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ROLE OF WHISTLEBLOWERS IN CORPORATE GOVERNANCE 

Publications, Research paper

ABSTRACT

The corporate sector in India has undergone significant changes in the past decade, but it has also been marred by various controversial scandals like [Satyam Computer, Kingfisher, Tyco,  and Enron] Corporation. These scandals not only damage the company’s reputation but also harm the interests of investors and stakeholders. These scandals highlight the importance of having a robust corporate governance structure in place to ensure transparency and accountability in corporate sector in India. 

Corporate governance is important for guiding a company’s ethical operations, promoting efficiency, and transparency and over all work. It helps in making strategic decisions that benefit shareholders and investors. Corporate whistleblowing is an important aspect of corporate governance.

The tragic death of Satyendra Dubey, who exposed corruption in a project of the National Highway Authority of India, prompted the parliament to introduce legislation to protect whistleblowers. However, the culture of whistleblowing is still emerging in India.

This research work will explore corporate whistleblowing, detailed information about the concept of corporate governance, the act of whistleblowing and whistleblowers, analyzing the legal framework of whistleblowing in India and around the world, notable whistleblowers from India. At the end, it will also offer recommendations for enhancing the effectiveness of whistleblower protection laws.

KEYWORDS 

Role of whistleblowers in corporate governance, corporate governance and it’s definition, whistleblowing, whistleblowers, legislation related to protection of whistleblowers, whistleblowing provisions around the world, notable whistleblowers, suggestions, conclusion.

INTRODUCTION 

Encouraging accountability and transparency is one of the fundamental principles of good corporate governance. These fundamental values are reinforced not only by strict disclosure guidelines and effective management, but also by putting procedures and mechanisms in place to recognize and address internal fraud and corruption incidences. Whistleblowing has always been important in bringing attention to companies about their internal operations, protocols, and the conduct of their employees. Special laws are in place to safeguard whistleblowers from job loss or mistreatment. Many companies also have their own detailed policies on how employees can report any such wrongdoing.

What is corporate governance?

The terms “Corporate” and “Governance” combine to form the word “corporate governance.”

  • A business, particularly a big one, is referred to as “corporate”.
  • The process of making decisions and carrying them out is called “governance”.

Thus, corporate governance refers to the system, procedure, and relationship that govern how corporations are managed.

Let’s see few definitions of corporate governance to understand it deeply– 

As per the definition given by the Institute of Company Secretaries of India, the Corporate Governance can be defined as:

“The application of best management practices, compliances of law in letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders.”

One of the most famous definitions Corporate governance was given by Sir Adrian Cadbury, chairman of  Cadbury Report  in his report “The Committee on the Financial Aspects of Corporate Governance” as :

“Corporate Governance is concerned with holding the balance between economic & social goals and between individual and communal goals. The CG framework is there to encourage the efficient use of resources and equally to require stewardship of those resources. The aim is to align as nearly as possible the interest of individuals. Corporations and society.”

In simple words, we can say that “corporate governance” is the mechanism, process and relation by which corporations are controlled.

Key Principles of Corporate Governance:

  1. [Equity: The board of directors should treat all stakeholders fairly and without bias, including shareholders, employees, suppliers, and communities.
  2. Transparency: Providing accurate and clear information in a timely manner is essential for the board, particularly about financial performance, conflicts of interest, and risk factors affecting shareholders and other interested parties.
  3. Risk Management: Identifying and controlling risks is a joint responsibility of the board and management. They must take necessary actions to mitigate risks and keep all relevant parties informed about potential risks.
  4. Responsibility: oversight of corporate affairs and management activities falls under the board’s responsibilities. They must ensure the company’s continued success and hire a competent CEO who acts in the best interests of the company and its shareholders.
  5. Accountability: The board and company leadership have the duty to explain the company’s actions, results, and performance. They are accountable for assessing the company’s capabilities, potential, and achievements, and must communicate important matters to shareholders.

Awareness and impartiality are also some major principles of corporate governance. 

