Whistle-Blowing Systems and Legitimacy Theory: A Study of the Motivation to Implement

Whistle-Blowing Systems in German Organizations Author(s): Esther Pittroff Source:

Journal of Business Ethics, ​Vol. 124, No. 3 (October 2014), pp. 399-412 Published by:
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J Bus Ethics (2014) 124:399-412 ​DOI 10.1007/s 10551-013-1880-2

Whistle-Blowing Systems and Legitimacy Theory: A Study ​of the Motivation

to Implement Whistle-Blowing Systems ​in German Organizations
Esther Pittroff
Received: 7 February 2013/Accepted: 26 August 2013/Published online: 5 September 2013 ​© Springer Science+Business Media Dordrecht
2013
Abstract Until now, there has been no theoretical foun dation that explains why organizations implement whistle blowing systems.
By understanding whistle-blowing sys ​tems as an instrument that is desired by society, the legiti m ​ acy theory could be transferred
to the whistle-blowing concept. A survey of German managers shows that legiti ​macy theory may be supported. Further insights
into legiti
macy theory are given by the motivation for the design of the ​implemented systems. The survey shows that, in particular, ​the
implementation of external whistle-blowing systems is ​seemingly not driven by desired effectiveness. This supports ​legitimacy theory,
since it reveals that external systems are ​symbolic rather than substantive systems. However, the results do not hold for internal
whistle-blowing systems ​because the implementation of internal systems is ostensibly ​driven by power theories. The results are
interesting for the ​planned statutory whistleblower protection as they reveal a ​partially restrained attitude toward whistle-blowing.
Whis ​tle-blowing systems are not effective if management is not ​convinced of their benefits.
Keywords Corporate social responsibility • ​Effectiveness • Legitimacy theory • Power theory ​Whistle-blowing • Whistle-blowing
systems
Introduction
Corporate scandals and the publication of internal infor ​mation by so-called whistleblowers reveal the challenge
E. Pittroff (El) ​Institute of Accounting, Finance and Taxation, University of ​Leipzig, Grimmaische Str. 12, 04109 Leipzig, Germany ​e-mail:
pittroff@wifa.uni-leipzig.de
that is connected with their behavior. Whistle-blowing has ​potential benefits: The information can contribute to pre venting
organizational wrongdoing, which would possibly ​lead to damages for the organization (Lombardi 1988, p. 155; Miceli and
Near 1992, pp. 11-13; Callahan et al. ​2002, pp. 195-196). However, whistle-blowing can induce ​negative consequences. If
the information reaches organi zational outsiders, it may cause damage of reputation and ​criminal consequences (Dunfee
1990, p. 132). The benefit ​of a whistle-blowing system is the avoidance of such dis advantages by ensuring that the information
is given to ​someone inside the system. The organization benefits from the possibility to stop wrongdoing before it becomes public
(Miceli and Near 1992; Callahan et al. 2002; Moberly ​2006). Finally, the system supports the prevention of cor porate
scandals.
The advantages of a whistle-blowing system for the organization are evident, but whistle-blowing seems to ​remain a
sensitive topic for the organization, since whistle ​blowers may be seen as disloyal (Gobert and Punch 2000, p. 52; Moberly 2006,
p. 1155). Although empirical results ​actually confirm the opposite result (Jos et al. 1989; Miceli ​et al. 2008), that is,
whistleblowers are in fact loyal and
identify themselves with the goals of the organization (Lewis ​2011; Lindblom 2007; Vandekerckhove and Commers 2004; ​Varelius
2009), it is not clear whether management is aware ​of this.
There are many studies that investigate the participants of ​the whistle-blowing process—who blows the whistle and why—and these
explore the occurrence of retaliation (for ​example, Near and Jensen 1983; Near and Miceli 1985, ​1986, 1987). Furthermore,
whistle-blowing is the subject of ​many legal studies discussing how to promote "good" ​whistle-blowing (for example, Callahan
et al. 2002; Dworkin 2007; Moberly 2006). The most recent literature follows the
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400 E. Pittroff
management v ​regards to how
implemented (H ​dekerckhove an ​retical foundati ​implement whis ​a specific form
tributes to the ​framework from ​framework that
theory. Ultima
legitimacy theor ​of whistle-blow
Legitimacy th investments in ​(Perrini et al. 2 ​be seen as an in ​to be applicable ​assumption that ​existence of th
license to ope ​Schrader 2005, t​ ribution to fin macy theory fo and Unerman 20
topics in the ​accounting scan ​decisions of th F ​ rom the persp ​tation of a whi s​ ocietal demand.
Furthermore, the study examines the design of the ​implemented whistle-blowing systems and especially the ​reasons that
lead to the choice of a particular design. These
results give further insights into the link between legitimacy ​theory and whistle-blowing systems. The prevention of ​corporate
scandals requires the effectiveness of the whistle ​blowing system. The literature defines effective whistle blowing procedures
using terms from power theory and ​defines effectiveness depending on the power of the partic ipants of the whistle-blowing
process (Near and Miceli 1995; M ​ iceli and Near 2002; Skivenes and Trygstad 2010). The ​design of the implemented systems
differs significantly between the organizations. The most significant difference between the implemented systems is whether the
whistle blowing recipient is located inside or outside the organiza ​tion. Both forms have advantages (Miceli and Near 1985,
2002; Dworkin and Baucus 1998) and are seen as effective ​(Vandekerckhove and Lewis 2012, p. 255).
Following legitimacy theory, the whistle-blowing sys ​tem may be implemented only at the request of the society. ​Management
possibly does not want to change the business
procedures. In order to attain legitimacy it is not necessary
to know how the organization is actually behaving, instead ​it is important what society perceives and knows about the ​behavior of
the organization (Deegan and Unerman 2011, ​p. 324). Whistle-blowing systems may only be a symbolic i​ nstrument that help to
create a so-called legitimacy facade (​ MacLean and Behnam 2010). The study therefore exam ​ines whether the choice of a
particular design of the system ​supports legitimacy theory.
