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THE ETHICAL IMPERATIVE AND IMPACT OF WHISTLEBLOWING: A BRIEF ANALYSIS
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THE ETHICAL IMPERATIVE AND IMPACT
OF WHISTLEBLOWING: A BRIEF ANALYSIS
AUTHORED BY - VANSHITA KALRA
& KUNAL JIGYASI
ABSTRACT
Whistle blowing is an act of disclosure of information
by people within or outside an organization which is not open to the public.
The disclosure is generally of activities that are unethical in nature. This mechanism is a
step towards taking a positive step to combat
corruption that is being caused by those unethical activities. A
whistleblower is the one who blows
whistle on the acts of crime, corruption, and unethical conduct. Several
commissions were appointed to suggest
the formulation of legislation for protection of whistleblowers as whistleblowers are subject to a lot of
victimization. There have been instances of murders of whistleblowers, hence it was necessary to formulate legislation for it.
Corporate governance and whistleblowing go hand in
hand. Corporate governance serves as the ethical
foundation guiding a company's operations. At its core, it revolves
around
identifying the most effective and efficient means to
instil transparency within the organization. This,
in turn, empowers
the company to make informed
strategic choices that
prioritize the welfare of its shareholders. Notably, corporate
whistleblowing assumes a crucial role
within the framework of corporate governance. This article would provide an insight
into the whistleblowing mechanism along with its link to corporate governance.
INTRODUCTION
A 'Whistleblower' is an individual who discloses wrongdoing within an organization either to the public or to those in positions of
authority. This act of blowing the whistle often exposes the whistleblower to potential reprisals or retaliation from the
person or entity against whom the
allegations are made. The purpose of a whistleblower policy is to provide
protection to such individuals,
safeguarding them from any form of retaliation or harm as a result of their disclosure.
In India, the
term 'whistleblower' is defined as an individual who makes a public interest disclosure. A "public
interest disclosure" refers to a specific disclosure made by an
individual that involves illegality, criminality, breaches of the law, miscarriages
of justice, threats to public health
and safety, damage to the environment, and includes attempts to conceal such wrongdoing in any governmental establishment or public or private
enterprise. This definition makes it clear that once the legislation is enacted, it will
provide landmark protection for whistleblowers, even extending to private enterprises. However, it's important to note that there is currently no official definition of a whistleblower in existence.
There is also
a concept of internal whistleblowing as well as external whistleblowing.
Internal whistleblowing refers to
when an employee or personnel reports conduct or illegal activities within their department or organization to
their immediate or designated superior. This form of whistleblowing is typically seen as positive because it
allows for an internal mechanism to address
and rectify problems, thereby improving the administration and addressing any
illegal activities within the organization.
On the other
hand, external whistleblowing involves disclosing information about illegal activities within the department or organization to external parties,
such as the media or law enforcement authorities. This type of
whistleblowing is more serious and can potentially harm the organization against which the disclosure is made.
LEGISLATIONS FOR WHISTLEBLOWERS IN INDIA
Whistleblowers
often confront significant repercussions for their courageous act of reporting
wrongdoing. They may lose their jobs or face isolation within their organizations.
Some whistleblowers even face criminal charges for violating laws or employment
agreements. In extreme cases, whistleblowers may encounter physical threats to
the extent of risking their lives.
One condition
that can foster corruption is the absence
of mechanisms that allow instances
of fraud and malpractice to be exposed by individuals who act in the public interest, without jeopardizing
their own safety or well-being. Such individuals, commonly referred to as 'whistleblowers' in legal terms, require
institutional protection against retaliation from the parties they expose. Ensuring the anonymity of whistleblowers
is therefore crucial for any such mechanism to be meaningful and effective.
