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Facilitation and Whistle-blower Protection by Indian Firms

M V Shivaani (mv_shivaani@iimnagpur.ac.in) teaches finance and accounting, and Thiagu Ranganathan (thiagu.ranganathan@iimnagpur.ac.in) teaches economics at the Indian Institute of Management Nagpur.

The policies related to whistle-blowing among the BSE 30 companies in India are analysed. In the facilitative aspect, 80% of the firms explicitly mention the reporting authority. Similarly, 80% of the firms have elaborated on how the reporting should happen, whereas only 10% of the firms allow complaints to be registered over phone. The findings indicate an urgent need to develop and enforce corporate policies to protect the whistle-blowers.

Whistle-blowing is a critical aspect that helps in upholding corporate ethics. In recent times, there have been increasing awareness about whistle-blowing activities.1 Around 17 NIFTY companies said they received 3,508 whistle-blower complaints in 2018 compared to 3,139 in 2017. While this might not be a huge difference, there is a push towards increasing awareness related to whistle-blowing.2 There is a need to understand what is happening in the sphere of whistle-blowing in corporate India and this article is an attempt in that direction.

Whistle-blowing, as defined by the United States (US) civic activist Ralph Nader, is 

an act of a man or woman who, believing that the public interest overrides the interest of organisation he serves, blows the whistle that the organisation is involved in corrupt, illegal, or harmful activity.

The word “whistle-blowing” is of British origin and was derived from the practice of British police officers who blew their whistles to alert others of wrongdoing (Cavico 2003). In this regard, whistle-blowers and whistle-blowing have been helpful in unearthing various fraudulent and illegal activities in both the public and private sector organisations across the world.

The importance of whistle-blowing to ethics in corporate culture across the world and to multinational enterprises (MNEs) has been widely acknowledged (Hartman et al 2009). There are established laws across the world to facilitate whistle-blowing and to protect whistle-blowers. These take into account various dimensions such as promotion of public interest, improvement of public service, preventing and eliminating wrongdoing in public and private sector organisations, promotion of compliance with laws, encouragement and facilitation of disclosures, provision of procedures for whistle-blowing, and protection of whistle-blowers (Hills Governance Centre 2004). There is an international consensus and continued commitment to enable laws of this nature and to implement policies by the public and private sectors.

In the Indian context, the concept of whistle-blowing dates back to the Arthashastra (around 300–250 BC) and there appears to have been some encouragement for whistle-blowing through reward systems in that era. Kautilya mentions that an informant who supplies information about embezzlement, if they succeed in proving it, get a reward of one-sixth of the amount in question and if they happen to be a government servant, for the same act, they get one-twelfth of the amount.3 Though such systems were existent in the ancient texts, modern India did not take cognisance of whistle-blowing and pass legislations to facilitate it. But, the last two decades have witnessed a surge in recognising the need for whistle-blowing and whistle-blower protection.

One of the first laws to protect whistle-blowers was suggested in 2001 by the Law Commission. Subsequently, the murder of 30-year-old Satyendra Dubey, a whistle-blower, made the Supreme Court direct the enactment of laws to handle whistle-blower protection.

Legislation

The administrative reforms commission’s report in 2007 also recommended a law to protect the whistle-blowers. After a reasonable bit of struggle, the whistle-blowers protection bill was introduced in 2012 and finally passed in 2014. These laws were aimed to facilitate whistle-blowing against public sector employees and bureaucrats. With Section 177 of Companies’ Act, 2013, the scope of whistle-blower protection extended to the private sector. The act directs the companies to establish vigil mechanism to report unethical behaviour or other concerns to management. It is mandatory for the listed companies, companies that accept deposits, and companies that have borrowed from financial institutions in excess of ₹ 50 crore under Section 177(9) read with Companies (Meetings of Board and its Powers) Rules, 2014.4,5 Given this background, Indian companies have laid down whistle-blowing policies over the last four years. There has also been reasonable media coverage on issues related to whistle-blowing. A look at the news items across English Indian newspapers6 shows there were around 118 news items referring to whistle-blowing and/or whistle-blowers and various companies, including Infosys, Welspun, Oil and Natural Gas Corporation (ONGC), Ranbaxy Laboratories, and the National Stock Exchange (NSE) were mentioned in these news items. In such a scenario, it is important to review the policies that have been made by these companies and the extent of facilitation and protection provided by them for whistle-blowing.

For the purpose of our analysis, we chose the top 30 companies listed on the Bombay Stock Exchange (BSE),7 that constitute Sensex. These companies account for about 95% of market capitalisation of all the companies listed on the BSE. Accordingly, these are the companies that we expect would provide leadership in corporate ethics as well. The corporate ethics in these companies should throw light on the overall practices of corporate governance among the Indian corporate sector. We obtained the whistle-blowing policy documents for all these companies from their respective websites. The findings related to these policies are provided in Table 1.

