Research Scholar, Dept. of Laws, Panjab University, Chandigarh
Whistleblowing is one of the top mechanisms which are important for implementing better and effective corporate governance in any institution or organization. Whistleblowing advances good corporate governance, which is essential to a corporation’s growth and development. Whistleblower policy has been recognized as one of the basic features of corporate governance. As whistleblowing promotes good corporate governance, it is enviable that a clear and specific definition and procedure of whistleblowing should be established in every corporation’s whistleblower policy. Whistleblowing is an important tool in any organization’s corporate governance strategy as it empowers employees to act on incidences of misconduct and help maintain a safe workplace, while protecting profits and reputation of the company. Further, the whistleblowing is an essence of conscience keeping and the whistleblowers are the conscience keepers. A conscience keeper has an obligation to blow the whistle i.e. raise an alarm whenever he finds anything which is not as per standards of conscience. Thus, in order to protect corporate conscience, it is necessary to protect conscience keepers, i.e. whistleblowers. This paper will provide an overview of how whistleblowing is related to good corporate governance, highlight the importance of whistleblowing policy in corporations and provide details of Indian legal provisions promoting whistleblowing policy in corporations.
“Citizens never support a weak company and birds don’t build nests on a tree that does not bear fruits”. These lines of Chanakya from his work ‘ArthaSastra’ highlight the importance of good governance practices in a company. In order to understand the concept of whistleblowing in relation to corporate governance, one must need to understand the terms ‘governance’ and ‘corporate governance’. The word governance has its origin in Latin word ‘gubernare’, means to rule or to steer. Governance, it is said, is about ‘steering’ a company in the right direction. Corporate governance means a system by which companies are managed and controlled. According to James D. Wolfenshon (former
President of World Bank), “Corporate governance is about promoting fairness, transparency and accountability”. According to Sir Adrian Cadbury, “Corporate governance is a system by which businesses are directed and controlled”.
In the proceedings of the Silver Jubilee National Convention of the Institute of Company Secretaries of India (ICSI), it was observed that:
“Corporate governance is not just corporate management; it is something much broader to include a fair, efficient and transparent administration to meet certain well defined objectives. It is a system of structuring, operating and controlling of a company with a view to achieve long term strategic goals to satisfy shareholders, creditors, employees, customers and suppliers and complying with the legal and regulatory requirements, apart from meeting environmental and local community needs. When it is practiced under a well laid out system, it leads to the building of a legal, commercial and institutional framework and demarcates the boundaries within which these functions are performed”.
Whistleblowing is an action that not only can aid in exposing organizations’ illegal activities to the public, but also can give employers an opportunity to find out irregularities that occur in the workplace and to rectify those mistakes beforehand. As for corporate governance it can be regarded as a structure, a system, or a means that companies set up to monitor the operation of business, to make firms’ policies and to achieve objectives more effectively and successfully.
II. Whistleblowing and Corporate Good Governance:
Whistleblowing can be defined in a number of ways. In simple words, whistleblowing involves the act of reporting wrongdoing within an organization to internal and external parties. Internal whistleblowing provides the reporting the information to a source within the organization and external whistleblowing occurs when the whistleblower takes the information outside the organization such as to the media or regulators. Good governance signifies that it is in the interest of organization, institution or an economy to report anything wrong happening in it. This reporting of wrongdoing (whistleblowing) is not meant to cause harm to the organization, rather, it is to facilitate the exposure of wrongful acts or omissions of a person or persons that is against the interests or values of organization. In this age of globalization, where economic motives precede over all virtues and traditions; protection of larger public interest from great corporate scandals has become matter of great importance. Corporate whistleblowing worldwide is considered as one of the best tools to ensure good corporate governance. Whistleblower policy has been recognized as one of the basic features of corporate governance.
