Introduction: The term ‘whistle-blowing’ is a relatively recent entry into the vocabulary of corporate and financial affairs, although the concept itself is not new. Whistleblowing can be termed as raising a concern of a wrongdoing in an organization. A Whistleblower in a layman’s language can be defined as an individual (employee/former employee) who exposes information regarding what he believes to be a wrongdoing, fraud, corruption, deviation from the set rules or mismanagement.
Also, there is a lot of debate over whether the act of whistle blowing is an act of employee deviance. Although some organisations may view whistle blowing as deviant, this perception cannot be generalized. It is best not to consider whistle blowing as an act of deviance until information to the contrary is provided in a particular case.
What is Whistle Blowing?
Technically whistle blowing is the act, for an employee or a former employee, of disclosing what he believes to be unethical or illegal behaviour to higher management (internal whistle blowing) or to an external authority or the public (external whistle blowing).
Whistle blowing is essentially a process and is not to be viewed as an individual event. Prima facie four important subjects of this process involve the whistleblower, the complaint or revelation, the party to whom the complaint or revelation is made and the organisation against which it is made.
The ultimate aim of the whistle blowing process is to protect public interest. Accusations regarding an official’s unusual sexual or religious experiences may well appeal to the public’s interest without being information relevant to the “public interest”. If an employee reports a wrongdoing which he/she believes to be illegitimate acts, outside the organisation’s purview then it is whistle blowing in true sense.
Who are Whistleblowers?
Individuals who expose information regarding wrongdoing, fraud, corruption or mismanagement and report such acts inside an organisation i.e. to the Chief executive officer or any member of the senior management are called as internal whistleblowers. Whereas individuals who report of such wrongdoings outside of the organisation i.e. to the media, law enforcement agencies, etc. are called as external whistleblowers.
It is not an issue that can be ignored, due to its negative consequences for both employees and organization. For example, a recent review of whistle blowing incidents shows that among the whistleblowers surveyed, 62% lost their jobs, 18% felt that they were harassed or transferred, 11% had their job responsibilities or salaries reduced, 51% of the incidents resulted in external investigations of the companies involved, 37% in management shake-ups, 22% in criminal investigations, and 11% in indictments.
A whistleblower reports the wrongdoings as he /she lacks the authority to correct the reported organisation’s activities. In other words he must lack the requisite base of power for making the change. Also personal characteristics of an individual to a great extent determine whether he/she would blow the whistle or not. Observers who have low esteem may be apathetic about most organisational activities or may withdraw from situations; they would be less likely to blow the whistle than with persons with adequate self esteem. Individuals with high internal locus of control see an illegal activity as an act that they don’t sanction and are more likely to blow the whistle unlike individuals with high external locus of control who see the questionable act as controlled by powerful superiors who cannot be deterred.
Why a Whistle Blowing Policy ?
“Whistle blowing is an important aspect that has the inherent power to mitigate a crisis-like situation. The whistleblower’s revelation needs to be handled correctly and promptly for sustained value creation in the organisation.” Says Kumar Bimal, Vice President, Marketing, Sonalika Group. It cannot be disputed that many large corporate frauds have come to limelight only through an insider’s revelation or a confession, and not through an audit report or a regulatory investigation. It thus, becomes very essential to provide to the whistleblower a smooth route for his revelation through an efficient whistle blower policy. The organisation needs to ensure that there is an easy route to raise concerns, otherwise either the workforce will become silent, or if the scandal comes out in the public, it will come out in the most destructive way.
An organisation’s commitment to develop an effective whistle blowing mechanism is essentially embodied in its formal policy. The underlying spirit of a whistle blowing policy aims to identify risks and temper them through the use of an efficient mechanism. The kind of risks here would include malpractices, fraud or corruption, illegal offences, etc.
The authors assess the viability of whistle blowing policies by taking examples of such policies established by two prominent corporations. The whistle blowing policy as incorporated by Berger Paints, India is a well developed and channelized whistleblowers policy. It not only directs any complaints regarding the violation of the Code of Conduct of the company, but also specifies the results and states that failure to report is also a violation of the policy.
- The whole chain of command, from an employee to the director, is allowed to report any violation of the policy. Frauds, harassment’s, discrimination, misappropriation of money are a few of the many kinds of violations that can be reported.