The remainder of the article is as follows: The next s​ ection gives an overview of related research about whis ​tle-blowing. It will
be shown that whistle-blowing systems are beneficial for an organization in order to prevent cor porate scandals. In the following
section legitimacy theory ​is presented as a possible theoretical framework for the
implementation of whistle-blowing systems. It will then be ​explained how a whistle-blowing system has to be designed ​so that it
works effectively. After this theoretical back ​ground the hypotheses are developed. The subsequent ​sections present the
methodology applied in this study, the ​sample selection, and the empirical results. Finally, the ​implications of the findings
are discussed. The article ​closes with some concluding remarks.
Whistle-Blowing and the Benefits of Whistle-Blowing ​Systems
Research on whistle-blowing dates back to the 1980s. The ​most common definition of whistle-blowing was formulated by Near and
Miceli in 1985. They defined whistle-blowing as ​"the disclosure by organization members (former or current) of illegal, immoral or
illegitimate practices under the control
of their employers, to persons or organizations that may be ​able to effect action" (Near and Miceli 1985, p. 4). The ​majority of
the studies concentrated on the participants of the ​whistle-blowing process and investigated the question of ​who blows the whistle
and why. They found out what kind of ​employee blows the whistle and in which organizational ​circumstances as well as
exploring factors that lead to ​retaliation against whistleblowers (for example Near and ​Jensen 1983; Near and Miceli
1985,1986,1987). One of the ​largest empirical studies was conducted in the Australian public sector (Brown 2008).
Researchers agree that whistle-blowing is beneficial if it occurs in good faith. In contrast, organizations do not often ​view
whistleblowers as heroes but rather as villains.
Whistle-blowing is often perceived as disloyal employee ​behavior (Gobert and Punch 2000, p. 52; Moberly 2006, ​p.
​ ctually very
1155), despite empirical results that show the opposite ​(Jos et al. 1989; Miceli et al. 2008). Whistleblowers are a
loyal to their employer and the organization ​because their loyalty and moral judgment is directed t​ oward the goals of the
organization and the public interest
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Whistle Blowing Systems and Legitimacy Theory 401
(Lewis 2011; Lindblom 2007; ​the V ​ andekerckhove w ​ histle-blowing channel ​and Com
​ eem ​organizations ​to be effective ​nevertheless
is left ​mers 2004; Varelius 2009). But s
(Brown 2008 ​fear that the implementation L ​ ewis ​of a 2
​ 012).
whistle-blowing system might destroy the work environment (Greenberger et al.
1987; Dunfee 1990; Moberly 2006). Moreover, opportu ​nistic motives could be responsible ​Whistle-Blowing ​for the
whistle-blowing
Systems and Le ​behavior. Whistleblowers may try to exact revenge on a ​colleague, or they may make ​The ​groundless
implementation ​or false ​of ​claims,
whistle-b ​only to fall under the protection ​explained ​of the ​with ​system ​legitimacy ​(Anechiarico
theory. ​and Jacobs 1996; Gobert and m ​ ainly ​Punch b ​ een ​2000; a ​ pplied ​Schmidt t​ o explain ​2005).
corp As a consequence, legal studies ​environmental ​examined how ​performance ​to promote
or CSR ​beneficial whistle-blowing ​(for ​that ​example. ​includes ​Brown ​avoiding ​and ​oppor
Deegan ​tunistic motives of the whistleblower, P ​ atten 2002). ​punishing C
​ entral to ​knowingly
this theory i ​false claims or punishing retaliation implies that against the whistleblowers
existence of an org ​(Callahan and Dworkin 1992; b ​ oundaries ​Callahan et a ​ nd ​al. 2002; n​ orms ​Latimer
of the soci and Brown 2008).
1998, p. 22; Hooghiemstra 2000, p. ​Mostly whistle-blowing first ​contains ​occurs inside ​specific ​an organization,
expectations of th ​and if it is not successful the mal whistleblower behavior of an sometimes organization goes
(Saw outside (Donkin et al. 2008; Miceli ​as the a ​ nd ​organization N ​ ear 1994). ​credibly T ​ he latter
sign c​ an be harmful for the organization ​requirements a​ s well ​of a​ s ​the f​ or ​society, t​ he whis
it can tleblower. Consequentially, ​license l​ egal studies ​to operate ​have concentrated
(Cramer 2002, o ​ n the regulation of whistle-blowing ​rader 2005, t​ hat ​pp. m ​ otivates ​373-374), o ​ rgani
which can ​zations to implement structures ​of its ​promoting ​continued ​whistle-blowing ​existence (Brown ​to
a
someone inside the organizations ​2009). In ​in ​particular ​order to avoid ​highly ​costly
​ xternal whistle-blowing ​pollution ​(Dworkin ​and 2
charged t e ​ 007; ​its S
​ chmidt ​corresponding ​2005;
soc ​Moberly 2006). It is nevertheless ​ered ​unclear ​in the ​whether ​decisions ​this ​of ​changes
an organiz ​management's attitude toward ​1977). ​whistleblowers.
Since perceptions about the e T ​ o conclude, one can state ​different t​ hat most ​from s ​ tudies ​manager ​have ​to ​con
manag c​ entrated on the social or ​lishes p ​ sychological ​specific strategies f​ actors ​to a ​ nd ​fulfill ​cir
t ​cumstances that lead to whistle-blowing. ​In this regard, the social ​This ​contract
has ​enhanced the understanding ​procedures ​of the whistle-blowing ​that prevent ​process
corporate and the action of each participant. ​ing scandals ​Finally, ​or ​the ​environmental ​result is a
po ​positive understanding of whistle-blowing ​scandals often result ​that leads ​from ​to ​managem
a demand for establishing whistle-blowing the misconduct systems or unsuccessful in the
int
organizations. A whistle-blowing ​society may s ​ ystem ​demand c ​ an ​an b​ e ​initiative u
​ nder
of ​stood as an instrument that that helps it has to changed detect misconduct
its actions an ​before it becomes public (Miceli ​respect. ​and ​The ​Near ​terms ​1992; ​of C
​ allahan
the social ​et al. 2002; Moberly 2006).
mechanisms that prevent corporat ​In recent years, the managerial nected view financial of whistle-blowing
losses for the inve
was intensified after corporate s​ ystem ​scandals c​ an be ​that u
​ nderstood ​also enhanced
as an instr ​communication about CSR ​the contract.