Due to the efforts of whistleblowers more and more corporate wrongdoings are being exposed around the world. Whistleblowers are the employees who exercise their free speech right in order to confront organizational abuse of power or illegality or wrongdoing that is against the public interest. They can disclose the wrongdoing either internally or externally. Whistleblowing can be used as an avenue for maintaining and promoting integrity by speaking truthfully about whist is right and what is wrong. It is an approach that combines many things; it asserts rights, protects interests, and influences justice. Every whistleblower policy in a corporation should establish a clear and specific definition and procedure of whistleblowing as it promotes good corporate governance which is essential and fundamental for growth of a corporation. Directors of all types of businesses are forced to demonstrate a clear commitment to their legal and ethical duties in governing their businesses. Even the management and staff have a duty to act responsibly and they are also being held liable for mismanagement. This is due to public focus and efforts of media on corporate governance and the increased interest in whistleblowing.
In the present times, the need of standards of corporate governance is more than ever for despite the supremacy of organizational actors in contemporary social life, law is badly short of doctrines, institutions, and regulatory techniques that effectively control corporate entities. It has now become crucial to design and implement a dynamic mechanism of corporate governance, which protects the interests of relevant stakeholders without obstructing the growth of enterprises because the corporate veil frequently prevents the penetration of legal values into and, indeed, the imposition of legal sanctions upon the corporate entity.
The Committee on Standards in Public Life, 2005 has highlighted the role which whistleblowing plays both as an instrument in support of good governance and a manifestation of a more open culture in following words:
“Effective whistleblowing is a key component in any strategy to challenge inappropriate behaviour at all levels of an organization. It is both an instrument in support of good governance and a manifestation of a more open organizational culture.”
Generally, employees are the one who frequently witness situations and incidents in corporations that are immoral or unethical at an early phase but they hesitate to inform about the same to authorities due to the lack of protection as only very few corporations or organizations have whistleblower policy. Thus, if an organization seeks to enhance standards and controls for better and more effective corporate governance, it has to focus on whistleblower policy. The top five mechanisms which are vital for implementing better and effective corporate governance in any institution or organization are:
1. Independent Board of Directors.
2. Role of Auditors (Internal and Statutory) and Audit Committee.
4. Shareholder Activism.
5. Fast Track Redressal Forums and Independent complaint mechanisms.
Thus, Whistleblowing is an important tool in any organization’s corporate governance strategy as it empowers employees to act on incidences of misconduct and help maintain a safe workplace, while protecting profits and reputation of the company. Whistleblowing is considered relevant and plays a critical role in implementing corporate governance practices. As more and more corporate wrongdoings are being exposed around the world, a small, but ever growing group (whistleblowers) must be thanked to bring such matters to light. Whistleblowers are employees who exercise free speech rights to challenge institutional abuses of power or illegality that betray the public trust. Their disclosure can be made either internally or externally.
A robust and holistic whistleblowing mechanism includes a policy framework, a dependable complaint-reporting platform, a well structured and practical response plan, creation of awareness among its management and employees, and requires them to be trained in the requisite process. Such a mechanism not only provides all the stakeholders of a business a platform on which they can report their genuine concerns, but also creates a veritable source of information that helps its management identify various lapses in its processes.
Uncovering malpractice in corporations through whistleblowing often depends on the compliance of those who are aware of or suspecting misconduct to disclose it. Revealing such misconduct is generally recognized to be the significant value to society at large, as it improves the openness, good governance and transparency in system. However, willingness of individuals to declare misconduct is likely to depend upon the fact that how the system deals with and protects them when they disclose wrongful act. Potential whistleblower must consider whether allegation will be taken seriously and the information treated confidentiality and whether disclosure of information will provoke retaliation. The Companies Act, 2013 under Section 177 (9) and (10) has made it mandatory for certain classes of companies to establish vigil mechanism for their directors and employees in order to report genuine concern in the recommended manner. Clause 49 of the SEBI Listing Agreement also lays down similar provisions. Non-compliance with these regulations could lead to fines and penalties.
III. Committees Recommending Whistleblowing as an Element of Corporate Governance:
With the introduction of privatization and liberalization in the decade of 1990s in India, a need for greater Foreign Direct Investment, the entry of transnational and multinationals to the country, a need for greater accountability and investor protection arose. The first step taken in this regard was the formation of Confederation of Indian Industry (CII) in 1996, which developed the set of laws for Indian companies as to initiate the act towards corporate governance. Later on two Committees i.e. Kumar Mangalam Birla and Naresh Chandra under Securities and Exchange Board of India started laying the groundwork for formalizing the best practices on corporate governance. However, whistleblowing as an element for good governance is discussed firstly in the Narayana Murthy Committee in the year 2003.