- The policy provides channels to report the violation on any level. The chairman presides above all the channels.
- In case of detection of any flaw the topmost management will take up the investigation and any revelation of providing false evidence shall be dealt with seriously.
- No retaliation towards the whistleblower is tolerated and the confidentiality obligation is to be maintained at all times.
- No malicious or unfounded allegations are to be made under this policy and the policy does not protect the employee from disciplinary action taken against him if found guilty.
Secondly, if one analyses the whistle blower policy of Ranbaxy Laboratories, it is found that the Company seeks to provide a procedure for all its employees to disclose any unethical and improper practice taking place in the Company for appropriate action and reporting. The Company provides necessary safeguards to all whistle Blowers for making Protected Disclosure in good faith, and in all the areas mentioned in the Code of Conduct.
Ranbaxy in May, 2013 pleaded guilty to felony charges in US for falsifying claims and distributing ‘adulterated drugs’ and agreed to pay a fine of $500 million. Dinesh Thakur, the former Ranbaxy executive who exposed dubious manufacturing practices in the company, pocketed $49 million for blowing the whistle. Thakur was tasked to scrutinize the data that Ranbaxy submitted for approvals to the US and other foreign markets. He found out that besides sloppy manufacturing processes, test results were being falsified for HIV anti-retroviral and other drugs. In 2004, after reporting his findings to his superior, his evidence was ignored and he was accused of watching pornography on his company computer following which he resigned.
Two years later Thakur made a complaint in the US under the False Claims Act (FCA), also known as a ‘whistleblower’s law’. The government investigated Thakur’s complaint and in May 2013, Ranbaxy pleaded guilty to criminal and civil charges in a case brought by the US Department of Justice. Thakur, in an interview stated that he reported and revealed the information to the US authorities because he was not aware whether a parallel comprehensive statute existed in India where private citizens were provided protection to help the Indian government prosecute companies carrying out illegal activities. This incident itself throws light to another very important aspect of how and why whistle blowing is not being used as an effective tool for fraud prevention in India.
Whistleblowing Policy and Legislation in India:
- The Companies Act, 2013 and WHISTLEBLOWING:
Though legislation in India, specifically relating to whistle blowing and protection of whistleblowers is inadequate, the advent of Companies Act 2013 is a step in the direction of effective corporate governance. With the emergence of the Companies Act, 2013, the thrust has been towards fraud elimination and establishment of an effective corporate vigil mechanism. 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.
Sections 206 to 229 of the Companies Act 2013 incorporate in detail all the provisions relating to inspection, inquiry and investigation under the head of a single chapter. Section 208 of the Act, empowers an Inspector apart from the Registrar to inspect records unlike the provisions of the old act of 1956. Also the Registrar/Inspector may furnish any recommendations to conduct investigations in such a matter. Section 210 on the other hand states that the Central Government may order an investigation into the affairs of the company either: a) on the receipt of a report of the registrar or inspector of the company b) on intimation of a special resolution passed by a company that the affairs of the company ought to be investigated; or c) in public interest. But where an order is passed by a Court or Tribunal stating that the affairs of a company ought to be investigated the Central Government shall order an investigation into the affairs of that company. Moreover, The Serious Fraud Investigation Office (SFIO) is now a statutory body established under section 211 of the Act with the power to arrest for offences specified as fraud. Also it is important to note that previously, auditors did not have to legally ascertain whether fraud had occurred or not. They were to primarily report material related to fraudulent reporting and/ or misappropriation of assets. There is now onerous responsibility on auditors to act as whistleblowers by reporting directly to the Central Government if they have reason to believe a fraud is being, or has been committed against the company by its officers or employees.
The companies act 2013 under draft rule no. 12.5 read with section 177(9) has made it mandatory for: 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 to establish a vigil mechanism for directors and employees to report their genuine concerns. As per the said provisions, the companies which are required to constitute a vigil committee shall operate the vigil mechanism through its audit committee and in case of other companies the board of directors are obligated to nominate a director to play the role of an audit committee. The very reason behind setting up of a vigil mechanism in a company is to rule out possibilities of embezzlement of funds of a company or any other act, in which stakeholders’ or public interest is involved.