(Arvidsson 2010) and the ​establishment of corporate ​If an ​governance ​organization breaches the ​codes. ​social contract
Organiza
and acts ​tions try to prevent corporate ​against the ​scandals ​societal norms, ​by ​a so-called ​investing ​legitimacy gap arises
in CSR ​or fulfilling codes of governance. ​(Brown and Deegan ​In ​1998, ​this ​p. 24; ​regard, ​Deegan and Unerman
a whistle blowing system can be integrated 2 ​ 011, p. 329; Lindblom i​ nto 1​ 993, ​these p ​ . 9) that ​investments.
can lead to enor ​The implementation of a whistle-blowing ​mous reputational damage. The ​system ​extent of the damage
focuses on the prevention of publicized depends on the information severity of the legitimacy that gap. Whenever
may lead to corporate scandals, lawsuits, legitimacy and is threatened, fines. the manager The has different increasingly
alter ​prevalent managerial view ​natives ​leads ​to take ​to ​action ​the ​(Brown ​establishment ​and Deegan 1998, p. 23;
of ​guidelines that present elements ​Deegan and Unerman ​of ​2011, p. ​effective ​333). It is either possible ​whistle
to ​blowing procedures (BSI ​report ​2008; a
​ bout ​Data-Protection-Group
the actual changes in the activities and the ​2006). However, these do not performance offer of the a organization special in
order design to show conver
​ f ​expectations ​whether ​(Dowling ​to ​and ​outsource
of the ​system; in particular, the question ​gence with societal o
Pfeffer
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402 E. Pittroff
1975, p. ​studies ​127; ​f
G2 ​ 009), or ​Patten ​the m
2d​ oes not ​cannot
actual sible to ​(McWill
draw a from the financia
legiti ​change ​tle-blow
the ex ​Pfeffer ​the ​1975,
fina Transferred by the to
f society generate
demand ​tion, the c ​ osts. ​manag
A ​system ​blowers
and repo ​enhanced despite reput
e uncovering To concl
cor ​This enhances
mentatio ​society. ​societal
It is no behaves s​ ignals ​in the
th ​ceives ​helps ​the org
to ​2011, p. ​of ​324). ​the co
T does not implem ​draws attention ​the other ​Effectiv
hand, ​whistle-blowin ​alternatives ​In order
are ​One has ​successfu
also to ​problems ​has ​in ​to b
m ​repairing ​connecte
it wh ​(Deegan l​ egitimac
and U ​macy first ​not able
lead ​second effective
to the p ​enhance ​with ​legiti
imp necessary t​ ially, ​to att
th ​areas and ​the ​needs
moti ​step is clear to repai
wh m ​ ens, ​determin
for exa ​compliance ​system ​sect
a ​chke et ​systems.
​ as caused ​The b
al. 201 w ​ y ​eff
u have been system prev
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the ​tem. Other o ​ ries, ​org
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kind in ​In the ​process
end, le ​tional" ​2010). ​financia
P ​investment ​immate
ha ​run, the ​employe
invest ​well-being these beca
po From a ​they ​short-t
ar ​efits seem resource to b ​macy theory.
Power c ​corporate someone
finan ​empirical ​done ​resu
oth studies ​Based ​confir o
​ ​Simpson ​blowing,
and K
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Whistle Blowing Systems and Legitimacy Theory 403
influence of the whistleblower. p. 692). Empirical Ultimately, whistle-blowing studies systems confirm
should favor ​this relationship (Miceli and c​ onfidentiality, ​Near, w ​ hereby ​2002; t​ he addressee ​Skivenes ​knows the ​and
identity of ​Trygstad 2010). If whistleblowers t​ he whistleblower ​have b ​ ut keeps ​no i​ t ​power s​ ecret. An external ​resour
addressee ​ces, they should contact a person ​seems to o ​ r ​be more i​ nstitution ​feasible for fulfilling w ​ ith t​ his e
​ nough
requirement influence. The addressee of the (Miceli complaint and Near 1985).
henceforth has t​ he responsibility to clarify the ​The r​ eported ​decision to implement m ​ isconduct ​either an internal (​ Near
or an and Miceli 1995, pp. 693-694; ​external ​Miceli ​system is ​and ​a tradeoff ​Near, ​between the ​2002).
power of the ​Nevertheless, the addressee should ​addressee and ​appear ​the protection ​credible ​against the ​to ​power ​the
of other ​whistleblower in order to signal ​people. ​his B ​ ut if ​willingness ​legitimacy theory holds, ​to use ​the decision ​his
to ​power in the whistleblower's implement favor a (Near whistle-blowing and system Miceli is not driven 1995,
by this ​pp. 693-694). This addressee t​ radeoff, ​may ​since ​be e ​ ffectiveness ​someone i​ s not required. ​inside T ​ he study ​or
will ​outside the organization. Empirical ​determine what motivates s ​ tudies ​organizations ​provide ​to implement ​no
an information as to which form e ​ xternal ​is o
​ rm
​ ore ​an internal ​effective w ​ histle-blowing ​(Dworkin
system in order to ​and Baucus 1998; Miceli and ​conclude N ​ ear, ​whether ​2002).
legitimacy theory holds. ​Aside from the power of the whistleblower or the ​addressee, the effectiveness also depends on the
power of other ​blower ​persons. ​(Skivenes ​Power ​and ​may ​Trygstad ​be ​Hypotheses
directed ​2010). ​against ​Retaliations ​the whistle
or the f​ ear ​effectiveness ​Effectiveness o​ f retaliations ​(Miceli ​ultimately h​ ave ​and a​ n enormous ​Near, ​depends ​2002).
influence ​on the power o ​ n the
of three
Model of Whistle-Blowing 1: The Motivation Systems for the and Implementation
Legitimacy Theory
bers ​persons: w ​ ith of retaliation. the ​The o​ rganization w ​ histleblower, S ​ ince the who whistleblower may ​the t​ hreaten ​addressee, o ​ ften
the ​and d​ oes whistleblower ​other n ​ ot have
mem
As ​because ​organization ​described ​of the ​may a ​ bove ​enhanced ​benefit ​legitimacy ​from a ​ cceptance ​a t​ heory ​whistle-blowing
in society. ​implies that ​The ​system
orga ​the
enough ​power and ​power, ​the whistleblower ​the addressee should ​should ​be ​be ​provided ​protected ​with ​against ​enough
nization ​2002; ​the
can only profit from the license to operate (Cramer ​Hansen and Schrader 2005) if it meets the require ​power of other persons.
