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1 February, 2017
One of the key tenets of effective corporate governance is the ability of a corporation to promote transparency. Transparency and accountability is strengthened not just by efficient management and robust disclosure policies, but also by the creation of systems and processes to detect and address internal instances of fraud and corruption.
Whistleblowing has always played a distinct role in making companies alert to, and mindful of, employee conduct as well as internal processes and procedures. The existence of this class of facilitators is well recognised in the Indian legislative framework. Under section 177(9) of the Companies Act, 2013, it is mandatory for every listed company to establish a vigilant mechanism for directors and employees. Furthermore, the revised clause 49 of the listing agreement mandates that the company must establish a whistleblower mechanism with adequate safeguards against victimisation of whistleblowers.
Whilst immensely beneficial, tipping off/whistleblowing comes with its own set of unique challenges for the company, the alleged wrongdoer as well as whistleblowers themselves. While there is no ‘one size fits all’, certain aspects, as detailed below, should be considered by any company seeking to establish a whistleblower mechanism:
1. Reporting mechanism
The most critical aspect of any corporate’s whistleblower policy is the mechanism it creates to allow for meaningful, reliable, yet anonymised disclosures. While there could be several avenues available for whistleblower reporting such as a hotline, dropbox etc., the Indian legal framework is agnostic to the mode of reporting. It is, however, imperative that the reporting mechanism ensures confidentiality to the whistleblower. As a practical matter, communication and data regarding the complaint should be secure and should be periodically audited to identify vulnerabilities which can compromise the identity of the whistleblower. It is also important for companies to ensure that there is a strong statement of support available on its website, to encourage employees to come forward and make necessary disclosures without any fear of adverse reactions within the organisation. There are some specific jurisdictions, such as India, Japan, China and other Asian countries, where hierarchy within the employee/management structure is an integral and unavoidable part of corporate culture. It is especially important for the whistleblower policies of these countries to encourage employees to raise genuine concerns/complaints, regardless of their designation or the position of the alleged wrongdoer.
Another important facet to bear in mind is that most whistleblowing policies focus on protecting the complainant. However, it is equally important to ensure that the alleged wrongdoer is given a fair hearing and reasonable opportunity to furnish his/her defences. The company stands to benefit if it follows a zero-tolerance approach on undue harassment of both the whistleblower and the alleged wrongdoer.
2. Effective evaluation and segregation
Once a whistleblower complaint is registered on the whistleblower mechanism, it needs to be evaluated for its severity and dealt with by the appropriate department. A company’s internal policy needs to factor in a number of issues when evaluating the nature of the complaint. First, the company should perform a complete legal evaluation of its reporting and preserving obligations under the legislations that govern the company. For example, para 3.1 of the Reserve Bank of India (Frauds classification and reporting by commercial banks and select FIs) Directions, 2016 mandates that in case of frauds above 0.1 million Indian Rupees, banks shall maintain records of the actual and suspected frauds, and the progress reports, and shall file returns in the prescribed manner. Second, there may be instances such as in case of sexual harassment complaints where the law mandates the handling of the complaints in a particular manner.
3. Identified and transparent investigation protocols
Success of a whistleblower mechanism depends upon the perceived effectiveness of the mechanism by stakeholders. If the employees of a company feel that their complaints are likely to be evaluated and resolved, they will actively report thereby ensuring good corporate governance. It is therefore important that credible whistleblower complaints are investigated by a team of independent personnel. This is essential to ensure that there are no conflicts of interest in handling whistleblower allegations. For instance, if the allegations relate to a potential regulatory violation such as insider trading or bribe taking, companies will always benefit from immediate legal consultation, since timely legal advice is critical to evaluate the requirement for a regulatory disclosure.
4. Privacy concerns
In companies where investigatory resources are limited, whistleblower complaints may have to be shared with overseas teams as well, depending on the global footprint of the corporate. In such cases, an evaluation under the Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011 may be required because the contents of such complaints may be treated as sensitive personal data and the safeguards adopted by the company in protecting such data need to be understood as well.
All companies aspire towards institutionalising good corporate governance practices. The four key tenets to bear in mind while putting in place appropriate whistleblowing policies are: (i) protect and anonymise the whistleblower; (ii) give fair hearing to the alleged wrongdoer; (iii) ensure wwift legal evaluation to assess regulatory and disclosure obligations; and (iv) deliver immediate corrective action.
For further information, please contact:
Kunal Gupta, Partner, Cyril Amarchand Mangaldas
kunal.gupta@cyrilshroff.com