Schedule IV read with section 149(8) of the Companies Act 2013 lays down the code to professional conduct for independent directors. The duties of independent director elaborated in part III of schedule IV include ascertaining and ensuring that the company has an adequate and functional vigil mechanism and that the interests of the persons using it are not harmed. The independent directors are also entrusted with the task of reporting concerns over unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy. Such changes made by the Act with regard to governance, transparency, disclosures, the position of the serious fraud investigation office etc under section 211 of the Act is expected to make companies shift from being complacent to playing compliant roles.
- SEBI and WHISTLEBLOWING:
The Securities and Exchange Board of India (‘SEBI’) vide its circular dated August 26, 2003 amended the Principles of Corporate Governance incorporated in the standard Listing Agreement. Clause 49 of the Listing Agreement to the Indian stock exchange now also mentions the formulation of a Whistleblower policy for companies. Following is the text from Annexure I D of the Clause 49 of the Listing Agreement:
“The company may 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. This mechanism could also provide for adequate safeguards against victimization of employees who avail of the mechanism and also provide for 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.”
At present, a listed company in India can establish as a non mandatory requirement, a whistle blower mechanism for employees to report their concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct. However, it is currently not mandatory for companies to have a whistle blowing policy in place. Besides this, the company also has a mandatory requirement to disclose, in its report on corporate governance, the extent of adoption of such non-mandatory practice. It is heartening to see that numerous companies have started to adopt the practice of formulating a whistle-Blower Policy either in their quest to uphold the highest corporate governance standards or in the fear of being regarded as late entrants to the ‘well-governed companies’ group.
- The WHISTLEBLOWER Protection Bill, 2011:
The Whistleblower Protection Bill, 2011 is another piece of legislation which after being passed by the Rajya Sabha in February, 2014 got the President’s nod in May, 2014. The Bill, though has not come into force yet. The Bill replaces the 2004 government resolution which gave the Central Vigilance Commission (CVC) the power to act on complaints from whistleblowers, and sets up a mechanism to receive complaints of corruption or wilful misuse of power by a public servant. It aims to balance the need to protect honest officials from undue harassment with protecting persons making a public interest disclosure.. Section 4(6) of the Act, bars competent authorities from inquiring into anonymous complaints and made it mandatory for all complainants making the disclosure to reveal their true identity. The Hon’ble Supreme Court of India making an intervention with this regard, in its order dated 20 November, 2014, legitimised the practice of anonymous whistleblowing which can prove to be a great boon for anonymous whistleblowers in India.
- India and Corruption: The paradox is that a country like India which boasts of its democratic system of government that was essentially put in place to ensure justice and equity is stuck knee deep in the muck of corruption, power play and hierarchical politics. The dense and dark network of bureaucracy in very few cases lets the genuine victim reach the horizon of justice. Those who attempt to raise their voice against this maligned system end up being humiliated and tortured by those at the apex of the system. The murder of engineer Satyendra Dubey in 2003 for taking on corruption in a highway project and blowing the whistle is one of the many examples of the fate of whistleblowers in India. He was gunned down by the mafia in Gaya on November 27, after he complained of corruption on the Golden Quadrilateral project. In his letter to the Prime Minister, Dubey had requested that his name be kept secret, which wasn’t honoured. The letter was sent from the PMO to the Ministry of Road, Transport and Highways and then to the National Highway Authority of India. His death speaks volumes about the growing nexus between politicians and mafia highlighting the illegal procedures/ways involved in awarding contracts and also the allegedly fraudulent pre-qualification bids in connection to big development projects. Another deplorable incident of lack of protection to whistleblowers is the case of Manjunath Shanmugam who was employed with the Indian Oil Corporation Limited when he was brutally murdered after he clamped down on the oil adulteration racket in Uttar Pradesh.
- Professional Responsibility VS organisational Loyalty : The moral dilemma faced by the whistleblower is acute and he has to make a choice, risking his job, relations and sometimes even his life. Blowing the whistle is a serious action with equally serious consequences. It involves a decision to be made among conflicting moral, legal, personal and career demands and choices. For a person with strong morals, it’s not a tough choice to make, as he’s also ready to accept the consequences. In the case of Sharmila Chowdhary, a qualified radiographer who was fired by her company for exposing that a huge portion of NHS money was going into consultant’s pockets rather than going to NHS patient care. Though she won an interim relief hearing and was compensated, but she lost her job and was diagnosed as a cancer patient which the doctors said was the result of her tough battle as a genuine whistleblower against the corrupt and powerful.