Various guidelines give advice for ​ments ​a
of the society (Sawyer et al. 2010). Recent corporate ​internal ​best be ​society ​Data-Protection-Group ​effective. practice ​does ​as
well ​not ​For whistle-blowing ​as ​prefer ​legitimacy ​external ​any ​2006). ​systems, ​particular ​theory, system ​All ​since ​this ​of ​(for ​design
both ​these ​result example: ​of ​forms ​recommend ​implies ​the ​BSI2008; ​seem ​system, ​that ​Legitimacy organizations ​scandals ​the
scandals t​ o
have increased public awareness of this topic. ​is threatened if there is a difference between ​expectations of the society
and the actions of the
with regard to the prevention of corporate ​(Brown and Deegan 1998; Deegan and Unerman s​ ince it is not possible to deduce
effectiveness from it.
2011; Lindblom 1993). Whenever a legitimacy gap arises ​have ​From ​a more ​a power ​powerful ​perspective, ​addressee, ​the
internal ​because tracing ​system ​the ​seems m​ al
activities to ​the organization ​of the organization ​may report ​in order ​about ​to ​the ​show ​changes ​convergence
in the
practice is easier for an insider. Furthermore, as a member ​with ​of
the societal requirements (Dowling and Pfeffer 1975; ​the same organization an internal addressee should be more
Gray et al. 1995; Lindblom 1993; Reverte 2009). In order ​interested ​(Near and Miceli ​in preventing ​1987, p. ​corporate ​344).
Thus, ​scandals ​the internal t​ han an ​addressee ​external
to tion repair, has to gain, implement or maintain procedures their legitimacy that prevent the corporate organiza
tleblower's ​appears to be ​favor. ​more ​While ​motivated ​the internal ​to use his ​system ​power ​seems ​in the ​to have ​whis
therefore, ​scandals ​a
(Deegan and Unerman 2011, p. 331). Society,
seems to demand corporate procedures that ​more powerful addressee, the external system evidently has
enhance whistle-blowing in the organization. ​more power to protect the whistleblower from the power of
The communication about the implemented whistle ​other persons who could retaliate against the whistleblower.
blowing system works as a signaling instrument that leads P ​ rotecting ​whistleblower p​ . 209; Dunfee ​the whistleblower ​should ​1990,
​ . ​kept 1
be p ​ 36; ​implies ​secret R
​ odewald ​that ​(Callahan t​ he ​and ​identity ​Unger ​et al. o
​ f ​2002,
2007,
the ​perspective, ​to ​than ​the ​the ​acceptance ​consequences ​the signaling ​of society. ​that ​consequences ​an effective F
​ rom a ​are
legitimacy ​whistle-blowing
more important
theory
p. ​the ​1630). ​whistleblower. ​In this regard, ​But ​anonymity ​anonymity ​plays ​to the ​an important ​whistle-blowing r​ ole for
system can provide. It is therefore assumed:
addressee is less effective since, first, the addressee is unable
Hypothesis la The perception that whistle-blowing sys ​to obtain further information from the whistleblower; and
tems are important to maintain legitimacy of the organi
second, the credibility of the complaint is lower if the whis
zation positively predicts the implementation of a whistle ​tleblower remains anonymous (Near and Miceli 1995,
blowing system.
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404 E. Pittroff
As a plausible
of the organization that lead to the design of a specific ​a whistle-blow
whistle-blowing system. If an organization indeed imple ​the system ​ments a whistle-blowing system in order to promote
sh may perceive
whistle-blowing and to prevent misconduct it should con ​benefits ​sider results from power theory ​impl
that lead to effective ​of opportunis
whistle-blowing systems. On the other hand, if organiza ​may deter tions legitimate their activities by implementing a whistle
or a
​ nd Jacobs blowing system, the results from power theory may be
1 ​even ​irrelevant. ​though
In other words, if legitimacy theory holds ​systems ​effectiveness is not the driver ​are ​for the decision for a specific
e ​Moreover, d ​ esign of the system. The following hypotheses therefore
t relationship
enlighten if the implemented system is substantively 1997; i​ mplemented ​Patten
or only a symbolic instrument. ​liams I​ f organizations ​and w
​ ith internal whistle-blowing systems
Si ​blowing implement the system substantively syste
their decision should ​this hypothes
be driven by the following aspects: As described above, the
​ ypothesis ​implemen
benefits the H
power ​addressee ​whistleblower, ​blowing ​of an ​addressee. ​are ​internal ​the ​and ​nearness ​to ​system ​The ​responsible
advantages ​lies ​to the ​of in ​persons ​the w
​ rongdoing, ​powerful ​of ​that ​the ​could ​internal
whistle
to the
end
a
l
Previous research has shown that the amount of
the misconduct. At first, the motivation of the internal ​investments that are used to legitimate the activities of ​recipient ​the
to correct wrongdoing seems to be higher than the ​organization differs between the organizations (Patten
motivation of an external addressee. That is, the miscon ​1991; Reverte 2009). Since large firms have a higher ​duct ​vis
affects the internal recipient more than the external ibility in the society (Watts and Zimmermann 1986), they
one (Near and Miceli 1987, p. 344). ​have to place more importance to the requirements of the
In internal systems, the recipient's familiarity with the ​society (Gray et al. 1995, pp. 330-331). As described
organization potentially improves this person's sensitivity ​above, the society may demand the organizations ​to the ​to
seriousness of the complaint. An immediate reaction ​implement whistle-blowing systems. Consequentially,
could thus be more likely. Additionally, the overall pro ​from a legitimacy perspective, large firms have more
cedure may be shorter in an internal system, so higher ​pressure to fulfill the demand to implement whistle-blow
management levels can be informed earlier than they ​ing systems than smaller firms.
would be by an outsider (Dunfee 1990, p. 133). An internal Moreover, large firms may have lower average costs recipient for
has, in other words, fast and unfiltered access to ​the implementation than smaller firms because of econo
relevant information. These aspects ultimately lead to a ​mies of scale (McWilliams and Siegel 2001, p. ​powerful
123).
addressee. Finally an internal addressee is more Smaller firms may decide earlier against a whistle-blowing
familiar to employees, so the inhibition threshold to blow ​system because higher average costs will outweigh ​the ​the
whistle internally is lower than externally (Pauthner ​benefits that are already hard to measure.
