Article
Background:
Securities Exchange Board of India (‘SEBI’) has prescribed
the listing agreement that is required to be executed between a stock exchange
and a company whose securities are to be listed
on that exchange. Clause 49 of the listing agreement is titled ‘Corporate
Governance’ and lays down the principles of Corporate Governance that are
required to be followed by the listed company. In addition to a list of
mandatory requirements that a listed company is obliged to comply with, there
are a few non-mandatory requirements that have been specified in terms of
Annexure I D of the specimen listing agreement. One such non-mandatory
requirement relates to ‘Whistle-blower Policy’. This article aims
to explore the meaning of ‘Whistle-blower Policy’, the rationale of making it a
part of the Corporate Governance Code (though not mandatory at present) and the
usefulness of such a policy in ensuring better governance.
Corporate Governance Code:
Clause 49 of the Listing Agreement of Stock Exchanges
places a non-mandatory requirement for listed companies in India to adopt a
Whistle-Blower Policy. The specific recommendation, placed in Annexure I D to
Clause 49 specifies that:
(i) The company will establish a mechanism for employees
to report to the management concerns about unethical behaviour, actual or
suspected fraud or violation of the company’s code of conduct or ethics
policy.
(ii) The mechanism must provide for adequate safeguards
against victimisation of employees who avail of the mechanism.
(iii) The mechanism must also provide, where senior
management is involved, direct access to the Chairman of the Audit
Committee.
(iv) The existence of the mechanism must be appropriately
communicated within the organisation.
(v) The Audit Committee must periodically review the
existence and functioning of the mechanism.
While this is a non-mandatory requirement, the company also
has a mandatory requirement to disclose, in its report on corporate governance,
the extent of adoption of such non-mandatory requirements. Numerous companies
have adopted the Whistle-Blower Policy in their organisations in their quest to
uphold the highest governance standards or in the fear of being considered late
entrants to the ‘well-governed companies’ club’!
A similar provision for protection of whistle- blowers is
found in the Sarbanes-Oxley Act of 2002, which forms part of the United
States Federal Law. S. 806 of this Act protects employees who provide
information or assist in an investigation from discharge, demotion, suspension,
threats, harassment or any form of discrimination. The Sarbanes-Oxley Act has
now increased the protection provided to whistle-blowers. The provisions have
made it clear that retaliation against whistle-blowers will not be tolerated. It
is now a criminal offence to retaliate against whistle-blowers, carrying
penalties from a large fine to 10 years in prison.
This raises questions such as — What is really meant by a
whistle-blower policy? And, how does it lead to better governance?
A logical starting point would be to examine the key
components of whistle-blower policy. There are four broad components of
whistle-blower policy:
- A
wrongful or unethical practice
The Four Components of a Whistle-Blower Policy:
A whistleblower:
“A whistle-blower is a person who raises a concern about
wrongdoing occurring in an organisation or body of people. Usually this person
would be from that same organisation. The revealed misconduct may be classified
in many ways; for example, a violation of a law, rule, regulation and/or a
direct threat to public interest, such as fraud, health/safety violations, and
corruption. Whistle-blowers may make their allegations internally (for example,
to other people within the accused organisation) or externally (to regulators,
law enforcement agencies, to the media or to groups concerned with the issues).”
(Source: en.wikipedia.org)
A Wrongful or Unethical Practice:
There are various grievance or complaint mechanisms that are
instituted by organisations. The wrongful practice or unethical conduct that is
sought to be covered under the whistle-blower policy is expected to be grave and
serious in nature, and may involve several parties. These practices may concern
serious disregard to the law of the land (e.g., dealing in narcotics
without a licence), a crime against human rights (e.g., child
trafficking, dealing in human organs), corruption of a high order (e.g.,
supply/use of substandard or expired medicines in a hospital), compromise of the
organisational values (e.g., bribery, unfair trade practices) and similar
serious acts. It is clear that trivial issues or unfounded claims should not be
escalated through this policy.
An Authority:
The policy defines a specific process to be followed for
escalation of information regarding the wrongful or unethical practice. The
person/authority to which the communication may be sent, the manner of sending
communication and the manner in which the information received would be dealt
with is clearly defined in the policy. It is felt that the management is often
the last in the knowledge-chain where a rampant wrongdoing is concerned, as the
employees and other stakeholders are not sure who to report to and not secure as
to how it would impact their relationship with the organisation. Thus, the
authority which deals with the information provided by a whistle-blower must be
independent, senior and responsible — and the policy must provide for
confidentiality of the information as well as the identity of the informer.
A Policy:
A whistle-blower policy is thus an internal policy on access to the appropriate designated authority, by persons who wish to report on unethical or improper practices. The policy is intended to create a platform for alerting the management of the company or those charged with the Governance of the company about potential issues of serious concern, by ensuring confidentiality, protection and expedient action. The Corporate Governance Code in India specifically states that the whistle-blower must have a direct access to the Chairman of the Audit Committee for reporting on wrongdoings by the senior management.
The Response of Corporate India:
Corporate India was slow to respond to the non-mandatory requirements of Clause 49 in general, and the clause relating to the whistle-blower policy in particular. A regulatory recommendation is a law in the making, and it is heartening to find that an increasing number of companies are now realising the need to pay heed to these non-mandatory requirements. A peek at some of the corporate governance reports that form part of the annual reports of companies reveals the status of adoption of this non-mandatory requirement? (refer Table).
Impacts of unblown whistles — a couple of instances:
A few instances of worms in Dairy Milk bars were reported in Maharashtra, following which ad campaigns roping in Big B and revamping of packaging took place as an effort to win back their eroded image and consumer confidence. This cost Cadbury a good Rs.150 million on packaging expenses and 15% up on advertisement costs.
