Accommodating would-be whistleblowers: Sarbanes-Oxley's Section 301 requires companies to establish effective procedures for handling whistleblower complaints. Attorneys, consultants and others talk about just how companies can best do that.

• Author: Sweeney, Paul
• Position: Governance

Three years ago, during the time of the Enron scandals, Alice Peterson was the chair of the audit committee at Fleming Cos. (now known as San Francisco-based Core-Mark International). In an interview, she recounts a "can-it-happen-here?" conversation she had with the company's chief executive officer at a board meeting.

"I asked the CEO, 'If we had a whistleblower like [Enron's] Sherron Watkins at our company, would she be able to find me?'" Peterson recalls asking. "And he assured me that the company had an 800-number for complaints that was up and running, and that it rang on the desk of the head of human resources."

Peterson, a former chief financial officer at PepsiCo and other companies, says she was disappointed by that answer. "The company's management had allowed [itself] to believe that, some-how, this company was different and that employees would speak out without fear of retaliation," she says.

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"But there are very strong statistics that show that internal hotlines do not get used. Nervous employees are not going to trust an inside hotline. You need a trusted third party," she adds, to field employees' complaints.

Today, Peterson heads a consulting firm called Listen Up Group, which helps companies institute confidential reporting systems--such as Fleming adopted during her tenure on the board--and sharing many of the lessons she learned in Corporate America as well. "We thought it would be best to get ahead of problems before they become headlines," Peterson says.

Now, under The Sarbanes-Oxley Act's Section 301--which took effect in 2003--audit committees at all public companies are charged with establishing effective procedures for handling whistleblowers' concerns. As Peterson notes, the law calls for a mechanism that collects, retains and manages accounting-related complaints.

In addition, all public companies must do what Peterson insisted upon at Fleming: ensure that whistleblowers are able to report financial and accounting irregularities without fear that they will suffer demotion, harassment, threats or any other form of retribution. Under the law, the Occupational Safety and Health Administration (OSHA), a division of the U.S. Department of Labor, hears and adjudicates charges of retaliation.

To comply with the whistleblower statute, most experts recommend that the company make it convenient for employees to report suspected incidents of misconduct. That entails establishing a dedicated hotline, with a toll-free number, as well as the capacity to accept collect calls where necessary. Moreover, whistleblowers should have access to a confidential Web site (but not an e-mail address, since e-mail is notoriously non-protective of anonymity), a fax number and a regular mail address or post office box.

There's certainly a cost to all that, and like...