Seidel and Stephan 2010, p. 266). These characteristics of ​Finally, there are two reasons why firm size influences
the powerful addressee should therefore ultimately lead to ​the decision to implement a whistle-blowing system:
the implementation of an internal whistle-blowing system. ​Legitimating macy ​because ​average ​theory c
​ osts ​of their ​activities
one ​to implement ​can ​higher ​conclude:
are ​visibility ​more ​the ​beneficial ​system. ​and they F
​ ollowing ​for large ​have ​firms ​lower ​legiti ​characteristics ​blowing
Hypothesis system 2a ​of ​Organizations attach ​the whistle-blowing ​more with importance an ​addressee.
internal to the whistle
power
In contrast to an internal whistle-blowing system, the Hypothesis lc The size of the firm positively predicts ​external ​the
system has more power to protect the whistle ​implementation of a whistle-blowing system.
blower against the power of others who could retaliate ​against the whistleblower. The possibility of remaining ​Model 2:
Motives for the Design of the Whistle
unidentified is crucial in order to avoid retaliation (Calla ​Blowing System: Does Legitimacy Theory Hold?
han et al. 2002, p. 209; Dunfee 1990, p. 136; Rodewald ​and Unger 2007, p. 1630). Since anonymous whistle
Further insights into the relation of legitimacy theory ​blowing ​and
is less effective, at least the whistle-blowing ​whistle-blowing systems may be gained from the motives
addressee should know the identity of the whistleblower. In
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Whistle Blowing Systems and Legitimacy Theory 405
this regard, a whistleblower ​Table ​is ​1 ​more ​Independent ​willing ​variables (benefits)
to confide in an ​external addressee because the threat of retaliation in
Legitimacy ​principle seems lower in external whistle-blowing systems
In the long run, whistle-blowing systems have a positive effect ​(Miceli and Near 1985). The most important advantage ​on ​of
the societal acceptance of the organization's activities, ​an external whistle-blowing system is therefore the con
(acceptance) ​cealment of the whistleblower's identity from the accused
Costs
wrongdoer (Pauthner-Seidel and Stephan 2010, p. ​A ​267;
whistle-blowing system causes high costs that could be higher ​Buchert 2008, p. 148). This fact holds because the external
than the hardly measurable benefits, (costs/benefits)
addressee is sufficiently independent from the organization ​that is accused of wrongdoing (Dunfee 1990, p. 137; Perry
(strongly relevant). Table 1 shows the variables and the ​1992; Leisinger 2003). If an organization with an external
corresponding statements in the questionnaire.2 ​whistle-blowing system implements the system substan
For the further discussion, only the abbreviations (bold t​ ively those aspects should be more important than ​and f​ or
in parentheses) of the characteristics are used. organizations with internal systems. This leads to the fol
In order to test Hypothesis lc, firm size is added as an ​lowing hypothesis:
independent variable to distinguish between small compa
Hypothesis 2b Organizations with an external whistle
nies, coded with 1, medium-size companies, coded with 2, ​blowing system attach more importance to the protection ​and large ​of
companies, coded with 3.
the whistleblower against the power of other persons.
In order to test Hypotheses 2a-b, several statements are ​examined that reflect the characteristics of the effectiveness
of whistle-blowing systems. Each of the respondents had to
Methodology and Description of Variables
allocate relevance to the formulated statements. The
response variables were measured again in 5-point scales
Dependent Variable
that ranged from 1 (irrelevant) to 5 (strongly relevant). ​Table 2 shows the independent variables of Hypotheses ​In order
to test Hypotheses la, lb, and lc, logistic
2a-b.
regression analysis1 is conducted to distinguish between ​implementers and non-implementers. The dependent ​Control ​vari
Variables
able is thus dichotomous, coded with 0 for non-imple menters and 1 for implementers. Due to sample ​Several ​size
control variables are added to model 1 since they considerations, Mann-Whitney U tests are preferred ​may ​for
influence the implementation of whistle-blowing
testing Hypotheses 2a and 2b. Hypotheses 2a and 2b only
systems. The industries of the organizations are examined
include ing system. organizations Differences with are an to implemented be expected between whistle-blow orga
since i​ nstruments ​they may (​ Bowen ​also influence 2
​ 000; Brammer ​the implementation a
​ nd Pavelin ​of 2​ 008). ​CSR
nizations depending on whether the appointed recipient Furthermore, of
several characteristics are added to model 1 ​complaints is internal or external. Thus, there is again ​that stand ​a
for traditional benefits of whistle-blowing sys ​dichotomous variable coded with 0 if the recipient ​tems. ​is
The respondents had to allocate relevance to several
internal and 1 if the recipient is external.
statements which were formulated in a questionnaire in ​order to represent possible traditional benefits of the
whistle-blowing system. The response variables were ​Independent Variables
measured in 5-point scales that ranged from 1 (irrelevant) to 5 (strongly relevant). Table 3 shows the industries and In order to
test Hypotheses la and lb, the benefits of the the
​ ad to allocate relevance ​system t​ o ​were s​ everal ​examined.
questions to the respondents according to traditional whistle-blowing h
statements ​The respondents w ​ hich were
benefits of the whistle-blowing system.
formulated in a questionnaire in order to represent possible
Data ​benefits and costs. The response variables were measured ​in 5-point scales that ranged from 1 (irrelevant) ​Between ​to
5
July and November 2008, 194 German organi ​zations were invited by e-mail to take part in the survey.
1​ I am aware of ​ the fact that ordinally-scaled ​ independent ​ variables ​
are ​ used. However, ​ in line with many similar research ​ approaches, ​ The ​110 ​I
invitation e-mail included a link to the questionnaire.
of the invited organizations were listed in the German ​nonetheless apply multivariate analyses. See, for example, Miceli and ​Near (2002),
Stansbury and Victor (2009), Park and Blenkinsopp ​(2009).
2 For the purpose of publication, the translated statements are shown. ​The questionnaire posed the statements in German language.