There has been a lot of discourse about whether whistle blowers violate a prima facie duty of loyalty towards their employers or not. Sissela Bok in Whistleblowing and Professional Responsibility, confronts the fact that a person’s morality holds an upper hand while dealing with matters where public interest is at harm. She lays three propositions about the moral conflicts one faces while confronting such situations:
- A person must decide whether speaking out is actually in public interest.
- He must weigh his responsibility to serve the public interest against the responsibility he owes to his colleagues and his institution.
- He must be ready to confront retaliation, as blowing a whistle on an employer is in the end a breach of loyalty.
A whistle blower disagrees with an authority, but has a narrower aim of shedding light on negligence or abuse, or harm to the public at large. They take up greater personal risks while challenging greater authorities. Apart from loyalty being violated, hierarchy is also opposed as the whistleblower is also a subordinate, than just a colleague. Also, there should be a concrete risk at issue rather than a vague apprehension, meaning there should be specificity about what the whistle is being blown on. Inarticulate whistle blowing is likely to dissipate the message since the person shall fail to capture the right audience. Whistle blowing will be ineffective in such cases.
Ronald Duska on the other hand in Whistleblowing and Employee Loyalty lays down a completely contrary point of view arguing that there are no obligations of loyalty to profit-making corporate enterprises. He states that loyalty is essential in those groups which are formed for mutual enrichment of their members. Self interests have to be kept aside while being loyal to someone. While corporations make money through the employees and there is absence of any mutual enrichment. Thus the employee owes no loyalty to the employer. The very fact that an employee joins a corporation to full fill his self interests, negates the notion that an employee owes loyalty to his employer. Also the primary function of a corporation is to make profit and people in such corporations are bound together for the same and not for mutual fulfillment and support. It is in relations where there is a feeling of self sacrifice and no expectation of rewards, that loyalty exists. In these times where commercialization of work has been on the demand, one cannot expect loyalty to exist in any employer employee relationship.. Hence, whistle-blowing is not only permissible but is expected when the public is being harmed.
- Lacunae in Present Legislation:
It is unfortunate that despite having a specific legislation dealing with public disclosures called as The Whistleblower Protection Bill, 2011 the Central Government hasn’t yet brought the act into force. The government has decided against implementing the Whistleblowers’ Act till the necessary amendments on keeping the issues of national security and sovereignty out of the ambit of the Act are brought in. Another Bill is pending before a Parliamentary Standing Committee to correct a ‘patent error’ in the Whistleblowers Act. The issue with such kind of delegated power is that the Court cannot compel or force the Executive (the Central Government) to bring the act into force and thus the Executive can also annul an Act merely by inaction.
Besides this, the provisions of the Bill are similar to those of the 2004 Government resolution appointing the CVC as the authority to receive public interest disclosures and there have only been a few hundred complaints every year. Therefore, it is doubtful whether the number of complaints will differ significantly or not. Secondly the bill while providing for safeguards against victimisation does not define what constitutes “victimisation” whereas other countries such as US, UK, and Canada define victimisation. The Bill defines “disclosure” as a complaint related to corruption, any criminal offence or wilful misuse of power that leads to loss to the government or gain to the public servant. This definition is narrower that the one recommended by the Law Commission, which included mal-administration (any action which is unjust, causes undue delay or negligence, leads to waste of public funds.) Thirdly, there is no penalty against the public servant who may be victimising the complainant. This Bill also does not provide for witness protection to protect witnesses during investigation and trial, despite there being guidelines recommended by The Law Commission for witness identity protection. There is no provision of any right of appeal for the whistleblower against the order of the Competent Authority except when a penalty is imposed for making mala fide disclosure.
- Lack of Hostalic Powerful Legislation :
The endeavors of both SEBI and Companies Act 2013 regarding establishment of an efficient mechanism for whistle blowing in the wake of growing corporate scandals and scams cannot be overlooked. While The Companies Act 2013 provides for establishment of a vigil mechanism, SEBI through Clause 49 of the Listing Agreement mentions as a non mandatory requirement the provision for a whistleblower mechanism. But with the Whistleblower Protection Bill 2011 not implemented yet, the absence of a holistic powerful legislation is deeply felt in all aspects of governance. Till the time there are no set of guidelines and requirements provided by legislation or a statute specifying what exactly a whistleblower policy must contain, ambiguity shall remain. Absence of a holistic law clarifying all vagueness with respect to the establishment of a whistle blower mechanism is a very major impediment in the way of achieving efficient corporate governance.
