Role of Employees in Corporate Governance With Reference To Whistle Blowing Policy

GLA University - B.Com | LLB | B.A.
GLA University | B.Com | LLB | B.A.

Priyanka Biswas

GNLU, Gandhinagar

Editor’s Note: The paper deals with the whistle-blowing policy of various corporates and the legal protection afforded to such actions in countries like USA, UK and India under their legal framework. The focus is on the role of an employee’s role in the whistle blowing process.”

INTRODUCTION:

This paper focuses on the analysis of the role employee’s play in making the corporate structure work better emphasizing on the whistle blowing policy. It is a system in which any corruption or mis-governance can be reported directly to the CEO of the company by the employee or any other person anonymously. Whistle blowing plays a very vital role to alleviate corruption.[1]

It also entails to explain the ethical dilemma that the employees face when he has to choose between his future prospect and blowing the whistle. It looks onto the legal framework of the policy of whistle blowing and enquiring into whether really the whistle blows or not and the factors behind it. Protection of the whistle blower is an important factor and must be taken up earnestly and hence it covers an analysis of the legislations prevalent in US, UK and India with respect to protection of whistle blowers with the Indian legislation and identify the deficiencies in the current law. It also looks into the changes that should be brought in the present legal framework. Particular reference to various corporate scams and incidents will be made highlighting the role of employees in better corporate governance and the treatment and retaliation that they receive from the employer or otherwise.

WHISTLE BLOWING POLICY:

Whistle blowing policy is a policy through which anyone can report alleged dishonest or illegal activities or misconduct in the company directly to any person having authority or to the director or the CEO. The alleged misconduct can be classified in many ways like fraud, violation of law, threat to the interest of the stakeholders of the company, violation of a law, rule or regulation, gross mismanagement, gross waste of funds, abuse of authority and a substantial and specific danger to public health or safety.[2]A whistle blower is an employee or ex- employee or any other stakeholder who provides information about his or her company which he or she reasonably believes provided they have evidence to support it.[3] Whistle blower plays a very important role in contributing to the better corporate governance.

Principally there are two kind of whistle blowing:

  1. Internal – report misconduct to another employee or a superior within their organization. It is often helpful to the organization or the company as it enables them to correct their discrepancies internally and relieve themselves from further embarrassment before the public.
  2. External – whistle-blowers report misconduct to outside persons or entities like media or law enforcement authorities.

A whistle is blown in circumstance like:

PIMR Indore Admission

  • Knowledge of inappropriateness – Making proprietary software available to public, Embezzlement or redirection of funds.
  • Bad claims – Unrealistic date projection, advertising hype, etc.
  • Knowledge of impending doom – When you know the project is doomed for failure and can prove it, yet no one else realizes it yet.

The whistle blower must choose between the various alternatives available to blow the whistle, like to blow it anonymously, in a group, by presenting just the evidence, disclosure through internal channels, through external channels i.e. going public. Whistle blowing through external channels have colossal menace as it bring about huge exposure in public which may be detrimental.

EMPLOYEES AND WHISTLE BLOWING:-

Employee is a person who is engaged to provide services to a company on a regular basis in exchange for remuneration and one who does not provide the service as part of an independent business. [4] Employees are considered to be the limbs of any organization. They are the one who are involved in the management as well as complete working of the company. A company will collapse in the absence of its manpower and employees are considered to be asset to the company. They are also one of the factors of production which ensures economic advantage to the company. The employees are actually within the crime vicinity. However in most cases the employees do not respond to any unethical, immoral or illegal actions that come to the notice of the employee. They either turn a blind eye or relinquish their jobs. But there are others who bring to light discrepancies in the working of a company those are the whistleblowers who have to face the brunt for their disclosure.[5]

Reaction towards whistle blowers:

Whistleblowers are generally considered to be selfless martyrs who face awful treatment because of their act. [6]They are ostracized by their co-workers, discriminated against by future potential employers, fired from their organizations, resented by coworkers. They also suffer from serious contemplation of job change or personal problematic activity and mostly get involved in drinking, drugs, self-destructive behavior.[7]

Ethical Dilemma faced by the employee as a whistleblower:

The employees face a dilemma as to whether to ensure his/ her own future prospect or to ensure the prospect of the company and are stuck between two competing loyalties and conflict of responsibility comes into being. Comparison and conflict of responsibilities is inherent and both the employer and the employee have responsibilities to themselves, the organization, and society, as well as to each other.  The whistleblower in a way challenges this relationship by accusing the employer of having abrogated his or her responsibility, and the employer in turn claims that the employee revealing confidential matters. The relationship between the employee and the employer is based on mutual trust which should never be broken. The employee also fears of being retaliated by employer as well as others.

