an employment tribunal for compensatory damages, which are theoretically uncapped.

For some, a whistleblowing claim is the winning ticket to damages that are not subject to the usual £72,300 cap on compensatory awards for unfair dismissal claims or a qualifying period of service.

Some claimants also feel that the pursuit of a whistleblowing claim does not carry the stigma of bringing a claim for discrimination (for which damages are also uncapped). They may therefore be more prepared to try their luck at a tribunal, usually with the aim of doing a deal somewhere along the line.

This is all the more likely given that the tribunals do not carry the same costs regime as the civil courts and, therefore, there is not the same financial downside to pursuit of a claim when it is only in very limited circumstances that the loser can be required to pay the winner’s costs.

Tribunals have made significant awards in the past. In 2010, Public Concern at Work reported that the highest whistleblowing award had been £3.8m and the average award was £113,677. These statistics do not, however, take into account the vast majority of cases that settle under confidential terms (all the more likely in the legal sector).

Where your whistleblower claimant is a lawyer with ambition (which, let’s face it, most of us are), then it is relatively easy for the disgruntled solicitor or salaried partner (who may well be an employee and therefore covered by whistleblowing legislation) to argue that, by being marginalised or sacked, he has sustained potentially career-long losses and should be compensated accordingly.

There are many lawyers around but, when it comes to litigation against law firms, it is a very small world and, as we '¨all know, it can be career suicide for a young lawyer to sue. As a result, high damages in some cases are a very real possibility, at least to the extent that the claimant has leverage to negotiate a settlement package in six and, in some cases, seven figures.

Limiting liability

Whistleblowing policy

So, do you need a formal policy? In the '¨UK (unlike jurisdictions like the US), there is no legal obligation to have a whistleblowing policy in place, but there are a number of good reasons to do so.

The aim must be to create an environment where your staff do not feel that they are likely to be victimised if they draw attention to wrongdoing and have the confidence to do so. The advantage of having a written policy in place is that you have a document accessible to all, where it is expressly stated that victimisation is prohibited and will not be tolerated, and that disclosure of suspected wrongdoing is actively encouraged.

A second (but also important) reason to have a written policy in place is that '¨if you are unlucky enough to need to defend a whistleblowing claim in an employment tribunal, you will immediately be on the back foot (particularly if you manage a medium to large firm) if you cannot point to a document which sets '¨out your approach to managing whistleblowing complaints.

There then needs to be a structure in place to ensure that individuals know whom to approach with a concern and, in particular, to enable them to bypass the person or management level to which the concern relates. In law firms, it is not always obvious who that person should be unless you have a clear policy in place.

Think carefully about who you nominate to consider and investigate any disclosures. It is not always sensible simply to name the head of a business function in every case. In order to facilitate internal disclosure, it is important to select individuals to whom staff feel comfortable reporting concerns. To get this right, you need to think carefully about the personality of any potential whistleblowing officers and, in particular, how they are perceived throughout all levels of your firm.

In the UK, the Solicitors Regulatory Authority’s code of conduct requires firms to notify the regulator promptly of any serious misconduct by any person or firm authorised by the SRA or any of its employees, managers or owners.

One of the indicative behaviours the regulator suggests would tend to show that you have complied with the SRA Principles is to have a whistleblowing policy in place (IB (10.10)), yet this is still not standard procedure in many law firms. That in itself is a good reason to have a written whistleblowing policy.

Firmwide training

There is little point in having a policy in place unless you draw it to the attention of staff.

If you are rolling out a new whistleblowing policy, then it makes sense to have some form of consultation with staff on the policy and to ensure that, once it is implemented, staff are made aware '¨of its content and purpose. The extent of that consultation will of course depend on the size and culture of your firm, and whether you already have a staff consultation body in place.

Firm culture

In reality, of more importance than a formal whistleblowing policy is adequate supervision and team working to foster the appropriate culture where mistakes come to light early.

If this culture is not proactively developed, then there is a risk that mistakes will be covered up and fester, rather than being dealt with properly '¨and sensitively.

Legal privilege

An area that requires very careful management is where an individual becomes aware of client wrongdoing '¨(in which your firm may be complicit).

Clearly, it will only be in extremely rare circumstances that legal professional privilege can be broken. For example, in the UK, there is a limited exception in the anti-money laundering regime where the information received from the client is communicated or given with the intention of furthering a criminal purpose.

However, you will still need to have a system in place for concerns to be reported upwards so that decisions can be taken at an appropriate level about whether, for example, your firm should continue to act for that client.

The reality is that sometimes the partner with responsibility for a big '¨client is not the best person to take '¨that judgement call (at least not in isolation without objective input), and therefore '¨your reporting systems need to take '¨that into account.

External perspective

If there are conflicting opinions amongst the partnership and you decide to seek external advice, be wary of using the '¨firm’s money to pay for such advice, '¨unless the firm’s management arrangements permit this.

If your partners have helped to pay for that advice as an expense of the firm but have not authorised it under the firm’s management arrangements, you may be placed in a tricky position when they ask to see a copy of it in circumstances where you would wish to keep that advice confidential to a handful of partners.

Internal support

Above all, ensure that you have adequate support from your management team to deal with the complex issues that can arise in a whistleblowing scenario. Careful planning in advance to ensure that you have support in place before a concern is raised is key. It will ensure that you are best placed to deal with the potential fallout both from the person about '¨whom a complaint has been made '¨and the whistleblower.

Developing a whistleblowing culture

Consider adopting a formal whistleblowing policy, but don’t forget the importance of training on that policy.
Consider as part of good risk management the importance of supervision and team working in fostering an open culture.
Think carefully about the personality of any whistleblowing officers, to ensure that they are people who are seen as approachable by your partners and staff.

Don’t

Take on all of the responsibility for the management of whistleblowing complaints yourself – ensure you have adequate support amongst your management team and consider appointing dedicated whistleblowing officers.
Allow a culture to develop of burying concerns and letting them fester. '¨Actively encourage the early reporting of concerns.

william.dawson@farrer.co.uk; '¨eleanor.rowswell@farrer.co.uk