1. Whistleblower protection Act, 2014-
In a communication dated August 24,
1999, Shri N. Vittal, who served as the Central Vigilance Commissioner (CVC)
at that time, addressed the Law Commission of India, expressing his concerns regarding the
protection of individuals who, at great personal risk, expose corruption or misconduct by public officials. In
his letter, he referred to a speech given by then-Prime Minister Shri Atal
Bihari Vajpayee, where he strongly criticized
the unchecked rise of corruption. Shri Vittal urged the Law Commission of India to draft legislation aimed at
safeguarding the identities of whistleblowers and emphasized the need for a zero-tolerance approach, not only from
the public but also from government officials.
Responding to this request, the Law Commission of India, in its 179th report,
formulated the 'Public Interest Disclosure and Protection of Informers) Bill
2002. This bill drew inspiration from similar legislation in the United
Kingdom, Australia, New Zealand, and the
United States, aiming to
protect whistleblowers.
The Second Administrative Reforms
Commission, in its 4th report on 'Ethics
in Governance,' also reiterated the necessity of enacting legislation to protect whistleblowers. Subsequently, in April 2006, the Ministry
of Personnel authorized the Chief
Vigilance Commission (CVC) to receive complaints of corruption involving government officials and initiate
preliminary investigations.
Following the
tragic murder of Satyendra Dubey, the government introduced the "Public Interest Disclosure and
Protection to Persons Making the Disclosures Bill, 2010." It was passed by the Lok Sabha in December 2011,
later renamed as the Whistleblower Protection Bill. After
extensive deliberation, the Rajya Sabha finally approved the bill on February 21, 2014, and it received
presidential assent on May 9, 2014. However,
despite these developments, the Act has not been enforced. Anamendment
to the Act was introduced in the Lok Sabha in 2015 through "The Whistleblowers Protection (Amendment) Bill,
2015."
The primary
intent of Parliament in formulating this legislation was to establish an effective mechanism to protect
whistleblowers' identities and to provide an efficient channel for lodging
complaints. It's important to note that the Act's scope is limited to the public sector
and
excludes the private
sector. The Act is designed to shield whistleblowers from victimization or harassment, thus
encouraging employees to report wrongdoing, fraud, or corruption.
Nevertheless, the Whistleblower Protection
Act, 2014, has certain shortcomings, including the absence of a procedure
for complainants to appeal orders issued by relevant authorities. The
2015 proposed amendments made it mandatory for
complainants or whistleblowers to disclose their identities, thereby
excluding anonymous complainants under this Act. This proposed
amendment was based on Section 8(1) of the Right to Information
Act, 2005. The last proposed amendment restricted disclosures falling under specific
categories.
2. Recommendations by N.R Narayan Murthy committee-
The Narayana Murthy Committee, in addition to other recommendations,
highlighted the need for an
"internal policy on access to audit committees." This policy aimed to allow individuals who observe unethical
or improper practices to approach the independent audit committee without
the necessity of informing the Board. The committee
proposed replacing the word 'board' with 'supervisor' in this context. It was also suggested that there should be a
mechanism to make employees aware of this privilege.
The committee
made a mandatory recommendation: Employees witnessing unethical or improper practices (not necessarily
legal violations) should have the ability to
approach the audit committee without notifying their supervisors.
Companies should ensure that this
right is communicated to all employees through internal circulars or similar means. The company's employment
and personnel policies should include provisions
to protect whistleblowers from unjust termination and other prejudicial employment practices.
To monitor
compliance with this recommendation, the committee suggested
that companies should
periodically affirm (at least annually) their adherence to this requirement. The committee also emphasized the importance of enhancing the independence of internal auditors by subjecting the
appointment, removal, and terms of remuneration
of the chief internal auditor to
review by the Audit Committee.
As a result,
the committee made another mandatory recommendation: Companies should annually confirm that they have not
denied any personnel access to the company's
audit committee regarding matters involving alleged misconduct and that they have provided protection to
whistleblowers from unfair termination and other prejudicial employment
practices. This affirmation should be included
in the Board report on Corporate Governance, which is required to be
prepared and submitted with the annual report.