1. Recommendations of Narayana Murthy Committee report on Corporate Governance, 2003:
SEBI again set up the Murthy committee under the chairmanship of Infosys chief mentor N.R. Narayana Murthy in a responds to the Enron scandal in the USA, to review Clause 49 in order to improve the Corporate Governance standards. This Committee recommended that the mandatory recommendations in the report of Naresh Chandra Committee, insofar as they relate to corporate governance, be mandatorily implemented by SEBI. The Committee further recommended various suggestions in order to encourage companies to follow the substance, not just the form, of good governance. On the aspect of whistleblowing, the Committee suggested mandatory recommendation that-
· The employment and other personnel policies of the company shall contain provisions protecting “whistle-blowers” from unfair termination and other unfair prejudicial employment practices.
· Companies shall annually affirm that they have not denied any personnel access to audit committee (in respect of matter involving alleged misconduct) and that they have provided protection to “whistle-blowers” from unfair termination and other unfair prejudicial employment practices. Further such affirmation shall form a part of the Board report on Corporate Governance that is required to be prepared and submitted together with the annual report.
2. Dr. Jamshed J. Irani Expert Committee Report on Company Law, 2005:
The Government of India constituted an expert committee on Company Law on 2 December, 2004, under the Chairmanship of Dr. J.J. Irani. The Committee submitted its report in seven parts consisting of thirteen chapters. In Chapter XII i.e. ‘Offences and Penalties’, heading 35, the Committee report provides protection to Whistle Blowers. It provides that law should recognize the ‘Whistle Blower Concept’ by enabling protection to individuals who expose offences by companies, particularly those involving fraud. Such protection should extend to normal terms and conditions of service and from harassment. Further, if such employees are themselves implicated, their cooperation should lead to mitigation of penalties to which they may otherwise be liable.
3. SEBI Committee on Corporate Governance, 2017:
SEBI formed a Committee on Corporate Governance on June 2017 under the Chairmanship of Mr. Uday Kotak with an objective to enhance the standards of corporate governance of listed entities in India.
The Committee recommends that there should be a leniency mechanism. It provides that a leniency programme creates structural incentives for persons connected with the commission an infringement to come forward and disclose such violations and assist the regulatory authorities by receiving lenient treatment and protection against victimization. Currently, the Competition Commission of India has powers to grant leniency to cartel members in case they disclose true, full and vital information. The Committee felt that a leniency programme would improve effective detection of violations and enhance ease of investigation and enforcement, while also acting as a deterrent that could result in an increase in the overall compliance of securities regulations.
The Committee held that SEBI may be empowered to grant leniency and offer protection against victimization to whistleblowers in certain instances determined on a case by case basis. Any such power would have to be accompanied by rules and regulations in relation to the conditions to be satisfied for getting benefits under the leniency programme and protection against victimization, the procedure for the lesser penalty or reduction in liability, the quantum of penalties that are waived when lenient treatment is meted out and protection of whistleblowers. In a nutshell, availing the leniency provisions is a win-win situation for SEBI as well as the whistleblower.
IV. Legal Provisions Governing Whistleblowing Policy in Corporations in India:
Corporations are governed by various legal provisions which provide for establishment of whistleblowing policy. These provisions are as follows:
1. Clause 49 of the Listing Agreement:
This clause has both mandatory and non-mandatory provisions. The provisions relating to whistleblowing is laid down in non-mandatory category.
i) Whistleblower Policy:
The company may establish a mechanism for employees to report to the management concerns about unethical behaviour, actual or suspected fraud, or violation of company’s code of conduct or ethics policy. The mechanism could also provide for adequate safeguards against victimization of employees who avail of the mechanism and also provide for the direct access to the Chairman of the Audit Committee in exceptional cases. Once established, the existence of the mechanism may be appropriately communicated within the organization. However, on 17 April, 2014, SEBI amended the Corporate Governance norms for listed companies in India which will be effective from 1st October, 2014 in order to bring the corporate governance norms in line with Companies Act, 2013.
ii) Whistleblower Policy under the Revised Clause 49:
After the amendment, now it has been made a mandatory provision. It provides:
· The company is required to establish a vigil mechanism to report unethical behavior or any sort of violation of the company’s code of conduct, any actual or suspected fraud.
