Corporate Governance and Whistle blower policy: Sakshee Sahay

In the last decade, the world economic system has witnessed in monetary terms the largest dollar level of fraud, accounting manipulation and unethical behaviour in corporate history and certainly the most economic scandals and failures since 1920.[1] Emerging financial scandals will continue to ensure that there remains a constant focus on corporate governance issues, especially relating to transparency and disclosure, control and accountability.[2]  Hence there is the need of the transparency, fairness etc and the minimum rate of negativity in the governance. Hence the whistle blow policy must be included either directly or indirectly. This article primarily focuses on the Corporate Governance and the Whistle Blower policy in India and the relevant provision particularly in the Companies Act, 2013.

Introduction to Corporate Governance

Corporate governance is the collection of mechanisms, processes and relations by which corporations are controlled and operated.[3] The research provides robust evidence that companies that exhibit sound corporate governance generate significantly greater returns when compared to companies that exhibit poor corporate governance.[4] After several paramount efforts, the final assent to Corporate Governance practices in the efficacious management of the company can be visually perceived as exordium to new paramount provisions introduced in the Companies Act, 2013 in form of independent directors, women directors on the board, corporate social responsibility and compulsory compliance of Secretarial Standards issued by Institute of Company Secretaries of India as per Section 118 of Companies Act, 2013. Corporate governance lays down the substructure of a congruously structured Board and strives to a salubrious balance between management and ownership which is capable of taking independent decisions for engendering long-term trust between the company and external stakeholders of the company. It invigorates strategic cerebrating at the top management by taking independent directors on the board who bring astute experience to the company and equitable approach to deal with matters cognate to companies welfare. Further, it instils transparent and fair practices in the board management which results in financial transparency and integrity of the audit reports. Moreover, it sets the benchmark for the company’s management to comply with laws in true letter and spirit while adhering to ethical standards of the company for bringing out efficacious management solutions in order to discharge its responsibility for smooth functioning of the company. It also instils staunchness among investors as their interest is looked after in the best manner by a company who adopts good management practices.

Whistle Blower policy in Corporate Governance

A whistle blower is an employee or other person, who is in a contractual relationship with the company, who reports the malpractices and misconduct present within the same, either to his superiors, or to some outside institution or firm which has the authority to correct them.[5]  It has been contended by various scholars that managers prefer that whistle-blowers use internal channels rather than external channels "so that the firm's dirty linen is not aired in public".[6]  External whistle-blowing is sometimes viewed as a sign of disloyalty and can have a much deeper negative impact, contrary to the intention of the whistle-blowing.[7]

Thus there exists a significant gap between Whistle Blower Protection Policy and the implementation of the same in India.[8] The SEBI report of the committee on Corporate Governance of 2003 specifically dealt with the issue of whistle-blower policy in India.[9]

Relevant Provisions in Companies Act, 2013

The laws dealing with the Whistleblower Policy in Corporate Governance is inadequate in the nation. But the relevance could be made after the enactment of Companies Act, 2013.  Section 149 of the Companies Act, 2013 provides for appointment of minimum three directors in a public company and two directors in a private company. A board can have a maximum of fifteen directors but can appoint more directors subject to special approbation. Section 149(3) mandates that every company will have one director who has stayed in India for a period of not less than 182 days. Section 149(6) provides for the qualifications for appointing an independent director in a public company. As per Companies Act, 2013 public listed company shall have at least one-third of directors as independent directors and public unlisted company will have two directors if they meet certain criteria. According to section 134 of Companies Act, 2013 the director has to give a detailed financial report which includes the director’s responsibility verbal expression. As per section 178(6) of Companies Act, 2013 if a company has more than one thousand shareholders, debenture-holders, deposit-holders or any other security holders in a financial year then it is obligatory to constitute a stakeholder relationship committee. Under section 177 of Companies Act, 2013 the following class of companies are required to constitute audit committee and they are as follows: 1) Listed company; 2)Public company having a portion capital of more than 10 crores;3)Public company having a turnover of Rs. 100 crores; 4)Public companies having deposits, outstanding loans or debentures more than 50 crores. Section 177(4) provides obligations of the audit committee and it has to act in accordance with the same. Companies Act, 2013 has mandated the internal audit for certain classes of companies as designated under Section 138 of the Companies Act, 2013. Moreover, the Draft Rule 12.5 of the Companies Act, 2013 and Section 177(9) directes the  listed companies, companies accepting deposits from public and companies borrowing more than Rs. 50 crore from banks or public financial institutions to have a whistleblowing policy and establish a vigil mechanism for directors and employees to report their genuine concerns as a compulsory provision. Section 211 (1) of the Companies Act, 2013 shall establish an office called the Solemn Fraud Investigation office to investigate fraud relating to Company. Section 178 of Companies Act, 2013 mandates the constitution of committee for the following class of companies: 1)Listed company; 2)Public company having a portion capital of more than Rs. 10 crores; 3)Public company having a turnover of Rs. 100 crores; 4)Public company having deposits, outstanding loans or debentures more than Rs.50 crores.

Conclusion                                                 

After several paramount efforts, the final assent to Corporate Governance practices in the efficacious management of the company can be visually perceived as exordium to new paramount provisions introduced in the Companies Act, 2013 in form of independent directors, women directors on the board, corporate social responsibility and compulsory compliance of Secretarial Standards issued by Institute of Company Secretaries of India as per Section 118 of Companies Act, 2013. Moreover, the whistle blower policy in India is aimed to safeguard the interest of general public. Employees who report fraud or corruption to the media, public or law ascendant entities are external whistleblowers.

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[1] Salem George R. and Franze Laura M., The Whistleblower Provisions of the Sarbanes-Oxley Act of 2002, available at-

https://www.niri.org/NIRI/media/NIRI/Documents/34-64545fr.pdf (retrieved on Aug 13, 2020)

[2] Mallin Christine A., Corporate Governance, 7, (3 rd ed. 2010).

[3] Shailer, Greg. An Introduction to Corporate Governance in Australia,(2004) Pearson Education Australia, Sydney

[4] For evidence in the Indian context, see Sarkar, Sarkar and Sen (2012), “A Corporate Governance Index for Large Listed Companies in India,” Working Paper, IGIDR. For similar evidence across the world, see Agrawal, A., & Knoeber, C. R. (2012), “Corporate governance and firm performance,” Oxford Handbook in Managerial Economics, Oxford University Press.

[5] Black's Law Dictionary 1627 (8th ed. 2004) (defining whistleblower as -"an employee who reports employer wrongdoing to a governmental or lawenforcement agency").

[6] Kaplan Steven E. and Schultz Joseph J., Intentions to Report Questionable Acts: An Examination of the Influence of Anonymous Reporting Channel, Internal Audit Quality, and Setting, 71 J. Bus. Ethics, 109, 110 (2007).

[7] Callahan, E. S. and T. M. Dworkin: Do Good and Get Rich: Financial Incentives for Whistle-blowing and the False Claims Act, 37 Vill. L. Rev. 273 (1992).

[8] Mangaldas Amarchand & Suresh A. Shroff & Co, Corporate Governance, 13, (Wolters Kluwer Business 2009).

[9] Report of the SEBI Committee on Corporate Governance, p.23, available at - https://www.sebi.gov.in/reports/reports/oct-2017/report-of-the-committee-on-corporate-governance_36177.html (accessed on Aug 14, 2020)