The
Whistleblower Policy aimed to empower the Internal Auditor and grant them some independence while also providing a
mechanism for personnel who witness unethical
or improper practices to approach this independent internal auditor without fear of
unfair termination or other
unfair employment practices.
However, the
corporate sector did not respond positively to this proposed change (Mandatory Recommendation), leading to
widespread protests from industry and corporate
entities. Under pressure, SEBI eventually reclassified this suggested "mandatory"
corporate governance measure as "non-mandatory." As a result,
the "whistle-blower policy"
now appears as a non-mandatory recommendation under the Listing Agreement.
3. Clause 49 of SEBIs listing agreements-
The Listing Agreement is a
contractual arrangement between a recognized stock exchange and a company listed on that exchange. It outlines various
listing conditions, the violation of
which could lead to the delisting of the offending company. One of the
clauses within the Listing Agreement is Clause 49, which
incorporates corporate governance measures recommended by various committees on corporate governance.
The Listing Agreement stipulates the
establishment of a Whistleblower Protection
mechanism starting from December 31, 2005, as a non-mandatory
requirement. It states:
"The company may create a system allowing employees to report concerns to the management regarding unethical behavior,
suspected or actual fraud, or violations of the
company's code of conduct or ethics policy. This system should also include provisions to protect employees from
retaliation and provide a direct channel to the Chairman of the Audit Committee in exceptional cases. Once
implemented, the existence of this
mechanism should be appropriately communicated within the organization."
Once this mechanism is implemented by the listed company, it becomes
subject to reporting requirements.
The company is required to submit a corporate governance compliance report that includes disclosures about the
Whistleblower policy and an affirmation that no personnel has been denied access
to the audit committee.
Furthermore, the Audit Committee is tasked with the responsibility of reviewing the functioning of the
Whistleblower mechanism if it
exists.
In India, the
Corporate Governance Statute only provides for internal whistleblowing through
a clause in the listing agreement and offers protection exclusively to employees. This policy is not applicable to unlisted companies
as they are not bound
by the terms of the listing agreement.
NOTABLE CASES
When
conscientious employees uncover instances of misconduct or unethical practices
within their organization, they
often find themselves compelled to voice their concerns, even though they are aware that whistleblowing can
be perilous, potentially jeopardizing their job security and exposing them to the risk of harassment or retaliation. Nevertheless, they are willing
to take these risks to reveal any wrongdoing. But they also get
subjected to victimization in a way that the question arises on their safety.
A few cases that led to need
for a proper legislation for protection of whistleblower were-
1. Satyendra Dubey case-
Satyendra Dubey, a young project manager employed by the National Highway Authority of India (NHAI), was appointed
as the project director for the Golden Quadrilateral
Corridor Project. While overseeing this project, Dubey uncovered several irregularities within the
financial department. In response, he took the
courageous step of suspending three engineers who were involved
in these irregularities. Additionally, he exposed the NHAI's blatant
disregard for established guidelines,
which allowed for sub-contracting and the use of substandard materials by engineers.
Subsequently, Dubey was transferred to another NHAI project in Gaya. It
was during this time that he realized
the corruption was not isolated
to one location; rather,
it was a widespread issue involving
numerous high-ranking officials and influential politicians. Committed to his principles as an honest
employee, Dubey wrote a letter
to then-Prime Minister Shri Atal
Bihari Vajpayee, outlining his concerns about the financial discrepancies and various
irregularities, including the use of inferior materials and subcontracting. In his letter,
he explicitly requested
that his identity
remain confidential.
The letter,
along with supporting documentation, was forwarded to the Ministry of Transport and Highways. Consequently,
Dubey faced severe criticism from the NHAI's vigilance
officer. Tragically, on November 27th,
Satyendra Dubey was found deceased. While the exact cause of his
death could not be directly linked to the corruption
he had exposed, suspicions arose that he may have been killed while resisting
a robbery.
