Considering the primacy of whistleblowing in exposing the big scams that have come to light, a well-defined ‘whistle blower’ policy has to be a vital element of good corporate governance.
FOLLOWING the Satyam episode, the biggest fraud in India’s corporate history, there has been a flurry of activity on corporate governance within government, industry associations and company boardrooms. Some view this as bolting the stable doors after the horses have fled; however, the fact is that — to stretch the metaphor — there are many horses yet left. The numerous reports on corporate governance are, therefore, welcome and necessary. Corporate governance should be, first and foremost, about ethics and values. This is both, the first and last line of defence. However, it is not necessarily the best, since the real world includes many ‘pragmatists’, whose pliable ethics facilitates actions that benefit them, personally, or their company.
It is for this reason that good corporate governance requires a system of checks and balances. This must include, amongst other things strong and active independent directors; thorough and competent statutory auditors; rigorous internal audit; appropriate metrics to diagonise the health of the company; transparency and disclosures; and active shareholders. These checks need to be backed up by appropriate laws and strong enforcement by an independent regulator.
Yet, the fact is that many large corporate frauds have come to light only through an insider speaking out or a confession, and not through an audit report or a regulatory investigation. In the case of Satyam, the fraud was brought to light by Raju’s confession, and not by the auditor, who certified the accounts and the system, year after year. Similarly, the investigation into Galleon in the US is the consequence of a tipoff from an individual. The IPL can of worms — a favourite of media — was opened and exposed, not by the auditors or the governing body, but by the key insider.
Given these and many other experiences, it is clear that depending solely on auditors or the board is not sufficient. This needs to be supplemented by steps that encourage those in the know, the knowledgeable insider, to speak up — and to do so with no fear or hesitation. A well-defined ‘whistle blower’ policy is, therefore, a vital element of good corporate governance, and must include three main elements: first, transparency and easy access to all nonconfidential information about the organisation; second, guarantees that the whistleblower will be protected and will not be persecuted, pressurised, or otherwise discriminated against; and, finally, that the whistleblower can have direct access to one or more non-executive directors of the board. Of course, it is also necessary to have some mechanism of sifting out frivolous or mala fide complaints, and this is no easy task.
Whistleblowers are such an important check against fraud and malpractice that it is questionable as to whether appropriate policies in this regard should depend merely on voluntarism or should be mandated by law. It may well be desirable to require that a whistleblower policy be a part of every organisation’s own policies, at least.
The focus, post Satyam — but also dating back to Enron — has been on corporate governance. However, many aspects can usefully be abstracted to the broader level of national governance. As in a company, so also with government, it is necessary to have mechanisms to check frauds or misuse of power. In this, Parliament could play a role akin to that of the board of directors. Already, the Right to Information Act has brought about transparency and facilitated ‘whistleblowing’ and one hopes that there are no amendments — as is being talked about — to limit its scope. There have been cases where whistleblowers have been persecuted — even killed, in a few instances.
THE state has clearly failed in its duty to protect such individuals. In many cases, following exposure of misuse of power or frauds as revealed through RTI petitions, action has been slow or negligible. This is part of the overall problem of lack of accountability and lethargic action by the authorities in cases of corruption and misuse of power. Maybe there is a need to consider mandatory action, within a specified time frame, in such cases. Special courts for economic offences — including corruption and fraud in both the government and corporate sectors — may help to ensure quick justice.
In many countries, shareholder activism keeps company managements and boards on their toes. It is desirable to see how this can be initiated in India. At the macro level, there is a vital role for civil society organisations. Whereas individual whistleblowers may be hesitant — even fearful, given recent incidents — organisations are far better placed to take on powerful vested interests and arbitrary use of state power, of which there is now a growing reassertion. This worldwide phenomenon is a reversal of what was expected after the adoption of the liberalisation-privatisation-globalisation (LPG) mantra, which — along with internet and other technologies (the ICT revolution) —was expected to vastly reduce the power of the state. Some, in fact, had forecast the early demise of the nation-state itself.
The resurrection of the nation-state is primarily due to concerns about terrorism and security. Unfortunately, in many cases, genuine concern transforms into paranoia and ‘security’ becomes a cover for arbitrary action by the government. Mobile phones are, doubtless, used by terrorists, but banning them in a state or stopping text (sms) messages is akin to banning the use of cars because they are used by terrorists and explosions are sometimes caused by car bombs. The antidote to such misuse of power is the whistleblowing civil society organisation.
Such watchdogs and conscience-keepers are essential parts of a plural polity. Harassing and arresting those who are seen as ‘sympathisers’ of extreme groups is antithetical to the democratic requirement to protect and foster all shades of opinion. Afarsighted government must, therefore, encourage and empower civil society organisations, just as it would corporate whistleblowers. In this, the corporate world too has a role: even as it evolves policies to encourage and protect whistleblowers, it must also support those who play that role in the wider societal context.