Treatment received by employees as whistle blower:

Countless number of incidents can be enlisted where the act of whistle blowing has been detrimental to the employees. The Enron scam was disclosed by Sherron Watkins, the vice president who wrote a letter to chairman Kenneth Lay warning him that the company’s methods of accounting were improper and that Enron ‘might implode in a wave of accounting scandals.[8] She also testified before Congressional Committees from the House and Senate investigating Enron’s demise. She was lauded in the press for her courageous actions for some time. She was at a better footing as her allegations were supported by Congressional reports and external auditors.  However she left her job at Enron after a few months when she wasn’t given much to do.[9]

In world com Scam case also an employee Cynthia Cooper exploded the bubble and informed the board of the company had covered up $3.8 billion in losses through the prestidigitations of phony bookkeeping. During an audit in May 2002, Cooper discovered that some of WorldCom’s financial practices were suspect. Her team discovered $3 billion in questionable expenses. The company had been classifying operating costs as capital expenditures, thereby inflating its profits which she found out from the audit committee of WorldCom’s board in June 2002. The total money that was overstated was ultimately proved to be $ 11 billion after the investigation and the board thereafter the board fired its CEO, Scott Sullivan. It was the biggest corporate fraud in U.S. history. Cynthia Cooper remained as vice president of internal audit, but did not get promoted, was not given gratitude and was resented by employees.

India has also witnessed many such incidents where employees played a greater role in whistle blowing and in return better corporate governance but at the same time they have also have experienced dire consequences which had to paid by the whistle blower and its family.

Satyandra Kumar Dubey who was a Project Director in the Golden Quadrilateral Highway Project wrote a letter to the then Prime Minister Atal Bihari Vajpayee to alleging high level Corruption and discrepancies in the project.[10] He had requested that his name should be kept confidential however the letter along with bio-data was forwarded right away to the Ministry of Road Transport and Highways. Soon Dubey received a reprimand and the vigilance office of NHAI officially cautioned Dubey of the consequences of writing a letter directly to the Prime minister. In the process, through connections in the NHAI and the Ministry, it is likely that the letter may have reached the criminal nexus running the highway construction projects in Bihar and was murdered. However a concocted story of he being killed by identified robbers while resisting the robbery was held after an investigation conducted by the CBI.  The sole witness, a rickshaw puller went missing and two other suspects committed suicide. Later it was also alleged that Dubey’s whistle blowing had to do very little with his death.[11]

Same was the fate of S. Manjunath, an A Grade Officer (Marketing Manager) at Indian Oil Corporation Ltd (IOCL) brought into light adulteration of petrol in the Lakhimpur Kheri Area, Uttar Pradesh and sealed a corrupt petrol pump. But the petrol pump owners started operating it again. He conducted a sudden raid whereby he was shot dead by his assailants.[12] His body was recovered from his own car which by driven by two aids of the petrol pump owner. Both were arrested along with the petrol pump owner for the Murder of S. Manjunath.[13]

Another case of whistle blowing by the Company Secretary cum Finance Manager of Malabar Cements V. Saseendran . He was prime witness in two vigilance cases against contractor V.M Radhakrishnan and his henchmen and had also written complaint to chief minister against them about the widespread corruption in the company. However within few days he wrote another letter taking back the allegation made by him. He also quit the job with the company He was found dead along with his two sons inside their house a week after the Vigilance Department has prepared the chargesheet where involvement of former state chief secretary and former company chairman John Mathai, including name of few officials of the company and V.M. Radhakrishnan surfaced.[14] The case was initially dismissed as suicide unless the Kerala High Court ordered a CBI probe into the case after demands by the family of the deceased. After investigation CBI named Malabar Cements managing director Sundara Murthy, his personal secretary Surya Narayanan and businessman V.M. Radhakrishnan as accused in the suicide of V. Saseendran. This highlights the importance of the role of employee who is the best to know about the functioning of the company and the need to protect them.[15]

On the backdrop of such set-up protection of whistleblowers from retaliation, reprisal or even worst becomes very important and in the absence of any legislation to protect whistle blowers in India the circumstances are even more dangerous as people will not be willing to disclose mis-management.

Why employees are considered to be the best whistle blowers?

