Five years after the Securities Exchange Board of India (Sebi) dropped a move to mandate listed companies to install a ?whistle-blower? policy, Tata Sons director JJ Irani has said it?s essential for companies to put in place a confidential ?whistle-blower? system to avoid frauds like the one at Satyam Computer Services. Ironically, Satyam is one of the few Indian companies to have a whistle-blower policy in place since 2005.
A whistle-blower system entails establishing a mechanism for employees to report concerns about unethical behaviour, actual or suspected fraud or violations, directly to the audit committee of the board of directors.
Satyam had adopted a Whistle Blower Policy during the financial year 2005-06 after its then audit committee, headed by former Andhra Pradesh chief secretary late VP Rama Rao, approved it. The company?s annual reports since that year affirm that ?no personnel has been denied access to the audit committee? under the whistle-blower policy.
Speaking on the lessons from Satyam, Irani said, ?If the CEO and CFO of a firm get together to do a fraud, there is nothing an independent director can do to detect or prevent it, even if they are professors of corporate governance. Companies must install a confidential whistle-blower system (to avoid such frauds). In our group, one of the major frauds was uncovered at Tata Steel through this system.?
While the Satyam episode should re-ignite a debate on better corporate governance norms for India Inc, the fact that the company had a whistle-blower policy in place should be useful information for the embattled firm?s suitors in the midst of a limited ?due diligence? exercise.
?Restating Satyam?s accounts would take at least six-12 months; its client and employee base is fast depleting; liabilities from law suits in the US could be no less than $1 billion while its current market valuation is $600 million. So buying Satyam on the basis of limited financial information is like searching for a black cat in a dark alley, as iGate and Spice Group found,? says a consultant close to the developments.
?In this scenario, the whistle-blower policy can help bidders who remain in the race as they could ask Satyam?s board to share any disclosures made under it with the Audit Committee. Fake employees on its rolls, Raju?s claim of a 3% margin, forged invoices? it is possible that some conscientious Satyamites blew the whistle on these issues and it constitutes ?material? information,? the consultant stressed.
Attempts to get in touch with members of the audit committee, who had approved the whistleblower policy?Mangalam Srinivasan and former ISB dean M Rammohan Rao? were unsuccessful. Corporate governance professor at Harvard, Krishna G Palepu, whom Irani alluded to in his remarks about independent directors? failure to detect fraud, had resigned from the audit committee in July 2005.
Irani?s call for a whistle-blower system assumes significance as he chaired the expert panel on the new law to replace the Companies Act of 1956. Though the Companies Bill of 2003 required firms to create such a system, the Companies Bill of 2008 floated by the UPA has no such requirement.
The Narayana Murthy panel on corporate governance, set up by Sebi around the time when IIT engineer Satyendra Dubey was murdered for blowing the whistle on corruption in national highway projects, had also mooted that listed companies be made to enforce a whistle-blower policy. Accepting the idea, Sebi had asked firms to create adequate safeguards so as to prevent the victimisation of whistle-blowers, under Clause-49 of the Listing Agreement.
In October 2003, stiff opposition from India Inc. on the proposed corporate governance norms resulted in the government withdrawing the Companies Bill 2003. The Centre also asked Sebi to review Clause-49 ? Sebi relented within months and made the ?whistle-blower? policy requirement non-mandatory.
?I firmly believe that all companies should have a whistle-blower policy as it?s the first line of defence for a Board, especially if senior management is involved in a fraud. Independent directors have no way of telling if a CEO is committing a fraud so it?s a serious weakness not to have such a system in place,? former Sebi member and IIM-Ahmedabad professor, Jayanth Varma, told FE .
?In Satyam?s case, I wouldn?t be surprised if no whistle-blower disclosures were made to the audit committee,? Varma said. ?If the CEO and CFO are part of the fraud, lower-level employees may simply not be aware or wouldn?t have the courage to complain.?
Moreover, if the audit committee is ?awestruck by the promoter? (as Satyam?s legal advisor Shardul Shroff described Satyam?s high-profile independent directors in a recent interview), then it is difficult to expect tough scrutiny ? be it whistle-blower disclosures or related-party transactions.
