India – Cost Of Opaqueness.

 

4 July, 2019

 

 

Mother Theresa said "Honesty and transparency make you vulnerable. Be honest and transparent anyway".

 

This statement is so true, more so when it relates to corporate governance of companies. Given a choice, companies may not want to disclose all their corporate actions to the public because such disclosures may sway their share prices. SEBI and MCA have made certain disclosures compulsory and companies today must comply with these requirements.

 

Corporate governance is a set of principles or guidelines by which a company is governed. It ensures that a corporate works in a way it is supposed to work to achieve the desired goals. It makes the corporations accountable to each stakeholder including directors, shareholders, employees, customers etc. The term "governance" by itself conveys a meaning that it is an act of managing a corporate entity. The entity is separate from its officials, which makes corporate governance an important subject. Corporate governance protects the rights of thousands of shareholders, who have ownership in the company but do not play an active role in governing day-to-day business activities.

 

Corporate governance safeguards the management and the interests of the shareholders as well and promotes the economic progress of India in the economies of the world.

 

Effective corporate governance in a company may be ensured by having complete transparency in internal and external dealings of the corporate. Transparency can be made a necessity in the company's affairs through active management and strong policies. A disclosure system must be employed to detect internal fraud and corruption and have a quick mechanism to deal with it.

 

When executed effectively, corporate governance prevents corporate scandals, fraud and civil and criminal liability. It enhances a company's image as a self-policing company, responsible and worthy of shareholder and debt holder capital. It demonstrates the philosophy, practices and culture of an organisation and its employees. An entity without a system of corporate governance may be regarded as a body without a soul or conscience. Corporate governance ensures that a company is honest and keeps out of trouble. If this philosophy breaks down, then corners may be cut, products may be defective and management may grow complacent and corrupt. The result may be a fall that may occur in the form of audited financial reports, criminal investigations and federal probes, bankrupting the company. Dishonest and unethical dealings can cause shareholders to flee out of fear, distrust and disgust.

 

 

If, for some reason, a company fails to disclose certain information, which it should have, one need not despair. There are always a couple of disgruntled employees in the company who will make that information public. They are called whistle-blowers.

 

One of the vital mechanisms of corporate governance is whistle-blowing. It has a critical role in implementation of corporate governance. Corporate Governance by whistleblowing not only protects the survival of the company but helps in maintaining the goodwill of the company. It can be a success factor for survival of corporates, build their brand image, which will support in raising funds. It can be an effective tool in curbing and reporting corporate frauds. Business entities often struggle with an appropriate level of segregation of duties making a whistle blower policy a good mitigating tool. The Whistle blower policies' effective implementations not only reduce the fraudulent activities but also send a signal to both internal and external agencies that organisations exercise good corporate governance.

 

Whistle-blowers are that rare breed of people who demonstrate exemplary courage, often at tremendous risk to their life and reputation, to unearth serious wrongdoings within their organisations and communities. Many recent corporate frauds may not have come to light without disclosure from an insider whistle-blower. 

 

A whistle-blower may, if he or she has knowledge of, an illegal or unethical act, such as fraud, corruption, violation of policy, laws, etc. report on the company or on the person involved in such illegal or unethical act. The reporting may either be to internal management or to the media or the government. Whistle-blowers, however, are often faced with reprisal and retaliation from those who are accused of wrongdoing.

 

A number of laws exist to protect whistle-blowers but poor implementation may cloud that protection and leave whistle-blowers vulnerable to legal trouble and retaliation. To add to that, whistle-blowing is not monetarily incentivized in India. Over the past many years, whistle-blowers have been harassed or jailed for exposing corruption, while many have been killed. It is for these reasons whistle-blowers prefer to be anonymous.

 

Till the murder of Dubey in 2003, India did not have an official mechanism to enable whistle-blowing or protect whistle-blowers. The Indian government woke up to the rude fact of murder for whistle-blowing and initiated steps to redress the anomaly. Satyendra Dubey was an Indian Engineering Service (IES) officer. He was the Project Director in the National Highways Authority of India (NHAI) at Koderma. He was murdered in Gaya, Bihar after fighting corruption in the Golden Quadrilateral highway construction project.

 

We are all aware of the whistle-blower, Arvind Gupta, who calls himself 'stakeholder-activist' and who squealed on ICICI Bank. He stated that the bad condition of banking today is because of favouritism and corruption. He says that he unearthed the multi-crore scam at ICICI Bank by carefully analysing publicly available records over the years. He believes that when the guilty are punished (not only in ICICI, but other banks and corporates, as well), such action will clean up the dirty corporate stables in India.

 

Indian laws are not adequate to protect whistle-blowers. Although, Section 177(9) of the Companies Act, 2013 ("Indian Companies Act") mandates that listed companies, companies accepting deposits from public and companies borrowing more than Rs.500,000,000 from banks or public financial institutions must have a whistle blowing policy and establish a vigil mechanism for directors and employees to report their genuine concerns, there is no cover or protection to whistle-blowers.

 

To encourage whistle blowing, the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 ("SEBI LODR") also mandate that a listed entity must devise an effective whistle blower mechanism enabling stakeholders, including individual employees and their representative bodies, to freely communicate their concerns about illegal or unethical practices. The SEBI LODR goes on to state that the vigil mechanism must provide for adequate safeguards against victimization of directors or employees or any other person who avails the mechanism and provide for access to the audit committee in appropriate or exceptional cases.

 

In whistle-blower cases, protective measures must be taken on behalf of both, the accused and the informant. Maintaining anonymity and discretion are paramount in preventing information about potential misconduct from being leaked to the public and subsequently misrepresenting innocent individuals as guilty actors. As one way to ensure confidentiality and protection of all parties involved, anonymous whistle-blowing systems are a good option for the safe transmission of misconduct cases and personal information. Thus, whistle-blower policies must be developed in a manner that the interests of whistle-blowers and that of the management against frivolous complaints must be protected. Neither should the whistle-blower hesitate in raising any concern against any employer or employee and nor should the management and the employee be harassed by frivolous complaints of the whistle-blowers.

 

A threat free environment is required to make things happen and give fruitful results. Whistle blowing mechanism works effectively only with the strength and support of the management. Thus, for implementing effective Corporate Governance, all companies must develop and follow a clearly defined whistle-blowers policy.