Thursday, March 23, 2017

Hush of the Whistleblower

[Guest post by Malek Shipchandler, who practices law with a firm in Mumbai. Views are personal and do not necessarily represent those of the firm.]

The ongoing controversy at one of India’s most celebrated companies, built on high standards of corporate governance, raises some interesting issues for consideration from a whistleblower perspective. It was earlier reported that the Indian securities regulator, the Securities and Exchange Board of India (SEBI) is examining a letter from a whistleblower at Infosys alleging that the CEO agreed to a gargantuan payout to a resigning chief financial officer, without any formal approval of the board, governance committees or the shareholders. The payout, the size of which is apparently unprecedented at Infosys, was riddled as “hush money” by one of the prominent founders of Infosys in an interview.

The Indian whistleblower norms for listed companies are relatively straitened, in comparison with jurisdictions such as the United States, where India often derives regulatory inspiration from. The Dodd-Frank Wall Street Reform and Consumer Protection Act of the United States established a whistleblower program to be overseen by the U.S. Securities and Exchange Commission (SEC) in 2010. The relevant norms, inter alia, make it a violation of law to take any action to impede an individual from communicating directly with the SEC about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement. In the contrasting Indian scenario, while the SEBI listing norms and Companies Act, 2013 mandate the company to establish a vigil and whistleblower mechanism which, inter alia, is to provide for adequate safeguards against victimization of the employees and their direct access to the audit committee of the company, they appear to envisage the umpiring and first go-to authority to be the board of directors and/or the audit committee, rather than a regulator such as SEBI. While the audit committee is statutorily required to be constituted (in majority) and helmed by ‘independent directors’ – considering that a majority of Indian listed companies are promoter driven, with independent directors spending less than nine days per year on board related work, and voicing that their company wants them to “toe the line” (according to the India Board Report 2015-16) – the moot point is whether, in reality, independent directors are truly independent and effective.

Questions therefore ensue: what if the whistleblower’s information pertains to the action of the board of directors or members of the audit committee? Is the board or the audit committee then expected to take action on incriminating information presented against it? Moreover, from a practical viewpoint, particularly when the mechanism does not adequately protect the identity of the whistleblower from the board or governance committee, is the whistleblower going to be protected from or become a prey of victimization by the very persons being incriminated?

The extant law, while requiring the company to establish a whistleblower mechanism and safeguarding against victimization, does not provide any guidance on how the mechanism ought to function or how victimization can be mitigated (if not avoided). Curiously enough, SEBI has not specifically touched upon whistleblowing in its recent guidance note on board evaluation, despite the guidance note being released in the aftermath of a high profile board-room battle. An option may perhaps lie in setting up a whistleblower hotline – managed by a professional third party who would in-turn verify the credibility of the complaint and the whistleblower. The idea of a third party managed hotline would however depend on the company’s willingness to spend extra currency and moreover, how thoroughly it is able to sensitize its employees about using such a hotline.

Further, employment/severance agreements often encapsulate boilerplate clauses that restrict a current or former employee from disclosing, voluntarily, any confidential information which may disparage the company or its officers. To reiterate the keyword in such clause(s): voluntarily. While the SEC has statutorily prohibited this (and taken enforcement actions against companies using such clause(s)), SEBI is yet to burgeon in this department. From the employees’ perspective, it is understandable why they would not resist signing off on such clause(s): one, boilerplate clauses by their very nature are not negotiated upon as enthusiastically as remuneration or notice period related clauses; and two, which may perhaps be the most crucial reason, voluntary whistleblowing is not, statutorily, monetarily incentivized in India. The SEC’s whistleblower program envisages paying awards to whistleblowers that provide the SEC with credible information about a securities law violation that leads to a successful SEC enforcement action resulting in monetary sanctions over $1 million – the award can range between 10% and 30% of the amount recovered in the enforcement action. In the Indian context, while it can be argued that monetary incentives may encourage frivolous and vexatious complaints, statutorily adopting a bounty system where an award is given only when the information is credible enough to bring about a successful enforcement action, can be food for thought. In fact, one of India’s steel giants is said to be rewarding its employees (including contract workers) up to INR 100,000 for whistleblowing – this is a welcome cue taken from the SEC’s bounty program.

Be that as it may, while SEBI may have its reasons for not having implemented a statutorily robust whistleblower program, it would be fair to acknowledge that SEBI does take cognizance of complaints and incrimination information against entities violating securities laws, through its SCORES (SEBI COmplaints REdress System) platform and otherwise. As regards the bounty mechanism for credible whistleblowers, the SEC Annual Report 2016 states that SEC has, since the inception of its whistleblower program, levied over $500 million worth of enforcement actions based on information received from whistleblowers, and awarded over $100 million to credible whistleblowers. Clearly, Benjamin Franklin, the founding father of the United States, said something which appears to resonate with the SEC: “An investment in knowledge pays the best interest.” Will it with SEBI?

-          Malek Shipchandler

1 comment:

Unknown said...

“……the moot point is whether, in reality, independent directors are truly independent and EFFECTIVE.”
Presumably, in the context, ‘effective’ postulates, apart from having a sense of / conscience to identify, the right direction to take in regard to any ‘policy decision’, as to be persuasive enough to convince the co-directors to toe the line, with the the objective of ensuring ‘good governance’.
“….. whistleblower hotline – managed by A PROFESSIONAL THIRD PARTY who would in-turn verify the credibility of the complaint and the whistleblower….”
Here again, is not the same essential factor of the ‘professional’ dispensing the responsibility in a truly ‘independent’ manner coming into play – a sort of vicious circle!
On the India Board Report 2015-16, having accessed and given a quick reading of it @…/F…/TheIndiaBoardReport2015-16.pdf :
That is an Experts' Report, which makes for an interesting but concerned read; on the vexing , rather irresolute problem faced / confronted with in ensuring 'independence' - that is, with focus on the field of 'corporate governance', the avowed objective is to securing independent 'thinking' and 'acting' by each and every individual functioning as a 'director', more so as an 'independent director'- to meet the expectation of 'trust' placed. The struggle towards achieving the desired objective, through legislation, is as old as the concept of 'corporate' itself.
it stands to be gathered from the report that the matter has as ever before remained a wishful thinking, if not a pipe dream.
What then is the root cause of the whole problem, or the factor(s) responsible therefor? In an attempt to find some answer or clue , if so wish, may be pleased to listen to the host of videoed interviews with a popular leader of his unique kind- Sachi Vausudev.
Taking out of context, but felt to being of relevance, to share :
When it comes to other aspects of our life, we employ science and tech to make things work. When it comes to religion, we still have silly philosophies and ideologies. Why? This is a movement from religion to RESPONSIBILITY (1). Without turning inward, there is no way you will have yourself THE WAY YOU (2) want yourself to be. When you can approach medicine in a scientific manner, why can’t you approach inner-well being in a logically correct and scientifically verifiable way, I ask?
(1) - ideally, towards the rest of the society, in its restricted or broader meaning as the context may warrant !
(2)-instead,the way fellow beings, directly concerned, want yourself to be !!