Table 1 presents the key insights into whistle-blowing policies of the 30 top companies on the BSE. The analysis looks at the facilitative and protection aspects of the policies. In the facilitative aspect, we have analysed the procedural and confidence-related issues. In the procedural issues, the analysis first relates to the appropriate authority for the purpose of whistle-blowing. We find that this is mentioned explicitly in about 80% of the companies. In one of the companies, whistle-blowers were empowered to report to any member of the audit committee. In another company, the appropriate authority was the chief compliance officer. If violation was related to the chief compliance offices itself, then the complaints could be directed towards the chief ombudsperson, which is an intermediate authority. Being a non-routine activity, it is pertinent that companies provide an elaborate and explicit account of the procedure for making complaints. Interestingly, 20% of the companies did not touch upon the procedural aspects at all. Further, in terms of mode of complaint, only about half the companies provided postal details and a similar proportion cited email as a medium. In addition, only about 10% companies allowed complaints through telephone.

It is surprising to note that about 20% of the companies mandated that the complaint will be entertained only if it is filed within 30 days of complainant becoming aware of the wrongdoing. In contrast, none of the companies provided any timelines for action to be taken against the misdoer. Given that only timely action will encourage whistle-blowing, the absence of any timelines indicates a lack of commitment towards timely investigation into matters raised by whistle-blowing. Only 63.33% of the companies mentioned authority who would take the final action and only 13.33% of the companies indicate whether the complainant will be informed of the decision made by the whistle-blowing committee. This is quite discouraging as we would expect the complainant to know about the results of the investigation to keep his faith alive in the system.

A key component of whistle-blowing regulation is related to the protection provided to the whistle-blower. Withregard to that, we find that anonymity is typically encouraged by companies across the world to encourage whistle-blowing. There is a strong case for and against anonymity. Anonymity might trigger irresponsible accusations by employees but it could also allow for much more vibrant whistle-blowing in the organisation. In the Indian scenario, we do not find firms encouraging anonymous complaints. We find that only five of the 30 companies seem to allow anonymous whistle-blowing. Many companies do not mention anything related to anonymous complaints and around one-third of the companies do not allow anonymous complaints. Protection to whistle-blowers is explicitly mentioned in three-fourths of the companies. It is important that while mentioning protection all kinds of possible retaliation are also mentioned. A good practice in whistle-blowing policy is to mention the kind of wrongdoings, the potential retaliation, and the explicit protection in the context of the organisation. This was not necessarily the case with the companies considered in our study. We find that almost one-fourth of the companies do not even mention protection explicitly. Another key component of whistle-blowing policy is the way to handle honest mistakes by the complainant. This is important as the complainant sometimes may not be sure of whether there has been a wrondoing but could file a complaint just to make sure something unethical or illegal or wrong does not happen. The companies are expected to consider them in good faith as a guideline to effective whistle-blowing legislation. That this might increase frivolous complaints is a concern raised by many firms. But, given that most of the firms do not allow for anonymous complaints, we should expect less frivolous complains by employees. It is found that only 23% of the companies mention that if the complaint was made in good faith, there will be no action. One company explicitly mentioned no action will be taken against the complainant in the case of a mistaken/wrong complaint. This could be seen as a good practice and other firms might not have mentioned this as there could be a fear of frivolous complaints in the presence of this provision in the policy.

The positive impact of this on appropriate whistle-blowing might be higher than the costs associated with frivolous complaints due to no action against mistaken complaints. Another interesting aspect in the policies is that they mention that employees should report further if they are not provided protection. This seems to be a strange provision. First, the policy should provide confidence that the protection would be provided and there is no concern related to not obtaining provision. Second, if at all there is a case of protection not being provided, there is high doubt on what further reporting by employee could achieve. Instead, some committee could be probably set up to monitor retaliation due to whistle-blowing for the complainant.

Conclusions

We analysed the whistle-blowing policies of BSE 30 listed companies in India. We evaluated these policies along the dimensions of facilitation and protection. We find that there is a need for these organisations to improve the policies along both these lines. Both facilitation and protection have to be taken seriously by the firms and the procedures need to be laid down such that there is an encouragement for whistle-blowing. The current policies seem to indicate that the firms have just laid down the policies more out of an obligation than with any enthusiasm. The firms also need to understand that fraud reporting will also help reduce costs to the firms due to frauds, and developing an ethical culture could also be of benefit to them. At this stage, the policies are so weak that they cannot even be called paper tigers.

Notes

1 https://economictimes.indiatimes.com/news/company/corporate-trends/whist....

2 https://economictimes.indiatimes.com/jobs/urgent-need-to-increase-awaren....

3 http://www.legalservicesindia.com/article/1693/Whistleblowers-and-their-....

4 https://economictimes.indiatimes.com/news/economy/policy/listed-companie....

5 https://taxguru.in/company-law/whistleblowing-vigil-mechanism-companies-....

6 https://pulse.zerodha.com/.

7 As on 23 March 2018.

References

Cavico, Frank J (2003): “Private Sector Whistleblowing and the Employment-At-Will Doctrine: A Comparative Legal, Ethical, and Pragmatic Analysis,” South Texas Law Review, 45, p 543.

Hartman, Laura Pincus, R Elm Dawn, J Radin Tara and Kelly Pope (2009): “Translating Corporate Culture Around the World: A Cross-cultural Analysis of Whistleblowing as an Example of How to Say and Do the Right Thing (2009),” Politeia, Vol 105, No 93, pp 255–72, SSRN: https://ssrn.com/abstract=1444187.

Hills Governance Centre (2004): “Whistleblowing in the Philippines: Awareness, Attitudes and Structures,” http://www.Aims-hills.ph/proejectpage/prs/research3_6htm.

Updated On : 12th Apr, 2019

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