Four Ps of Corporate Governance:

  1. People: This ‘P’ emphasizes the  significance of the  people concerned in  company governance,  such as the board of directors, executives, and employees. The composition of the board, their skills, independence,  and variety are  vital factors.
  2. Purpose: Purpose refers back to the overarching  task and  desires of the  organization. Corporate governance  guarantees that the  organization’s  motive aligns with  moral requirements and is  centered on  developing long- time period cost for shareholders and stakeholders.
  3. Processes: This ‘P’ entails the  structures and  strategies hooked up to supervise and  control the  organization. Governance  methods consist of  how choices are made, how  threat is classified and managed, and the way responsibility is maintained.
  4. Practices: Performance in  company governance pertains to the organization’s  basic achievement in  reaching its  desires whilst adhering to  moral requirements. The governance framework  video display units and evaluates the  overall performance of the  organization in opposition to hooked up benchmarks.]

Whistleblowers have proved themselves as a powerful tool to maintain accountability and transparency in corporate governance by uncovering the fraud, abuse and  other systematic problems.

What is whistleblowing and who are whistleblowers?

A whistleblower is not a person playing a flute but someone who exposes or reports the misconduct of others. “Whistleblowing” is the act of exposing unethical or illegal practices, such as corruption, corporate malpractices within an organization. It can be done by current or former employees, suppliers, contractors, clients, or any individual who becomes aware of such misconduct in the workplace. These are the individuals who disclose unethical actions in a company, whether they are in progress, in the past, or being planned.

What constitutes unethical and illegal behaviors include fraud, corruption, embezzlement, employee dishonesty, misconduct, misuse of authority, criminal behavior, and breaches of regulations.

The term ‘whistleblower’ first related itself with regulation enforcement within side the nineteenth century, due to the fact human beings used to blow a whistle to officers or the public, and sports activities referees who blew the whistle to suggest abnormal or foul play. Soon the ‘whistle’ started for use with inside the metaphorical sense, as whilst someone ‘blows the whistle’ to name interest to a few incorrect doing that has been saved a secret.

Whistleblower: A whistleblower is an individual, possibly employed by a company or government entity, who reveals information to the public or higher authorities about any misconduct, such as fraud or corruption, they believe is taking place within the organization or a specific department.

[A whistleblower is someone who provides information about suspected wrongdoing within an organization or a particular department. This individual can be an employee, contractor, or supplier who becomes aware of illegal activities and reports them. 

A whistleblower has the option to either file a lawsuit or report their concerns to higher authorities, leading to a criminal investigation being initiated against the company or specific department.]

Whistleblowing is typically divided into two categories: 

  1. internal, which involves reporting misconduct to higher authorities within the organization, and
  2.  external, which involves informing third parties such as the media or professional organizations. 

Most ethicists view whistleblowing as an ethical practice and carefully examine its motives and justifications:  

“Whistleblowing is exactly as ethical as the practices it exposes are unethical”

Regulatory Framework of Whistleblowing in India 

Following are the legislative framework related to Whistleblowing in India:

  1. The Whistleblowing Protection Act, 2014.
  2. The Companies Act, 2013 read along with “The Companies (Meeting Board and its Power) Rules 2014.
  3. The SEBI’s Listing Equity Agreement
  4. Companies (Auditor’s Report) Order 2020 [CARO 2020]

1. Laws Applicable to the Listed Companies 

a).  The Companies Act, 2013 lays down the provisions for organizing a proper ‘Vigil Mechanism’ via way of means of the organizations for whistleblowing in India. The Inquiry, Inspection and Investigation are protected below Section 206 to 229 of the Companies Act, 2013. Furthermore, as in step with Sec.177(9) of the Companies Act 2013 along side Regulation 22 of SEBI LODR Regulation, 2015 states that, each indexed employer is needed to set up a vigil mechanism for the personnel and the directors, and this type of mechanism need to be followed via way of means of enough protections in opposition to victimization of people who use it. In which Moreover, below Sec. 177(9) of Companies Act, 2013 with Rule 7 of the Companies and (Meetings of the Board and its Power) Rules 2014, the information of the vigil mechanism need to be posted within side the Board of Directors’ Report and at the Company’s website. The Companies and (Meetings of Board and its Powers) Rules, 2014 additionally nation that if a director or worker documents numerous frivolous complaints, the audit committee or the director nominated to characteristic because the audit committee can take suitable movements in opposition to the worker or the director, such as reprimand.