· The details of the establishment of such mechanism shall be disclosed by the company on its website and in the Board’s Report. It also provides for the adequate protection against victimization of the personnel who avail of the vigil mechanism.
2. Corporate Governance Voluntary Guidelines, 2009:
These guidelines provide for a set of set of good practices which may be voluntarily adopted by the Public Companies. Private companies, particularly the bigger ones, may also like to adopt these guidelines. The guidelines are not intended to be a substitute for or additions to the existing laws, but are recommendatory in nature. Chapter VI of the Voluntary Code of Corporate Governance mentions about institution of mechanism for whistleblowing. It provides that-
(i) The companies should ensure the institution of a mechanism for employees to report concerns about unethical behavior, actual or suspected fraud, or violation of the company’s code of conduct or ethics policy.
(ii) The companies should also provide for adequate safeguards against victimization of employees who avail of the mechanism, and also allow direct access to the Chairperson of the Audit Committee in exceptional cases.
3. Companies Act, 2013, and Companies (Meetings of Board and its Powers) Rules, 2014:
The Companies Act, 2013, having been developed in the aftermath of various corporate scandals, eliminates loopholes by prescribing stricter compliance and disclosure norms than were imposed earlier. The advent of Companies Act, 2013, is a step in the direction of effective corporate governance. The Companies Act, 2013, though does not include the terminology whistleblowing; but the provisions are laid out on the concept. The separate chapter (Chapter XIV) in the Companies Act titled: “Inspection, Inquiry and Investigation” deals with the various aspects of the concept whistleblowing. Section 206 to Section 229 of the Companies Act provides new procedure for inspection, inquiry and investigation of company affairs. Section 211 of the Companies Act provides for establishment of Serious Fraud Investigation Officer (SFIO). According to Companies Act, 2013, whistleblowing is not just voluntary act of the person willing to do so, but actually it is the duty, right and responsibility of the person to assist in company affairs.
The joint reading of Section 177 (9) and Draft rule no. 12.5 of the Companies Act, 2013, and the Companies (Meetings of Board and its Powers) Rules, 2014, has made it mandatory for following to establish a vigil mechanism for directors and employees to report their genuine concerns:
(a) Listed companies;
(b) Companies that accept deposits from public; and
(c) Companies which have borrowed money from banks or public financial institutions in excess of rupees 50 crores;
Companies which are required to constitute an audit committee shall operate the vigil mechanism through the audit committee and if any of the members of the committee have a conflict of interest in a given case, they should rescue themselves and the others on the committee would deal with the matter on hand. For other companies, the Board of Directors shall nominate a director to play the role of audit committee for the purpose of vigil mechanism to whom other directors or employees may report their concerns. It provide adequate safeguards against victimization of employees and directors who avail of the vigil mechanism and also provide for direct access to the chairperson to the audit committee or director nominated to play the role of audit committee, as the case may be, in exceptional cases. Once established, the existence of the mechanism may be appropriately communicated within the organization. The details of the establishment of vigil mechanism shall be disclosed by the company in the website, if any, and in the Board’s report. If case of repeated frivolous complaints being filed by a director or employee, the audit committee or director nominated to play the role of audit committee may take suitable action against the concerned director or employee including reprimand.
V. Whistleblowers: The Keepers of Corporate Conscience:
“There is a Court, higher than the Court of Justice, it is the Court of Conscience, and it supersedes all.”
