On Whistle Blowing

Economic Times dtd May 4,2010 carries an article on the importance of whistle blowers  in corporate governance by Kiran Karnik, former CEO of Nasscom and  who was nominated to the Board of Directors of Satyam  by the Government   when the Government  used its powers to replace the Satyam board after  promoter Ramalinga Raju’s confession on the ongoing fraud at the company. Mr.Karnik  tries to impress upon  us that most of the frauds  have come to light  only through insiders (whistleblowers) and in Satyam’s case, the fraud was  brought to light by Mr.Raju himself and that he hence belongs to the whistleblower category.

While a whistle-blowing mechanism is considered to be highly desirable in the pursuit of better corporate governance systems, at the core is  the philosophy “Prevention is better than cure” and not  to  confess about wrongdoings  when  no other  option is left. It is true  that many  corporate frauds and consequent failures causing miseries to all stakeholders could have been avoided, had the system of whistle-blowing was in place and institutionalized. Sherron Watkins in Enron, tried to act as a whistle-blower once she found that whatever the CFO Andy Fastow did  was benefiting him personally at the expense of  Enron by  sending an anonymous mail to Kenneth Lay, the Chairman and CEO of Enron. But nothing happened as Ken Lay ignored the warning and failed to make any investigation on the allegations mentioned in the mail. Rest is history now and is well known.

While whistle-blowing as a policy is laudable, the intricacies involved in institutionalizing it as a process poses great challenges to corporate and the very concept of corporate governance. While most of the corporations consider the regulations for the governance themselves as a necessary pain, it is very difficult for a system of whistle blowing mechanism to set in and get institutionalized. In  fully or partly government-owned companies, this could work as they can have a system of nominating somebody at a higher level of the organizational hierarchy who will have the responsibility of the oversight of vigil and report to an outside agency rather than the top executive cadre of the company. In India, public sector organizations have a policy of appointing a Chief Vigilance Officer in the category of General Manager and above who is responsible for the oversight of the vigilance function of the company and reports to a Chief Vigilance Commissioner, appointed by the Government. Such an arrangement will enable the process to get institutionalized. But how to implement such a process in the private enterprises is a major challenge before the policy makers. While the mechanism per se  can do wonders if implemented, the challenges revolve around the very implementation issue.

Clause 49has put the whistle-blower policy under the non-mandatory requirements . Companies have to present the whistle-blowing mechanism installed in their annual reports. Whistle blowers shall be provided access to the audit committee and if necessary to the Chairperson of the audit committee. Instances of whistle-blowing have been there in India but most of them have been instigated. Mr.L.C.Gupta, a former member of SEBI hailed Mr. Anil Ambani as “An unusual whistle-blower” while writing about the issues that were raised by Anil Ambani during the sibling-rivalry days in the pre-demerged Reliance Group. Gupta wrote that “It is a rare case of whistle-blower emerging from a company’s top management cadre”( Gupta  L.C., “An unusual whistle-blower”, Economic Times, May 5, 2005).While there is nothing wrong about somebody from top management level blowing whistle if some frauds or unethical practices happen in the company. But, Reliance had been involved in many issues of violation of rules and regulations during their growth phase during eighties and nineties, and Anil was very much a part of it, no such issues were raised  or discussed  by him in public. Hence, while he might have done the right thing by pointing to various issues and refusing to sign the accounts for 2004-05, there is all the reason to believe that this was the result of the eruption of rivalry between him and his brother Mukesh Ambani  with respect to the control of the Reliance group.

But, when a company seems to be doing extremely well, or during good times, everybody has a tendency to ignore most of the issues. Most of the control mechanisms don’t get enforced when the going is good. As Garrat says, “In good times, both the cream and scum rise to the top. Very few people are willing to blow a warning whistle when every one seems to be winning in a rising market. When that market turns and the cream curdles, however the scum become only too obvious. What looked to the public like marvelously engineered marble palaces turn out to be two –dimensional lath and canvas film sets, closely held together by “creative” EBITDA accounting.”(Bob Garrat, Thin On Top,2003).Such issues will get attention during tough times when everybody searches for the problems and tries to fix a culprit.

According to me, for a whistle-blowing mechanism to work, some pre-requisites are necessary:

• The corporate governance must become a culture within the entire organization rather than an annual box-ticking exercise by the board. For this, every employee should have some learning about the importance of it.
• The whistle-blowing must start from top, the board of directors. Non-executive directors , and especially independent directors, should blow the whistle the moment they find that something is not in line.
• All employees must have access to not only the audit committee members but also to the non-executive and independent directors.
• A mechanism whereby any employee, if his concerns are not addressed by the audit committee or directors, has the freedom to convey the concern to SEBI.SEBI may open a mail-id under the control of a General Manger for the purpose.
• SEBI must invite researchers on corporate governance  or corporate watchers to get their inputs where there are no clear guidelines  and also to get sounded of some untoward happenings in the companies.
• SEBI should encourage investors to act as whistle blowers. A number of governance deficiencies, either due to lack of regulation or otherwise, can be brought to the notice of the audit committee, auditors and/or non-executive directors.

How many companies encourage  their employees to voice their concerns in the best interest of corporate governance? How many companies look for qualities(such as courage, value system etc) in the potential employees while recruiting and existing employees during their appraisal? According to me such courage is  not only missing at the lower employee levels but also at the higher levels like directors. When the RIL-RNRL gas  allocation and pricing suit was heard at the supreme court, the counsel  for RIL, Mr.Harish Salve  stated that the RIL board was not aware of the family MOU and hence it is binding only on Mukesh and not  on  the company. But, none of the directors showed courage to raise a question  regarding how could Mukesh as an individual could get into an agreement with his brother  to allocate gas from the oil wells owned by the company.

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