b)  The Securities and Exchange Board of India or SEBI revised the Corporate Governance Principles in 2003 majorly after one of the critical case i.e. Satyendra Dubey Case. Regulation 9A (6) of SEBI PIT Regulations, 2015 states that as consistent with the required hints issued through SEBI, each Listed Company have to have a Whistle-blower Policy and make personnel aware about it. This permits the personnel to reveal times of the leaks of unpublished fee touchy information. As consistent with the provisions referred to below Chapter III A of SEBI PIT Regulations, 2015, with impact from December 2019, SEBI has additionally carried out a “Reward Mechanism” to incentivize the “Informants” to reveal the violations of insider buying and selling to Securities Exchange Board of India.

c)  Also, as in keeping with Regulation 30 of SEBI LODR Regulations, 2015, the indexed agencies are required to make disclosure of the fabric occasions to the inventory exchanges wherein their securities are indexed, and such disclosure will be made in Schedule III of the Listing Regulations. 

d)  The Ministry of Corporate Affairs currently launched the Companies (Auditor’s Report) Order, 2020 (CARO 2020), with the intention of enhancing the company governance gadget in the Companies Act, 2013. Every Company, along with a overseas corporation as distinctive with the aid of using the Companies Act, 2013 is challenge to the Order. The CARO 2020 includes expanded due diligence & disclosures at the a part of the Auditors of eligible agencies, and is meant to boom transparency in the ones agencies’ economic position.

2. Laws for Public Officials

The Whistleblowers Act, 2014 is applicable exclusively to public servants in India.

 Its objective, as stated in the preamble, 

  1. Is, to create a system for receiving complaints about abuse of power by public officials, investigating such disclosures, 
  2. and providing protection against any form of retaliation towards those who raise complaints.

 In 2015, a proposed Whistle-Blowers Protection (Amendment) Bill failed to pass in the Rajya Sabha, rendering it.

Whistleblowing laws around the world:

According to a 2016 OECD (The Organization for Economic Cooperation and Development)  report, “Whistleblower protection is the ultimate line of defense for safeguarding the public interest.”

“In 2003, the importance of whistleblowers and the necessity for protecting them was acknowledged on an international scale when the United Nations adopted the Convention Against Corruption. This Convention was signed by 140 nations, and 137 nations, including the United States, ratified, accepted, approved, or acceded to it.

Different countries have varying degrees of protection for whistleblowers in their laws. For example, in India, only public employees are safeguarded, while in Japan and South Korea, both public and private employees are covered. The definition of who can be considered a whistleblower also varies among nations, with some only including government employees as public sector whistleblowers, while countries like Mexico, Portugal, and Norway include a broader range of individuals, such as former employees, contractors, or suppliers.

According to the OECD in 2014, the countries with the most comprehensive whistleblower laws were the United States, Canada, Japan, Australia, South Korea, the Netherlands, New Zealand, and the United Kingdom.

International Whistleblower Reward Laws

Reward laws are a powerful tool for encouraging whistleblowers to come forward. In a 2015 report by the National Whistleblower Center, titled Whistleblower Reward Programs: An International Framework for the Detection of Corruption and Fraud, it was noted that the U.S. whistleblower reward laws successfully motivate whistleblowers from various countries to report instances of fraud, waste, and abuse. The report suggests a model for implementing similar whistleblower reward laws worldwide.”

— Based on the report of National Whistleblower Center

Notable whistleblowers:

 Despite of all difficulty and the chances of being harassed or victimized, honest employee of 

Organization always raise their voice against the corporate malpractices and wrongdoing. 

In India: 

  1. Satyendra Dubey 

Satyendra Dubey, a young project manager at the National Highway Authority of India, uncovered financial irregularities in the Golden Quadrilateral Corridor Project. He suspended engineers involved in these irregularities and raised his concerns with the Prime Minister Atal Bihari Vajpayee, requesting anonymity. Unfortunately, he was later found dead under suspicious circumstances. 

  1. Manjunath Shanmugam

Similarly, Manjunath Shanmugam, a marketing manager at the Indian Oil Corporation, was killed after sealing petrol pumps selling adulterated fuel.