Fraud within companies has increased to a great extent be it the Citibank employee hurling the cash or the Satyam founder misleading the industry, every incident has been a knock to corporate image.  In such a circumstance it would have been favorable if someone would have disclosed the mishandlings at the initial stage and here the role of the employee becomes important. [16] Employees are usually the first to come to know about any sort of illegal or improper business practices within the company. Employees working in the same department are more aware about the fact that who is corrupt and is involved in mal- practice but they often feel apprehensive about voicing their concern or blowing the whistle as they are afraid of the consequences that will follow thereafter.[17] As an employee a person has to keep certain information confidential as it’s a duty towards the employer. This is what generally restricts the acts of the employee to bring into the forefront any form of wrong doing.[18] They also have a duty not to destroy the “mutual trust and confidence” on which employment relationship exists.[19]

LEGAL FRAMEWORK OF WHISTLE BLOWING:

United Kingdom:

The Public Interest Disclosure Act 1998 in UK protects employees who ‘blow the whistle’ about wrong doing. It makes provision for the protection of the whistleblower, the circumstances in which such disclosures are made and also protect the employee from being subjected to a detriment by their employer. Employees who are protected by the provisions may make a claim for unfair removal from office if they are dismissed for making a protected disclosure. Workers who are not employee cannot not claim unfair dismissal however, if their contract has been terminated by the employer because they made a protected disclosure, they may instead make a complaint that they have been subjected to a detriment by the employer.

This protection is subject to limited exceptions, the new provisions protect persons who work under contracts of employment like those who work personally for someone else (under a worker’s contract) but are not genuinely self-employed, certain agency workers; National Health Service practitioners such as general physicians, certain dentists, pharmacists and opticians and certain categories of trainees.

United States:

Whistle blower’s Act (for federal employees) provides protection Act to federal employees who blow the whistle making a disclosure verifying unlawful or offensive government activities. The law applies to most federal executive branch employees and become applicable where a “personnel action” is taken “because of” a “protected disclosure” made by a “covered employee.”[20]

 The Sarbanes-Oxley Act of 2002 contains significant protections for corporate whistleblowers having various criminal, civil and administrative, provisions. It is one of the essential whistleblower protection laws. The SOX’s whistleblower protection provisions are not restricted to affording a legal remedy for wrongfully dismissed employees but it has employment-based protections for employee whistleblowers, the law contains four specific provisions directly relevant to whistleblower protection.[21] The law requires that all public trading corporations create internal and independent audit committees. There must also be provision to file whistle blowing complaints within the company to the Audit Committee which would in turn protect the confidentiality of the discloser/ complainant.

Sarbanes-Oxley Act, 2002 sets fresh ethical principles for attorneys practicing before the Securities and Exchange Commission. This law, and the SEC’s executing regulations, requires attorneys, under some circumstances, to blow the whistle on their employer or “client.” Third, the Sarbanes-Oxley Act, 2002 amended the federal barrier of justice statute and any retaliation against whistleblowers who provide “truthful information” to a “law enforcement officer” about the “commission or possible commission of any Federal offense” was criminalized. This provision of the SOX was not limited in its application to publicly traded corporations; it covers every employer nationwide. Sarbanes-Oxley Act, 2002 also has an enforcement provision which states that “a violation by any person of the Act shall be treated for all purposes in the same manner as a violation of the Securities Exchange Act of 1934.”[22] This section grants jurisdiction to the SEC to enforce every aspect of the SOX, including the various whistleblower-related provisions. It also provides for criminal penalties for any violation of the SOX, including the whistleblower-related provisions. These four provisions of the Sarbanes-Oxley Act collectively provide a unique and comprehensive federal framework for enforcing whistleblower protections for corporate employees. In addition to these four provisions, the law contains an employee protection provision which permits whistleblowers to file a complaint before the U.S. Department of Labor alleging unlawful retaliation.[23]These are the two important law in US protecting the whistle blowers.

India:

India had fairly weak whistleblower protection laws. The companies Act, 1956 though provided for provision through which mismanagement can be ventilate does not expressly provide for the protection of whistleblower as such. However after coming into force of the Companies Act, 2014 there is a provision to protect the Whistle Blower. Every listed company or any company that is prescribed shall establish a Vigil mechanism specifically for the directors and employees to report genuine concerns. It also seeks to provide adequate protection to the employees from victimization as a result of disclosure made using the mechanism. It affords direct access to the chairperson of the Audit Committee in appropriate or exceptional cases. The establishment of a vigil mechanism has to be disclosed on the company’s website. [24]

India lacks a specific whistleblowers protection law and does not cover all whistleblowers. The Indian Parliament has passed the Whistle Blowers Protection Act, 2011, however the Act has not come into force. The Act was approved by the Cabinet of India and passed by the Lok Sabha on 27 December 2011. The Bill was passed by Rajya Sabha on 21 February 2014 and received the President’s assent on 9 May 2014 yet the Act has not come into force till now. The Act provides for mechanism to scrutinize alleged fraud and abuse of power by public servants. It also seeks to protect one who would bring to light wrongdoing in government bodies, projects and offices. The wrongdoing might take the form of fraud, corruption or mismanagement. The Act will also have provision of penalty in case of false or frivolous complaints.