2. Manjunath Shanmugam-
Manjunath Shanmugam, an employee of the Indian Oil Corporation, served as
a marketing manager. During his tenure, he took decisive
action by ordering
the temporary closure of two petrol pumps in Lakhimpur Kheri, situated
in Lucknow, after uncovering their involvement in selling adulterated fuel. His order mandated
a three-month shutdown for these petrol
pumps. However, when he discovered that they had resumed operations within just one month,
he conducted an unannounced inspection with the intention
of shutting them down again. Tragically, during
this surprise raid,
he was brutally murdered by the
petrol pump owner and several members of the local
criminal syndicate.
3. Infosys whistleblower case-
On October 21, 2019, the Chairman of Infosys made an announcement stating
that, following a comprehensive
investigation by the audit committee, no substantial evidence was found to support the allegations made against CEO
Salil Parekh and CEO Nilanjan
Roy. Chairman Nandan
Nilekani, in a press release,
revealed that the company had received complaints from a group of employees who referred to themselves as the "Ethical Employees." These employees had accused both executives of engaging in financial
misconduct and employing unethical practices to boost the company's profits.
The chairman
explained that in response to these complaints, the audit committee, in collaboration with independent legal
counsel, conducted a thorough inquiry. Their
findings indicated a lack of concrete evidence to substantiate any
claims of financial impropriety. The evidence presented
to them, including video recordings and emails, was deemed
to be unsubstantiated and without merit.
4. Lalit Mehta-
Lalit Mehta, an engineer by trade, played an active role in advocating
for 'The Right to Food' campaign within
the Palamu district
of Jharkhand. Mehta brought to light
instances of corruption within the Mahatma Gandhi National Rural Employment Guarantee scheme's operations. He
initiated a social audit of the program, collaborating with economists to uncover irregularities. Tragically, before he could fully expose the extent of the scandal,
Mehta was tragically murdered. On May 15, 2008,
he was assaulted while riding his motorcycle in the Chhatarpur district of Madhya Pradesh.
KEY SHORTCOMINGS OF THE POLICY
A nation
cannot establish a strong corporate governance framework by creating numerous regulatory bodies while excluding a
specific sector and making it non-mandatory for them to adopt the framework. To be effective, any law or regulation should
have clear and unambiguous scope and coverage.
The legal
framework concerning whistleblowing is still evolving
in India. Having
a whistleblowing policy in place is not detrimental to a company; in fact, it can
be beneficial when implemented
efficiently and effectively.
Trust forms
the foundation of the whistleblowing policy's success. Companies should foster an environment where employees are
encouraged to report any wrongdoing to the appropriate authorities. There are several challenges, such as trust
issues, lack of awareness about the whistleblower policy,
misconceptions about the reporting process,
and more, that organizations need to address
to ensure the policy can effectively deter misconduct at an
early stage.
One significant 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 Act only applies to companies listed on stock exchanges. It also lacks provisions governing the
internal procedure for investigating complaints. The proposed amendment, which
requires whistleblowers to reveal their
identity, raises concerns
about potential victimization and harassment, potentially discouraging
employees from reporting concerns. Additionally, the Act
does not contain specific provisions regarding
compensation in cases where whistleblowers face harassment or victimization.
SUGGESTIONS
Whistleblower
policies are formulated with the aim of furthering public policy objectives and fostering transparency within
organizations of various kinds. These policies are designed to break down the barriers of silence
surrounding illegal activities in both corporate and public entities.
They are primarily intended to safeguard
employees who expose corporate misconduct,
unlawful practices, internal fraud, and instances of discrimination, shielding them from retaliation. The promotion of
such transparency is vital for ensuring public
accountability in corporations, government bodies,
and nonprofit organizations.
In India,
there are several challenges, both general and specific to corporate
governance, that hinder the effective implementation of a 'whistleblower' policy mechanism. Some of these issues can be examined under
the following categories.