  1. Dinesh Thakur and the Ranbaxy Debacle

Dinesh Thakur joined Ranbaxy, a pharmaceutical  agency in the year 2003 and he  become compelled to go away the  agency in the year 2005  while he  knowledgeable his seniors and the top-  stage control approximately the suspicious  production practices that  had been undertaken  through the  agency. Dinesh Thakur  correctly supplied the U.S. regulators and  government with  proof that proved that Ranbaxy had indulged in malpractices  which includes falsifying drug  information and  become additionally responsible of violating  desirable control practices. Dinesh Thakur  to show the malpractices that  had been undertaken  through Ranbaxy  additionally supplied the  government and regulators with  proof proving that Ranbaxy had engaged in  production and distribution of adulterated drugs.

  1. Infosys Whistleblowing case

 In the Infosys Whistleblower Case, the audit committee found no evidence to support allegations against the CEO and CFO for financial impropriety, as raised by a group of employees called “Ethical Employees”.

Around the world: 

  1. Edward Snowden: In 2023, Snowden expressed his  moral issues concerning the worldwide surveillance  packages accomplished through the American National Security Agency.
  1. Frank Serpico: Serpico assisted with a 1970 article  in the New York Times that  uncovered large corruption in the New York City Police Department (NYPD).
  1. Chelsea Manning: In 2010, an intelligence analyst named Manning from the U.S. Army leaked the  maximum large series of  labeled files in the records of the United States. These  files had been posted particularly through WikiLeaks and contained descriptions of prisoners’ detention, abuse, and torture,  amongst different touchy information.

RESEARCH METHODOLOGY 

This research paper is written in my own words, easy to understand and of descriptive nature. I took help from secondary sources like newspaper, websites, journals, articles, laws to deeply analyze the role of whistleblowers in corporate governance, why Whistleblowers are important. 

REVIEW IN LITERATURE 

There are several books written on the acts and courage of Whistleblowers, here are some of most famous books written on whistleblowing around the world:

  1. Secrets: A Memoir of Vietnam and the Pentagon Papers by Daniel Ellsberg

Daniel Ellsberg, a former Pentagon official, felt disheartened by the Vietnam War and ultimately leaked classified documents to the media, leading to Nixon’s downfall. His autobiography, “Secrets: A Memoir of Vietnam and the Pentagon Papers,” recounts his life as a whistleblower.

  1. Whistleblower: My Journey to Silicon Valley and Fight for Justice at Uber by Susan Fowler

Susan Fowler’s book, “Whistleblower: My Journey to Silicon Valley and Fight for Justice at Uber,” details how her blog post about misogyny at Uber led to significant changes and her role in the #MeToo movement.

  1. Truth to Power: My Three Years Inside Eskom by André de Ruyter

André de Ruyter’s “Truth to Power: My Three Years Inside Eskom” sheds light on his efforts to combat corruption at the South African energy company Eskom, which was plagued by blackouts. De Ruyter’s gripping account of his time at Eskom reads more like a thriller than a typical nonfiction work. 

  1. Permanent Record by Edward Snowden.
  2. The Great Post Office Scandal by Nick Wallis.

The above mentioned books celebrates the spirit of Whistleblowers who were brave enough to speak truth to power.

METHODS 

I have used a mixed method approach to write this research paper, I have taken help from secondary sources like online articles, journals and newspapers. Other than that I have used descriptive data like acts and legislations related to Whistleblowers which includes pdfs and survey reports from the National Whistleblowers Center. From all these data collection I filtered out the data which fulfilled my goal of writing this research paper: Role of Whistleblowers in Corporate Governance.

SUGGESTIONS 

One of the challenges organizations face in implementing whistleblower policies effectively is the lack of trust, ignorance of the policy, and misconceptions about how the system operates. This needs to be changed. 

  1. Issue: An important limitation of the Whistleblower Protection Act, 2014 is its exclusion of private companies from its scope, rendering clause 49 of the SEBI Equity Listing Agreement non-mandatory for them. This means that only publicly listed companies fall under the jurisdiction of the Act.

Suggestion: The Act’s scope should be expanded to include private sector companies as it currently only protects whistleblowers in relation to corruption, fraud, and irregularities in the government sector.