The Central Vigilance Commission, the sole authority in protecting future whistleblowers.[25] The Act expanded the definition of whistleblower.[26]It classifies anyone making “public interest disclosure” a whistleblower. It is aftermath of murder of environmentalist activist Amit Jethava who was campaigning against illegal mining in the Gujarat’s Gir lion reserve to protect the lions.

The Central government came up with a legislative proposal to prevent such tragic killings. The Act empowers the Central Vigilance Commission to issue binding orders – to protect whistleblowers from physical attack and/or victimization. CVC is authorized to issue interim orders to stop corrupt practice pointed out by the whistleblower. But these limited powers are likely to prove insufficient if CVC remains no more than an advisory body with regard to sensitive matters which may or may not be a corruption case that is to be registered against a public servant. It was a immense leap forward from where the legal framework stood. Only a public servant could be a whistleblower under the 2004 Cabinet resolution, but the expanded definition is the only real positive change in the official attitude towards whistle-blowing.[27]  The Act is to some extent on the lines of the Sabanes Oxley Act in United States which enacted as the repercussion of the Enron and WorldCom scandals, making it compulsory for audit committees of boards to establish procedures to receive anonymous complaints and reports from whistleblowers. Senior management is forbidden from discriminating against whistleblowers. Any retaliation against a whistleblower is a criminal offence, which can be punished with up to ten years in prison. But SEBI initially made  whistle blowing mandatory clause 49 of the listing agreement but later made it non- mandatory when SEBI accepted the argument made by the corporate sector that the regulation would lead to too many frivolous complaints.[28]

Various companies are establishing Whistle Blower Policy in the company.  Maruti Suzuki India Ltd in its preface of their Whistle blowing policy mentions that Clause 49 of the Listing Agreement provides, a non-binding requirement, to establish a mechanism called “whistle blower policy” for all listed companies for the employees to report unethical behavior actual or suspected fraud or violation of the company’s code of conduct or ethics policy to the management of the company.[29]

HCL adopted a whistle blower policy to afford appropriate avenues to the employees, contractors, clients, vendors, internal or external auditors, law enforcement / regulatory agencies or other third parties to bring to the consideration of the management any issue which is identified to be in infringement or in conflict with the essential business principles of the company. The employees are encouraged to raise any of their concerns by way of whistle blowing. All cases registered under the whistle blower policy of the company are reported directly to the CEO.[30]

CONCLUSION:

After analyzing the scenario prevalent in the corporate arena with regards to the role of employee as whistle blowers and their contribution in better corporate governance it can be construed that they play fairly larger role in keeping the check and balances required in place but there is a towering need to protect them as well. With regards to the various legislations in US, UK it implicit that though there is specific legislation present to protect the whistle blowers from being retaliated by the employer yet there are instances where such phenomena can be seen and in India where there is no specific law to protect the whistle blower the consequences are even more grave. The Whistle blower Act, 2011 is yet to see the light of the day and is yet to come into force. With the increasing number of death of whistle blowers in the country who are mainly employee immediate steps must be taken up the Government. The changes made in Clause 49 of the listing agreement which initially mandated setting up of internal whistle blowing structures in the company but was later made non-mandatory must be restored back. An interesting observation in this respect is that clause 49 even though does not mandatorily require listed companies in India to have whistle blowing policy but that is in place. However the policies talk about the protection of the whistle blower by keeping the identity of the whistle blower anonymous but in practice that is no followed. Whistle blowing must be supported by the companies as well as by its management so that the whistle-blower does not fear of being retaliated by the employer or others. Apart from whistle blowing law, a properly implemented witness protection program would also help in protecting the Whistle blower similar to the one in US. The Judicial System also must give proper space to the Whistle blowers’ so that their spirits are lifted.