Ideal Whistel Blowing Policy: Recommendations
Shortcomings or wrongdoings in an organisation when remained unblown ultimately lead to brand disruption and financial losses to the company. Today’s world which is infested with scams and fraudulent activities, initiation of a whistle blowing policy is not only the call of the day but also very essential, both for the organisation and for the employees. Nevertheless appropriate whistle blowing legislation and the means to enforce it are indispensable to support a culture of commitment, openness and integrity.
There can although be no specific kind of a whistle blowing policy since it is to be made keeping in mind the type of organisation and the industry. Still for an organisation to encourage employees to speak against a wrongdoing and to help them reach the right authority in order to expose an act, it must incorporate in its policy certain essential features. First and foremost the whistle blower policy must ensure and specifically mention that it will maintain the anonymity of the informant to the extent that the whistle blower feels safe and secure. People fear exposing wrongdoings in organisations since confidentiality is either not guaranteed or not executed in action. Informal communication channels should be entertained at least for preliminary investigation. Subsequently the question of anonymity will not arise. No doubt this will open the channel for unfounded complaints, but since the very purpose of a whistle blowing policy is to eradicate unethical practices which are eating away the economy and morality like cancer, then it is worth to swallow the bitter pill of extra burden of preliminary inquiry into frivolous complaints too. At the same time a strong message should reach the employees that frivolous accusations are not to be used as a means to harass senior management. The assumption of innocence cannot be made until revelation is sufficiently proven. Thirdly the authors suggest that for better implementation of the policy, organisations should also constitute an internal committee of members from each level of management that will specifically deal with matters concerning individuals who are potential whistle blowers. Also, whistle blowing policies should be bent on by the desire to treat employees fairly. It is essential to propagate the whistle blowing policy within an organisation at all levels. Initiation of two way communication channel for employees not only eliminates doubts but also generates trust.
The authors support the recent proposal of SEBI, the market watchdog to make mandatory the incorporation of a whistle blowing policy by all listed companies. The policy will come as a meaningful solution to a lot of employees who intend to disclose the wrongdoings witnessed by them at an appropriate platform.
It is also imperative to mention that though a whistle blower policy might be incorporated on paper, whether its spirit is imbibed or not depends on the organisations. Unless the organisation’s philosophy and leadership positively encourages ethics and integrity, employees will in all probability assume that aiding in increasing revenues for the organisation is a priority over ethics. It is thus important that the management clearly communicates organisational philosophy, values and code of conduct of the organisation to its employees.
In order to rise above corporate scandals and scams, organisations besides incorporating an efficient whistle blowing mechanism, also need to imbibe in their very formulation the supremacy of ethics over indiscriminate rate of money making. The Companies Act 2013 having introduced provisions to combat the growing rate of frauds can only be successfully executed if the companies acknowledge the need to educate and train independent directors and audit committees. Putting in place robust internal controls to identify and report fraudulent activities, using technology for monitoring activities, employing internal auditors to strengthen internal control systems are other methods through which an organisation can control whistle blowing activities.
There’s no denying that whistle-blowing and a culture which promotes whistle-blowing will not only be extremely beneficial to the organisation and its employees but also to its shareholders, society and nation at large. There have been numerous cases of whistleblower victimization that have shocked the conscience of the country at large but then pragmatically thinking it is true that corruption can only be minimised and cannot be totally driven out of any society.
Formulation of concrete, holistic laws and effective implementation of such laws alone can reduce the ever rising levels of corruption and malfeasance. It is only organisation-employee compliance together with Government and legislation acting as a benefactor that can not only ensure viability of a whistleblower policy but also a corporate world and society free from frauds and scams.
The question of viability of a whistleblower policy is not measuring the magnitude of immediate outcomes as it does not have a proverbial Midas touch. We have to acknowledge that a journey of thousand miles starts with a single step. The seed has already been sown and only active participation in nurturing will blossom into the flowers of a corruption free society.
By: Ayushi Kalyan & Aseem Diddee , 3rd and 2nd year , B.A LL.B (Hons.)Institute of Law, Nirma University.
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