  1. Issue: There is no specific provision in the Act for compensating whistleblowers who experience harassment or retaliation for their disclosures.

Suggestion: Regulators and Authorities must ensure the implementation of effective whistleblower policies to safeguard their identities and prevent any form of victimization or harassment.

  1. Issue: Lack of awareness among the employees 

Suggestion: The top-level management should ensure that every employee must be aware of the whistleblowing policy and there shall be workshops that are conducted to make all the employees aware of the same.

  1. Issue: Sometimes organizations don’t address these issues to ensure early detection and prevention of wrongdoing. 

Suggestion: There are provisions which are crucial in enhancing the overall whistleblower policy. 

One of the challenges organizations face in implementing whistleblower policies effectively is the lack of trust, ignorance of the policy, and misconceptions about how the system operates. This needs to be a change.

Everybody will have to work together to enhance the working of whistleblowing policy and overall performance of corporate sector. 

CONCLUSION 

Scandals like Tyco, Worldcom, Enron, Satyam, and AIG have emphasized the importance of ethical governance. Although whistleblowing laws in India are not comprehensive, incorporating the core principle of corporate governance can greatly benefit the public and stakeholders. 

“Corporate Governance standards are not merely to be followed but they are to be adopted/implemented as a day-to-day practice of every organization.” 

Adhering to corporate governance standards is crucial for organizations, making whistleblowing a valuable tool in safeguarding public interest and enhancing their reputation. Consequently, effective whistleblowing can aid in detecting and reporting corporate frauds that might have gone unnoticed before.

By: Suprabha Rani 

College: University Law College, VBU, Hazaribag 

Websites/ pdf/ newspapers’ articles: 

  1. FinIndigoLearn , Top 5 financial scams in India, Indigo Learn, 05June, 2019, https://www.indigolearn.com/blogs/Top-5-Financial-Scams-in-India/b218399bd14e4473907fdaa165b20f94
  2. ICSE, Corporate Governance, National and International Scenario, https://documents1.worldbank.org/curated/ar/194571468330288811/pdf/346690v20Corporate0governance0Rationale.pdf
  3. Wikipedia, Cadbury Report, https://en.m.wikipedia.org/wiki/Cadbury_Report
  4. ICSE, Corporate Governance, National and International Scenario, https://documents1.worldbank.org/curated/ar/194571468330288811/pdf/346690v20Corporate0governance0Rationale.pdf
  5. Stephen Conny, what is a Whistleblower, Corporate Governance Institute, https://www.thecorporategovernanceinstitute.com/insights/lexicon/what-is-whistleblower-meaning-examples/
  6. The Economics Times, what is Whistleblower, https://m.economictimes.com/definition/whistleblower/amp
  7. The Hindu, Three get life in Satyendra Dubey case, 2021, https://www.thehindu.com/news/national/Three-get-life-in-Satyendra-Dubey-murder-case/article16625349.ece/amp/#amp_tf=From%20%251%24s&aoh=17154882685230&referrer=https%3A%2F%2Fwww.google.com
  8. National Whistleblower Center, https://www.whistleblowers.org/whistleblower-laws-around-the-world/
  9. Stephen Conny, what is a Whistleblower, Corporate Governance Institute, https://www.thecorporategovernanceinstitute.com/insights/lexicon/what-is-whistleblower-meaning-examples/
  10. James Ball, Five of the best books about Whistleblowers, The Guardian, 12 Jan, 2024, https://www.theguardian.com/books/2024/jan/12/five-of-the-best-books-about-whistleblowers

Acts/Legislations:

  • The Whistleblowing Protection Act, 2014.
  • The Companies Act, 2013 
  • The Companies (Meeting Board and its Power) Rules 2014.
  • The SEBI’s Listing Equity Agreement
  • Companies (Auditor’s Report) Order 2020 [CARO 2020]

Books: 

  • Truth to Power: My Three Years Inside Eskom by André de Ruyter
  • Permanent Record by Edward Snowden
  • The Great Post Office Scandal by Nick Wallis
  • Whistleblower: My Journey to Silicon Valley and Fight for Justice at Uber by Susan Fowler
  • Secrets: A Memoir of Vietnam and the Pentagon Papers by Daniel Ellsberg