Edited By Amoolya Khurana

[1] Whistle Blowing Exercise in Indian Corporation – Does It Really Blow?,SSRN, available at http://poseidon01.ssrn.com/delivery.php?ID=462120099114114080092116064002122067018047004027052090098065005121125096092069122100123058007118021059046118094087097121103082011066028081000003088098125103127100072021021049104102083121096017098100085104&EXT=pdf  last see on 23/09/2014

[2]  V. Sithapathy & Ramadevi Iyer, Taxmann’s Corporate Governance Practice and Procedures, 95(1st ed.,2006).

[3]  Supra n.1

[4] Supra n.1

[5] Guy Dehn and Richard Calland,  Whistleblowing –The State of Art The Role of The State, The Media and The Civil Society, 2,3 in Whistleblowers Impact and Implications,  (Anila V. Menon, 1st ed., 2007).

[6] Whistle blowing at Work – Ethical and Juridical Issues, Whistleblowing. it, available at http://www.whistleblowing.it/Whistleblowing%20at%20Work.%20Ethical%20and%20Juridical%20Issues.pdf, last seen on 21/09/2014.

[7]Supra n.2

[8]Interview with Sherron Watkins Constant Warning, Fraud Magazine, http://www.fraud-magazine.com/article.aspx?id=583, last seen on 11/09/2014.

[9] Id.

[10]Get on with Whistleblower’s Act, Human Rights Initiative, available at  http://www.humanrightsinitiative.org/chrinews/cbi_says_dubey_murdered_fighting_robbers.pdf, last seen on 8/10/2014.

[11] Id.

[12] TAPMI remembers slain whistle blower, The Hindu, (20/11/2010), http://www.hindu.com/2010/11/20/stories/2010112063920300.htm , last seen on 09/10/2014.

[13] Hari Narayan, The Extraordinary Tale Of An Ordinary Man, The Hindu, (05/01/2013), http://www.thehindu.com/features/magazine/the-extraordinary-tale-of-an-ordinary-man/article4269047.ece, last seen on 04/10/2014.

[14] Kerala whistleblower’s death mystery deepens, IBN Live, available at http://ibnlive.in.com/news/kerala-mystery-over-saseendrans-death-deepens/142353-3.html, last seen on 11/10/2014.  

[15] Malabar Cements Chief drove Whistleblower to Suicide: CBI, Yahoo News, available at https://in.news.yahoo.com/malabar-cements-chief-drove-whistle-blower-suicide-cbi-20110321-015057-095.html, last  seen on 21/09/2014.

[16]Corporate fraud: Should employees be encouraged for whistle blowing?,Silicon India, available at http://www.siliconindia.com/onlinepolls/Corporate_fraud_Should_employees_be_encouraged_for_whistle_blowing_-id-19.html  (Last seen on 02/10/2014).

[17] Supra n.2

[18] Id.

[19]Whistle blowing International Standards and development, SSRN, available at http://poseidon01.ssrn.com/delivery.php?ID=348094069068096090119089122112004024022087061054024018026093002006065026028029110106002063005047108007015086103079093064119021046053082082007100077088068102007127030095085017075116113090080083111064109074&EXT=pdf, last seen on 10/09/2014.

[20]The Whistleblower Protection Act: An Overview, Congressional Research Service, available at http://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?article=1031&context=crs, last seen on 26/09/2014.

[21]Sarbanes – Oxlay Act: Legal Protection for Corporate Whistleblowers, Whistleblower.Org, available at http://www.whistleblowers.org/index.php?option=com_content&task=view&id=27, last seen on 28/09/2014.

[22] S. 3(b), Sarbanes-Oxley Act, 2002

[23] Supra n.2

[24] S.177(9) Companies Act, 2013

[25] The Whistle Blower Protection Act, 2011

[26] Manoj Mitta, Who will protect the whistleblower?, Times of India,  (19/09/2010),  available at http://articles.timesofindia.indiatimes.com/2010-09-19/special-report/28220132_1_public-interest-disclosure-central-vigilance-commission-cvc , last seen on 01/10/2014).

[27] Id.

[28] Discussion Paper Corporate Governance In India: Theory And Practice, NFCG India, available at Indiahttp://www.nfcgindia.org/library/cgitp.pdf, last seen on 20/09/2014.

[29] Vigil Mechanism (Whistle Blower Policy),  Maruti Suzuki India Limited,  available at http://marutistorage.blob.core.windows.net/marutisuzukipdf/whistle-blower-policy.pdf, last seen on 11/10/2104.

[30] Corporate Governance at HCL, HCLTech, available at http://www.hcltech.com/investors/corporate-governance-hcl,  last seen on 28/09/2014.

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