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Companies Need to Listen to Whistle-Blowers

NEW YORK (TheStreet) -- The resistance to accept uncomfortable truths is an aspect of human nature we all deal with, but how many scandals could have been prevented if CEOs or boards had simply stopped to listen to complaints from concerned employees and investigate them further?

Investors are justifiably worried about CEOs and boards being in denial about the probability or severity of risks.

After all, how many times have investigations into corporate problems revealed that "warning signs and red flags went ignored"?

What if Enron had listened to Sherron Watkins?

What if WorldCom had listened to Cynthia Cooper?

Did anyone come to JPMorgan's (JPM) leadership about warning signs before the company lost so much money trading?

Did MF Global Holdings have anyone warn it before its meltdown?

In a world of unbridled sine qua non leadership optimism, investors are wondering whether company leaders are simply refusing to listen when insiders raise concerns or problems.

Here are the five potential CEO/board responses to risk alerts:

  1. "The data are wrong." This is total denial, couched in an unwillingness to accept that the data may reflect an uncomfortable reality.
  2. "The data are right, but it's not a problem." This accepts that data reflect reality but that the data are variants on the desired and predicted reality.
  3. "The data are right, it's a problem, but it's not my problem." This is when the problem isn't your fault and you shouldn't have a role in its resolution.
  4. "The data are suspect due to the provider." This suggests that the bearer of unwanted news is not a team player or is disgruntled or has an ulterior motive.
  5. "The data are right, it's a problem, and it's my problem." This is an acceptance of a leader's role to take responsibility and come up with a solution, even if the leader didn't contribute to the problem. This is the response of a true leader and an honorable steward.

When companies suffer accounting or management scandals, typically the investigations that follow focus on who knew what and when.

Sadly, there is almost always at least one top executive and/or board member who was made aware of the problem before it erupted into scandal but who chose to dismiss or totally ignore the message or the messenger.

Boards and top executives are paid handsomely to consider all of the ramifications of risk management decisions, even when doing the right thing might not seem popular or optimistic.

In our age of complexity and uncertainty, compromising facts at the altar of optimism is not the way to go.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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