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406 E. Pittroff
Table 2 Independent
Effectiveness external addressee
The independence of the whistle-blowing recipient has to be ​assured e.g. in order to prevent exertion of influence, ​(independence)
Anonymity of the whistleblower should be ensured, ​(anonymity)
The whistleblower should never experience negative ​consequences imposed by the employer if the complaint is given ​to the whistle-blowing system in
good faith, (no negative ​consequences)
Effectiveness internal addressee
The whistle-blowing recipient has to be motivated to trace the ​malpractice, (motivation)
The whistle-blowing recipient should have extensive access to ​information on every firm level, (access to information)
The responsible person should be familiar to the potential ​whistleblower. (familiarity of the recipient)
Table 3 Control variables
Industries
Financial industry
Chemical and pharmaceutical industry
Consumer industry
Industrials and construction
Media
Technology
Transport
"Traditional" benefits
Implementing the system leads to a better control of compliance ​with the law. (compliance)
Whistle-blowing systems help to avoid criminal consequences ​because the reported malpractice can be clarified internally, ​(criminal
consequences)
Whistle-blowing systems avoid uncontrollable whistle-blowing ​to organization outsiders and the damage of reputation, (less ​damage of reputation)
A whistle-blowing system reduces costs of equity because of a ​lower risk premium of the investors and therefore causes an ​increase of corporate
value, (costs of equity)
A whistle-blowing system reduces costs of debt because of a ​lower risk premium of the creditors and therefore causes an ​increase of corporate value,
(costs of debt)
A whistle-blowing system reduces the stock price risk of the ​mentioned organization, (stock price risk)
stock index HDAX. 84 randomly selected organizations ​were added to the sample. In order to explore comparable ​data, it
​ xample the
was necessary to find someone at management level ​who is responsible for the whistle-blowing system, for e
Compliance Officer. The overall response rate ​was 44.85 %, which amounts to 87 questionnaires.
Results
Descriptive Statistics
36 of 85 responding organizations (42.35 %) implement a ​whistle-blowing system. Only 31 of them answered whe ​ther this
system is internal or external. Most of those, ​exactly 22 organizations, choose the internal model. The ​nine remaining
organizations choose the external system (5) or claimed to provide a combination of both (4).
The descriptive statistics of the explaining variables are ​shown in Table 4.
The medians and mean values demonstrate that all ​respondents
allocate a high relevance to compliance, criminal
consequences, acceptance, and less damage of ​reputation. For the characteristics of effectiveness, the ​respondents
place the highest relevance on the variables ​independence, anonymity, and no negative consequences. The correlation
matrices are available upon request from ​the author.
Model 1
In order to test Hypotheses la-c, logistic regression ana ​lysis3 was used. Table 5 shows the results of this analysis by
including all variables simultaneously.
The results of the logistic regression analysis show three ​significant variables (column 5 of Table 5, significance ​level p <
0.05): acceptance, costs/benefits, and firm size. ​The signs of the regression coefficients (column 2 of Table 5) of these
three variables correspond with the ​expected signs (column 1 of Table 5). A positive regres ​sion coefficient indicates
that the higher the perceived r​ elevance of that aspect, the higher the probability of pre ​dicting an implemented
whistle-blowing system. For a n ​ egative coefficient, the opposite holds true. According to ​Hypotheses la-b, costs should
therefore have a negative r​ egression coefficient, and advantages, a positive one. The ​sign of the variable costs/benefits is
in the expected ​direction and it is significant at a 5 % level. Hypothesis lb can therefore be supported, which means that
non-imple ​menters do actually weigh the costs higher than the b ​ enefits.
According to the significant variable acceptance ​Hypothesis la can be supported. Moreover, the firm size is significant at
the 5 % level: The firm size has a significant ​influence on the implementation of whistle-blowing sys ​tems. Hypothesis lc can
therefore be supported.
3 For further reading on logistic regression analysis see Hosmer and ​Lemeshow (2000).
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Whistle Blowing Systems and Legitimacy Theory 407
Table 4 Descriptive statistics ​for independent variables
N Median ​Mean value Standard-deviation Min./Max.
81 3 3.27 1.10 ​1/5
Acceptance (legitimacy) ​
Costs/benefits 81 ​2 ​2.33 0.96 ​1/5
Firm size ​81 2 2.41 0.61 ​1/3
Effectiveness external addressee
76 5 4.39 ​0.88 ​2/5
Independence ​
76 ​5 ​4.61 ​0.82 ​2/5
Anonymity ​
76 ​5 4.86 ​0.45 3/5
No negative consequences ​
Effectiveness internal addressee
Motivation ​76 ​4 4.01 ​1.08 ​1/5
Access to information ​76 4 ​3.87 ​1.14 ​1/5
76 ​3.5 3.26 1.24 ​1/5
Familiarity of the recipient ​
Control variables
Industries
Financials 37 ​0 0.46 0.50 ​0/1
8 ​0 0.10 0.30 ​0/1
Chemical and pharmaceutical ​
4 ​0 0.05 0.22 ​0/1
Consumer goods ​
Industrials and construction ​17 0 ​0.21 ​0.41 ​0/1
Media 3 0 0.04 0.19 ​0/1
8 0 0.10 0.30 ​0/1
Technology ​
4 ​0 0.05 ​0.22 ​0/1
Transport ​
'Traditional' benefits
81 4 3.70 1.01 ​1/5
Compliance ​
81 ​4 ​3.58 ​1.04 ​1/5
Criminal consequences ​
81 ​4 ​3.43 ​1.07 ​1/5
Less damage of reputation ​
81 2 2.11 ​0.88 ​1/4
Costs of equity ​
Costs of debt ​81 2 2.10 ​0.85 ​1/4
81 2 ​2.16 0.94 ​1/4
Stock price risk ​
The impact of the influence of each variable is indicated ​by the percentage change in odds (last column of Table 5). A one-unit
change in the variable acceptance will increase ​the odds that the participant is an implementer by ​169.12 %. If the variable
costs/benefits changes by one ​unit, the odds that the participant is an implementer ​decreases by 66.04 %. The odds
that the firm is an ​implementer increases by 575.31 % if the variable firm size ​changes by one unit.
The explanatory power of the model is significant. The ​model Chi square is 47.01 with a significance of 0.00. Pseudo
^-square amounts to 59.1 %4 and explains the ​variance of the dependent variable by the use of the inde ​pendent variables
very well. The classification matrix is ​shown in Table 6. In 81 samples, 66 samples showed ​predicted values that were
identical to the observed values: ​A total of 81.5 % were correct predictions.