1. Silence of The Companies Act,2013
The Companies Act of 1956, a
foundational piece of legislation governing the corporate sector in India, notably
lacks provisions for the protection
of whistleblowers. There is a need to find a harmonious balance between the
provisions of the Companies Act and the guidelines set forth by SEBI (Securities
and Exchange Board of India). One
area where these two frameworks appear to be in conflict is the disclosure of interests of directors.
Under the Companies Act, it is stipulated that a director
with a conflict of interest
may not be allowed to cast a
vote on relevant matters. However, SEBI's guidelines do not provide
specific direction on this issue, creating a potential discrepancy between the two
sets of regulations.
2. Protection of whistleblowers in private and hybrid entities
The issue at hand pertains to whether whistleblower protection should
extend to private companies that are
not bound by the listing agreement. Furthermore, this question also encompasses hybrid entities like joint ventures.
It's important to recognize that
whistleblower protection serves a broader purpose beyond merely exposing corporate irregularities; it also
encompasses matters of public interest, such
as environmental concerns and the safety of workers. Given this expanded
scope, the whistleblower policy
should not be limited exclusively to listed public companies.
In essence, the argument here is for the extension of whistleblower
protection to encompass private
companies and hybrid entities, as they too can potentially be involved
in activities that impact
public welfare and require transparency and accountability. Expanding whistleblower protection beyond the confines of the listing
agreement ensures that concerns related to public interest and ethical
conduct can be reported and addressed effectively across various
sectors of the economy.
3. Misuse of the policy
The misuse of whistleblower policies can have significant repercussions.
With just one phone call to the
media, a video on YouTube, or a letter to the right public official,
a corrupt company can be exposed and face severe consequences due to the actions of a whistleblower.
There is a crucial role for the designated authority, currently the Central
Vigilance Commission (CVC),
to distinguish between malicious troublemakers and genuine whistleblowers.
While it's possible that investigating false charges could burden honest
officials, it is a necessary step. If India aims to combat
corruption at higher levels and protect honest
citizens, then the existence of fraudulent cases needs to be
acknowledged and addressed to safeguard real whistleblowers.
Implementing measures to check
frivolous complaints, such as imposing hefty fines, can help instill confidence
in the whistleblower mechanism and ensure that it serves
its intended purpose
effectively.
4. The need to make it a mandatory provision.
The necessity for a mandatory recommendation for a whistleblower policy
should be understood as distinct from Corporate Social
Responsibility (CSR) measures.
Corporate
governance measures should not be viewed as a part of CSR; instead, they should
be regarded as an essential
commitment to uphold
the highest standards of ethical, moral, and legal business
conduct.
Making the
whistleblower policy mandatory is imperative to ensure the protection of employees who come forward in good faith
to report wrongdoing. Such a policy serves
as a safeguard against reprisals or victimization. It is not merely a social responsibility but a fundamental requirement to maintain
transparency, accountability, and ethical
conduct within an organization.
CONCLUSION
In conclusion, corporate governance is an indispensable requirement for
any company's functioning. A robust
corporate governance framework enables transparency in operations and encourages the policy of complete
disclosure, thereby strengthening relationships with stakeholders and employees. It serves as a guarantee
for the company's
stability and growth.
An effective Whistleblowing Framework plays a crucial role in promoting
accountability within a company. It encourages employees to report concerns
to the relevant authorities, facilitating the early detection and
prevention of wrongdoing, malpractice, corruption, or fraud. This, in
turn, helps in safeguarding the company's reputation.
Over the past few decades, the world has witnessed scandals like the
Harshad Mehta Scam, the Satyam
Computer Scam, the Satyendra Dubey murder Scam, and the Ranbaxy Scandal, which have had far-reaching negative
consequences. Therefore, it is imperative for
companies to protect ordinary individuals from becoming victims
of such scandals.
Article Information
THE ETHICAL IMPERATIVE AND IMPACT OF WHISTLEBLOWING: A BRIEF ANALYSIS
Authors: VANSHITA KALRA, KUNAL JIGYASI
- Journal IJLRA
- ISSN 2582-6433
- Published 2023/10/04
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
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