Coca-Cola India has been fighting a legal battle over allegations that its largest plant in India, at Plachimada has been responsible for environmental damage in the area. In a major step towards holding Coca-Cola accountable for damages it has caused in India, the State Government of Kerala decided to move forward with the formation of a tribunal that will hear and award compensation claims against the Coca-Cola Company. The Kerala State cabinet’s decision is based on the report and recommendations of a high-power Committee which released a report on March 22, 2010 holding Coca -Cola responsible for causing pollution and water depletion in Plachimada in the State of Kerala in southern India. Using the ‘polluter pays principle’, the high-power committee had recommended that Coca- Cola be held liable for Rs. 216 crore (US $ 48 million) for damages caused as a result of the company’s bottling operations in Plachimada.”
(Source?: http://www.indiaresource.org/campaigns/coke/)
Cadbury’s worm battle and Coke’s water contamination combat are classic examples of unblown whistles. If timely alerts were sent out through internal whistle-blowing the companies could have perhaps saved themselves of serious brand tarnishing and grave financial blows.
Whistle-blowers of Global Acclaim:
- Sherron Watkins of Enron, Coleen Rowley of FBI and Cynthia Cooper of WorldCom awarded ‘The Persons of the Year 2002’ by ‘Time Magazine’ are classic examples of whistle-blowers in America.
- Sherron Watkins was the Enron Vice-President who wrote a letter to Chairman Kenneth Lay in the summer of 2001 warning him that the company’s methods of accounting were improper. In January, when a Congressional subcommittee investigating Enron’s collapse released that letter, Watkins became a reluc-tant public figure, and the Year of the whistle-blower began.
- Coleen Rowley was the FBI staff attorney who caused a sensation in May with a memo to FBI Director Robert Mueller about how the Bureau brushed off pleas from her Minne-apolis, Minn., field office that Zacarias Mous-saoui, who is now indicted as a September. 11 co-conspirator, was a man who must be investigated.
- One month later Cynthia Cooper exploded the bubble that was WorldCom when she informed its board that the company had covered up $?3.8 billion in losses through the prestidigitations of phony book-keeping.
Whistle-blower Policy and Corporate Governance:
Some Thoughts:
Would you blow the whistle?
Mere bringing in the whistle-blower policy in an organisation does not necessarily result in successful functioning of the whistle- blower mechanism. It has to be put into action by creating awareness, propagating the policy, and assuring that no reprisal would be met against the whistle-blowers.
To safeguard themselves from the consequences of reporting a wrongdoing known or observed, employees across organisational hierarchies are tight-lipped and fearful to blow whistle against their colleagues, their business associates (vendors, customers, etc.) or their higher ups. Employees consider silence as golden in the wake of surviving in the workplace. This is detrimental to both the individual and the organisation.
Employees being closer to the organisation would be in a better position to uncover corporate mis-behaviour. Corporates need to decide whether they would welcome alerts through internal whistle-blowing and take corrective actions internally or be faced with the implications of unsolicited alerts from external sources, thereby endangering their goodwill and reputation.
The Association of Certified Fraud Examiners have highlighted five reasons for ‘Why Employees Don’t Report Unethical Conduct’:
- No confidentiality of reports
- Retaliation by co-workers
Several corporate collapses like Enron, WorldCom, Satyam, Global Trust Bank, UTI scam, Siemens bribing scam in Germany to gain contracts, Harshad Mehta and Ketan Parekh scam, have quaked up the investors’ reliance on governance. This has surfaced the need for reinforcement of a mechanism to escalate misconduct to the appropriate authorities at the right time.
Benefits of a whistle-blower policy:
There is no doubt that in today’s fast-paced world and mega corporations, institution of a whistle-blower policy is not a corporate luxury, but an organisational necessity. The benefits of such a policy are many:
- Fostering good governance by encouraging employees to escalate deceitful actions by colleagues/ seniors/third parties.
- Promotion of the organisational values thus nurturing a culture of openness in workplace.
- Sending a clear message that severe action will be taken against unethical and fraudulent acts.
- Dissuading employees from committing fraud by instilling fear of unfavourable consequences when caught.
- Early alerts to diffuse a potentially larger disaster.
How to make the Whistle-Blower Policy a success?
The success of the Whistle-Blower Policy largely depends upon various factors viz. the level of tone at the top and the signals that its sends down the level, organisational philosophy and code of conduct; whistle-blower policy campaigning, orientation and awareness in the organisation.
The Whistle-Blower Policy should clearly state that:
- Anonymity of the informant will be maintained.
- The authenticity of the information will be confirmed and there will be no reprisal for reporting the information.
- Appropriate and disciplinary action will be taken after investigation and on confirmation of the information.
While the regulatory requirement may lead to introduction of a Whistle-Blower Policy on paper, whether it is imbibed in spirit or not is determined by the tone at the top.
Tone at the top:
The tone at the top has a cascading effect on organisational pyramid downwards. Unless the organisational philosophy and the leadership positively encourage ethics and integrity, employees may assume that aiding in mounting revenue for the organisation is more a priority than ethics.
It is thus important that the leaders of organisation clearly communicate the organisational philosophy, values and code of conduct to be followed by each employee. Similarly, paying lip service to the whistle-blower policy is not enough; as employees and stakeholders are not encouraged to blow the whistle unless there is a serious commitment to it by the leadership.
Wrap-up:
The utility of whistle -blower policy is not only for private corporations but also larger organisations and Government bodies. The recent news coverage on inadequate preparation of infrastructure for the Commonwealth Games, 2010 has rocked India. The authors humbly submit that a well implemented national whistle-blower policy would have perhaps helped in giving early alerts of the impending fiasco and would have gone a long way in protecting the country from loss of credibility in the international arena.