I tested all variables for collinearity and found no seri ​ous problems that indicate difficulties with the ​interpretations.5
Model 2
The following analysis focuses on differences in the per ception of the factors that influence the effectiveness of ​whistle-blowing
systems. In the set of hypotheses, orga ​nizations with an internal whistle-blowing system are ​assumed to attach more
importance to a powerful
5 All variables are tested for multi-collinearity. None of the variables show serious multi-collinearity problems, thus one can adhere to the ​model. The
variance inflation factor (VIF) is in every case smaller ​than 10 (Stevens, 2002, pp. 92-93). Since a VIF smaller than 3 is ​sometimes demanded
(Hair et al. 2010, p. 204), two variables exceed ​this level: cost of equity and cost of debts with 4.84 and 4.90, ​respectively. These high values
derive from a high correlation of both variables (r = 0.85). Neither of these two variables are significant for ​4 This value bases on the calculation of
Nagelkerke. The Pseudo
the model, so there are no problems with interpretation. Moreover, the ​R-square formed in accordance with Cox and Snell is 44.0%. See ​results ​for
are unchanged if these two variables are left out of the model. ​the differences between the methods see Hair et al. (2010, p. 420).
The correlation matrices are available on request from the author.
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408 E. Pittroff
Table 5 Logistic
Standard ​Wald-statistic ​
Expected ​Regression ​ Significance ​% change sign (1) ​coefficient b (2) ​deviation (3) (4) ​(5) ​in oddsa (6)
+ ​0.99 0.43 5.40 0.02* 169.12
Acceptance (legitimacy) ​
Costs/benefits

-1.08 0.42 6.58 0.01* -66.04

-​

Firm size ​+ ​1.91 0.68 7.86 0.01* 575.31

Control variables
Industries
Financials 0.93 1.41 0.44 0.51 153.45
2.04 ​1.95 1.10 ​0.30 669.06
Chemical and pharmaceutical ​
1.60 ​2.77 ​0.33 0.56 395.30
Consumer goods ​
Industrials and construction 1.53 ​1.58 0.94 ​0.33 361.82
Media ​2.00 ​2.06 0.94 0.33 638.91
0.88 ​1.63 ​0.29 ​0.59 141.09
Technology ​
'Traditional' benefits:
Compliance ​+ ​0.68 0.50 1.89 0.17 97.39
 + ​0.50 0.44 ​1.28 0.26 64.87
Criminal consequences ​
Less damage of reputation ​+ -0.44 ​0.45 0.97 0.33 -35.60
+ ​-0.47 0.95 ​0.24 ​0.62 ​-37.50
Costs of equity ​
Costs of debt ​+ ​-0.36 1.03 0.12 0.73 ​-30.23
Stock price risk ​+ 0.68 0.43 ​2.52 ​0.11 97.38
Constant ​L ​oo oo ​2.60 ​0.52 ​0.05 ​-84.74
* p < 0.05 ​X2: 47.01 (p = 0.00)
Pseudo-/?2 (Nagelkerke): 59.1 %
" The percentage change in odds is equal to (exp(b) — 1) * 100
addressee, whereas organizations with an external system should weigh the protection of the whistleblower higher than
organizations with an internal system. A multivariate ​analysis such as logistic regression was not applicable, ​since only a
few cases were available due to the fact that t​ he analysis concentrated on implementers. 31 organiza ​tions answered that
they have a whistle-blowing system. I​ nternal systems are installed in 22 cases, five have an ​external system and four
organizations provide both alter natives. Since the last group clearly assigns importance to ​the opportunity to report to external
addressees, these were ​included in the external group. A Mann-Whitney U test ​was applied to assess whether there are

differences ​between the two groups. Table 7 shows the results of the ​test. ​Column 1 in Table 7 indicates for each variable whether
the organization has an internal or an external whistle ​blowing system. Column 2 shows the respective numbers ​of
organizations. For each variable, the Mann-Whitney ​U test arranges the observed values of both groups in ascending
order. Each value has a specific rank in this ​order. Because the observed values are between 1 (irrele ​vant) and 5
(strongly relevant), a high mean rank indicates a highly perceived relevance of this variable. The average
Table 6 Classification matrix ​Predicted
Observed
No whistle
blowing system
Implemented
whistle-blowing ​system
Percent correct
No whistle- Implemented Percent ​blowing whistle-blowing correct ​system system
41 5 89.1
10 25 71.4 ​81.5

mean ranks of each ​mean ranks between ​difference in the p ​among organization ​recipient.
To calculate the U value, one has to count how many ​values of one group stand before each value of the other ​group.
While there are two countings (one counting for ​each group), the U value represents the smaller amount ​(column 4). A
small U value thus indicates that the values
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Whistle Blowing Systems and Legitimacy Theory 409
Location of the
Table 7 Mann-Whitney-t/-test ​for Hypotheses 2a-b ​
addressee ​(1)

N​
(2)
Mean
rank ​(3)
​ ( 4)
Mann ​Whitney U
Z-value ​(5)
Asymptotical significance ​(p value) ​(2-tailed) (6)
Effectiveness external addressee
Internal 22 ​17.34 69.50 -1.47 ​0.14
Independence ​
External ​9 12.72
Internal ​22 ​15.68 92.00 -0.40 0.69
Anonymity ​
External 9 ​16.78
Internal ​22 ​16.07 97.50 -0.13 0.90
No negative consequences ​
External 9 ​15.83
Effectiveness internal addressee
Motivation ​Internal 22 ​18.30 48.50 -2.38 ​0.02*
External 9 ​10.39
Access to information ​Internal 22 ​18.68 40.00 -2.70 ​0.01*
External 9 ​9.44
 Internal ​22 ​18.45 45.00 ​-2.43 0.02*
Familiarity of the recipient ​

* p < 0.05 External

​ ​9 ​10.00 ​of the respective variable in one group are small compared to those of the other group. That is, the groups

do indeed ​differ in the perception of the relevance of this variable. ​Given that the U value presumably follows a standard ​ized
normal distribution for sample sizes larger than 30 ​observations, the Z values are calculated, which stand for
the empirical values of the standardized normal distribution ​(see column 5). Column 6 shows whether these values are ​statistically
significant (asymptotical) for each of the ​variables.