Whistleblower protection today is a matter of much Corporate Global Concern because overtime whistleblowers have been seen as the ‘Keepers of Corporate Conscience’. The whistleblowing is an essence of conscience keeping and the whistleblowers are the conscience keepers. A conscience keeper has a duty to blow the whistle (raise an alarm) whenever he finds anything which is not as per standards of conscience. In the context of a corporation, whistleblowers are those who expose malpractices, unethical and corrupt practices of their co-workers and seniors, for the benefit of the company, stakeholders and society at large. The word ‘conscience’ comes from the Latin term ‘conscientia’ which means ‘co-knowledge or knowledge within oneself’. Commonly used metaphors for conscience include the ‘voice within’ and the ‘inner light’. Conscience is an aptitude, faculty, intuition or judgement of the intellect that distinguishes right from wrong. Simply put it is an individual’s system of moral values, the sense of right and wrong in his or her conduct.
Corporate conscience is a term widely used for ‘Corporate Social Responsibility’, but in actuality corporate conscience is more than corporate governance and corporate social responsibility. Corporate conscience is displayed in exercising fair treatment and growth for all stakeholders and society without leaning towards profit for a particular interest group. To put it simply, corporate conscience is a two-fold realization: firstly that, corporate governance deals with promoting corporate fairness, transparency and accountability; and secondly that, corporate social responsibility focuses on the idea that a business has social obligation above and beyond making profit. It requires management to be accountable to full range of stakeholders.
The dictionary meaning of the word ‘keeper’ is a person who manages or looks after something or someone, in particular. Synonyms of ‘keepers’ are custodian, guardian, warden, caretaker etc. The term conscience keeper refers to a person who an individual listens to when in doubt about moral values but not necessarily agrees with. Conscience keepers thus seek to guide but keep a respectful distance from the individuals or systems involved in decision making. They often think differently from the latter on the moral contents of the issues, and disagree with the individuals or the systems concerned either in public or private, giving them the option to choose between two competing values.
Accountability, transparency and openness are the pillars of good governance and protecting whistleblowers helps to encourage a culture of transparency and accountability or public and private institutions. The organization is always interested in eliminating unethical or improper practices and in this perspective, management taking the responsibility to promote good corporate governance, formulates policy on whistleblowing and put in place an efficient administrative system and thus bringing out the transparent transactions. Whistleblowing is an internal mechanism, which is formulated by organizations worldwide to help their employees to draw up a relevant whistleblowing mechanism through the established whistleblowing procedure, which provides a channel of communication for individuals. The whistleblower policy is put in place by organizations to ensure the safety of those individuals who blow the whistle.
The whistleblower policy should be drafted and implemented effectively, as the effective whistleblower policy not only reduce the fraudulent activities but also send a signal to both internal and external agencies that organization exercises good corporate governance. The foundation of whistleblower policy is a clear and specific definition of whistleblowing. The key aspects of effective whistleblower policy are:
(a) Clear definition of individuals covered by the policy;
(b) Non-retaliation provisions;
The whistleblower policy should include the methods to encourage employees, shareholders, and customers etc., to report evidence of fraudulent activities. When we want to protect corporate conscience, we should protect our conscience keeper, our whistleblower.
Good corporate governance practices are a sine quo non for substantial business that aims at generating long term value to all its shareholders and other stakeholders. It is important as it can make company or organization more transparent and satisfied the shareholders and other stakeholders of a company. It is strong fundamentals and ethical behavior in a company that can help it overcome huge crises. Compliance with good corporate governance practices should not be regarded as regulatory requirement but rather as an opportunity and value proposition for organization.
In the end it can be concluded with the words of U.K. Whistleblowing Commission, 2013, where it highlighted the importance of whistleblowing as an instrument in support of good governance. The Committee observed that:
“Effective whistleblowing arrangements are a key part of good governance. A healthy and open culture is one where people are encouraged to speak out, confident that they can do so without adverse repercussions, confident that they will be listened to, and confident that appropriate action will be taken. Company should provide appropriate development programmes and training in order to create a better and healthy corporate culture or corporate environment and should also strengthen whistleblowers by making effective whistleblowing policy. This is to the benefit of organisations, individuals and society as a whole.”
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Received on 02.06.2018 Modified on 15.07.2018
Accepted on 06.08.2018 ©AandV Publications All right reserved