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Encourage whistleblowers

May 4, 2010

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.

  1. Empowerment of Whistle Blowers
    Post Satyam fraud, transparency and a commitment to ethical business practices are gradually becoming accepted way of life in India. With the recent issue of Voluntary Guidelines for Corporate Governance 2009 by the Ministry of Corporate Affairs (MCA) it is likely to further strengthen good corporate practices, which also include issues of Whistle blowing; by the India Inc. Moreover, present government is committed to improving corporate governance practices in listed and unlisted PSUs as well and has already mandated CG for all the CPSEs. The complete overhauling of Company Act is underway and is presently being examined by the standing committee; we are keeping our fingers crossed and hope that it is passed in Parliament before end 2010. Good governance spreads one board at a time.
    Another issue, which I want to point out, is the commitment by the government for speedy settlement of cases, protection and institution of major rewards and punishment scheme, in line with what is already implemented in SOX Act, to empower WBs to boost these ethical aspects.
    The regulatory framework and societal expectations are important but, until we have boards that put their duty to shareholders ahead of any personal interest, we will continue to have governance failures. I am hopeful for the rise of better governance in India because I see many good business companies that instill ethics along with economics in their participants. India has some great governance professionals – it is up to the people of India to support their endeavors by actively questioning boards about their practices and shunning investments where the board displays poor practices. P R Chandna

  2. Pushkar Raj Chandna permalink

    President Obama just signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The Act contains a number of governance-related provisions including strong whistle blower protection, that will affect all U.S. public companies and is likely to increase the influences in corporate governance matters almost immediately.

    It is high time now – a similar stronger protection Acts and empowerment of Whistlblowers in India are implemented.
    P R Chandna

  3. P R Chandna permalink

    The Cabinet Monday cleared a bill to protect whistleblowers and it is likely to be tabled during the ongoing monsoon session of parliament, official sources said.

    The approval for the Public Interest Disclosure (Protection of Information) Bill, 2010, was given at a cabinet meeting presided over by Prime Minister Manmohan Singh.

    As per the bill, the onus will be on the Central Vigilance Commission (CVC) to protect the identity of the citizens who provide information about the misuse of governmental authority and funds.

  4. P R Chandna permalink

    It is heartening to know, after a long wait of around seven years of the first brutal killing of an engineer Mr. Satyendra Dubey in November 2003, who had blew the whistle in the case of unbridled corruption in NHAI’s Golden Quadrilateral project; that the Cabinet has recently cleared the “Public Interest Disclosure (Protection of Information) Bill – 2010”, and is likely to be tabled during ongoing session of the Parliament.
    India all these years does not have any law to protect and reward whistleblowers. Several countries worldwide have already put in place laws to protect whistleblowers, the US was one of the earliest to have the Whistleblower Protection Act of 1989, while the UK has the Public Interest Disclosure Act of 1998, and Norway has a similar law in place since January 2007.
    Shockingly, the issue of protection of whistleblower in India had been dragging for all these years, as the country leisurely debated and struggled with the problem of resolving the contradiction of a whistleblower’s law with the provisions of the Official Secrets Act; unfortunately the whistleblowers continued to be atrociously coerced, intimidated, threatened, victimized, and being cruelly killed in retaliation by the perpetuators of frauds, powerful, imperious and Machiavellians individuals and company heads/CEOs, mafias, to satiate their unbridled greed. In the latest incident of last month, activist Mr. Amit Jethwa was shot outside the high court in Ahmedabad, while he had exposed illegal mining in the Gir forest area in the state of Gujarat.
    The proposed law has provisions to prevent victimization or disciplinary action against those who expose corruption in the government and will cover central, state and public sector employees. As per the bill, the onus will be on the Central Vigilance Commission (CVC), who would be designated as the competent authority for complaints, would have the powers of a civil court, including powers to summon anybody, order police investigation and provide security to the whistleblower and to protect the identity of the citizens who provide information about the misuse of governmental authority and funds. It is expected to encourage disclosure of information in public interest. According to the bill, if a person making a disclosure is victimized and his or her identity is revealed, the whistleblower’s superiors will be held liable. There are provisions for a fine and other penalties — a punishment is set at up to 3 years in prison or a fine of up to Rs. 50,000 or both; if a whistleblower is found to be “punished” for exposing wrongdoing. These penalties and imprisonments could possibly have been higher so as to have efficacies of high deterrence, along the lines of the Sarbanes-Oxley Act (SOX) – 2002 and Dodd- Frank Act-2010.
    However, the proposed law neither has provisions for encouraging whistle blowing by providing for financial incentives; nor deals with corporate whistleblowers and does not extend its jurisdiction to the private sector. India Inc ought to have learned lessons after the experience of the massive fraud at Satyam.
    The recently enacted “Dodd-Frank Wall Street Reform and Consumer Protection Act -2010” in USA, however, creates an elaborate new system of financial incentives to encourage whistleblowers to come forward to the SEC with information about securities law violations. The new incentive offered to whistleblowers in Dodd-Frank Act is the opportunity to obtain substantial cash reward. The Section 922 of the Act provides that the SEC “shall pay an award” to the whistleblower of between 10 and 30 percent of the monetary sanctions. The Act also provides significantly enhanced remedies for whistleblowers who believe they have suffered retaliation by their employers, including expanded private rights of action and the ability to obtain awards of back pay. In view of these provisions, the Act will allow as most effective deterrent for companies to prevent any mistreatment of whistleblowers.
    The whistle blowing, as an internal control mechanism is yet to come of age in our country. Whistle blowing, in India, still continues to be perceived by many as acts; which are not constructive, a matter of personal vendetta or revenge, intention to embarrass the organization, and so on so forth. On the other hand, the whistleblowers have often faced reprisal, greatly suffered and endured, often for many years, after the complaints have gone unheeded. One of the reasons attributable to this is poor levels of confidence in the ability of the legal and regulatory environment to ensure promised protection against retaliation.
    For developing a better governance practices in the India, it is imperative to empower and encourage the whistle blowers, the policy concerning them need to be comprehensive rather than applicable to one set of people only and be made mandatory for one and all, with clear guidelines for prosecuting intimidation of or retaliation against the complainants, including imposition of fines/ penalties for frivolous or mischievous complaints and fast-track disposal of cases.

  5. P R Chandna permalink

    SEBI may make whistleblower mechanism mandatory for companies: – However, whistle blowing can be effective tool to deter and detect corruption both in the private and public sectors, when whistle blowers are empowered & encouraged and the policy concerning them is comprehensive and holistic and is made mandatory for one and all, with clear guidelines and provisions for substantial financial incentives – which inspire them, prosecuting intimidation of or retaliation against the complainants, including imposition of fines/ penalties for frivolous complaints and last but not the least fast track disposal of cases.

  6. Had the ‘Whistle Blower Mechanism’ in place… the present day corruption acts could have been tackled in time….. This brazen acts of corruption are a big deterrent to our national prosperity and has already damaged the brand India.

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