Three characteristics are significant in the model. ​Motivation, access to information, and familiarity of the ​recipient indicate
that the groups do not belong to the same ​population (see Table 7). Since the mean ranks of the e ​ xternal systems are
smaller in every significant variable, ​one can conclude that organizations with an external whistle-blowing system assess
the relevance of these ​characteristics to be significantly lower than organizations ​with an internal system. The motivation of the
recipient, ​the recipient's access to information and the familiarity of ​the recipient determine how powerful a whistle-blowing
addressee is. In the end, Hypothesis 2a can be supported, which means that organizations with an internal whistle blowing
system attach more importance to the powerful addressee than organizations with an external system.
However, Hypothesis 2b cannot be supported, since the mean ranks of these variables (independence, anonymity, and no
negative consequences) do not differ significantly between the two groups of implementers. These variables ​were suggested to
be particularly relevant for organizations ​with external recipients. The mean ranks of the variable anonymity in fact show the
expected relationship for this ​variable. That is, organizations with external recipients
allocate more relevance (higher mean rank) to the ano ​nymity of the whistleblower than those with an internal ​system.
Unfortunately, the difference in mean ranks between ​the groups is not statistically significant (p > 0.05).
Discussion of the Results
The results indicate that organizations do not actually ​implement whistle-blowing systems in order to yield con crete
"traditional" benefits such as, for instance, compli ance with the law, and prevention of reputational damage ​resulting from
uncontrolled external whistle-blowing. ​Furthermore, the corresponding financial benefits such as decreased capital costs are
not relevant for the implemen tation. In contrast, the signaling effect that the whistle blowing system creates seems to be more
relevant for the decision. Insofar, the results support legitimacy theory, ​which means that the organization instead pursues
the objective of legitimating its activities. This means that ​organizations implement whistle-blowing systems even ​though
they are not convinced that whistleblowers are a valuable resource. The motivation to implement a whistle ​blowing system is only
the signaling effect, that means, the ​organization behaves in the way that society desires.
While one might argue that—in an economic sense— ​any perceived advantage should lead to concrete financial benefits, the
​ ating and financial performance is not perceived by ​implementers. Management
results indicate that the link between legiti m
decisions are evidently based ​on short-term outcomes. Whistle-blowing systems have ​good publicity because of recent
management scandals. ​Society may demand the implementation of whistle
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410 E. Pittroff
blowing ​These ​system
or ment whistle-b
which m ​tance by ​blowing
society Legitimacy change theo
t ​firm size In has contr
a s ​of whistle-blo
the char ​theory o ​ rganiza
shows th legitimating ​that these reasons are decisive for the choice of the internal
th Reverte ​variant. Legitimacy ​2009). ​theory, therefore, cannot be supported
T zation's for organizations visibilit
with internal whistle-blowing systems, ​Consequentially
since their systems seem to be substantive. This result ​legitimating weakens the result from the first hypothesis. The organi
th ​Non-implemen
zations do not perceive that whistle-blowing systems can ​than any ​enhance organizations' activities, ​benefi
but they implement ​benefit ​actual effective systems. ​relation
Management is possibly not ​perception ​aware of the potential benefits that the system ​of ​which should
b relationship only legitimate organizations' activities may additionally
bet ​performance ​create. Further research is needed to investigate this point.
( ​Schrader 2005, system may cau might outweigh whistle-blowing
Concluding Remarks
exploiting of th
As described ​Management scandals and payments of bribes lead to more
ab ​organization ​attention being paid to promoting whistle-blowing ​mi
in ​even though ​organizations. The implementing organization is con
it consider ​fronted with a challenge, ​that ​because establishing a whistle
th ​instead ​blowing system ​import
requires the reconsideration of a gover ​organization's nance concept that is traditionally perceived as disloyal
a t​ his case, ​behavior—particularly in Germany. t​ he ​As yet, no theory
sy ​implemented e ​ xists that is able to explain the implementation of whistle
(m ​ ay lead ​blowing systems.
to legi ​implementation
The study provides a theoretical explanation of the ​symbolic ​implementation of whistle-blowing ​system
systems by using v​ ant or ​legitimacy theory. e​ ven ​Organizations try to ensure their con
no ​extent ​tinued existence ​to ​by fulfilling the expectations ​whic
of society. achieve These arguments effectiv
were transferred to the whistle-blowing ​the whistle-blo
case. The results show that legitimacy theory can also be ​power u ​ sed in ​characte
this case. The "traditional" benefits that a whistle
blowing blowing system may system
provide, for example, revealing cor unique ​porate ​design ​misconduct and preventing the threat of uncon
it r​ ather ​trolled external t​ han ​whistle-blowing, are not the main drivers of
a s ​theory ​the investment. ​is ​Organizations ​only i​ nstead try to benefit from
p ​only for ​the signaling effect that ​organi
the system implies. Whistle tems that ​blowing systems help to legitimate the activities ​non
of the ​implemented ​organizations.
se​ xternal ​The results further m
​ odel.
show that some whistle-blowing c​ oncluded ​systems seem to be only symbolic t​ hat ​models, since effec
e ​symbolic tiveness is not desired. This model
is especially relevant for the their activities
planned regulation of whistle-blowing in Germany. Gen p ​ le those ​erally, there seems to be ​system
a limited perception of the ​tion (MacLean ​advantages, since only legitimacy aspects are relevant for
a ​blowing ​implementation. One can ​model
cautiously conclude that statutory
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Whistle Blowing Systems arid Legitimacy Theory 411
regulation such as whistleblower protection6 hardly leads to effective whistle-blowing systems as long as organiza tions are not
convinced of the benefits. Statutory approa ​ches that focus on incentives for implementation therefore ​in principle seem to be a
better solution.7
A major restriction of the study is the relatively small ​sample. However, the basic sample includes most imple ​menters of
whistle-blowing systems in Germany, since ​these firms are typically large organizations that are listed o ​ n the German stock
exchange. Future research might ​benefit from a wider range of implementing organizations. ​Whistle-blowing is still not a
widespread phenomenon in Germany, and in most firms the experience with whistle blowing systems is relatively limited. It will
therefore be interesting to explore how stable the results remain over ​time. Since the study also shows results that weaken
legitimacy theory, further research may enlighten the rea ​sons for the partial support of this theory.
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