Break the Silence: How whistle-blowing can avert ethical crises

Encouraging whistle-blowers is essential to stem the rot affecting our institutions and organisations. People Matters explores how ethical crises can be averted by creating a culture of speaking-up.

The fraud at Ranbaxy Laboratories is the latest in a string of corporate scams to hit India. What caught the attention of the world was the size and scope of the fraud and it has raised serious questions about the regulatory oversight in India and beyond and the legal frameworks that govern organisations in the country.

Corruption seems endemic in India, according to the 2012 KPMG Fraud Survey, where 71 per cent of the respondents believe that fraud is an inevitable cost of doing business here. India was ranked 94 out of 174 countries in the Transparency Index, which ranks companies on the perception of corruption. It is ranked 132 among 185 economies ranked for the ease of doing business, where a high ranking means that the regulatory environment is more conducive to the starting and operation of a local firm.

The extent of this corruption is so rampant that Ratan Tata, the former chairman of the Tata Sons, said in an event in the Harvard Business School in August 2011, “I think corruption has become worse and if you choose not to participate in this, you leave behind a fair amount of business.”

With corruption so pervasive, is there no way out? It is in this context that whistle-blowing and corporate ethics becomes important. In fact, the KPMG survey points out that a whistle-blowing hotline is one of the most effective ways to beat fraud. In the Ranbaxy case, Dinesh Thakur, the whistle-blower, worked relentlessly behind the scenes for eight years to bring the fraud to light. Thakur, a former Director of Projects and Information management at Ranbaxy, proved in a US federal court that the company was manufacturing adulterated drugs at its facilities in Paonta Sahib and Dewas in India.

But why did Thakur report the fraud to authorities in the US and not in India? Our cover story explores the subject of whistle-blowing in the Indian context, its connection with ethics and corporate governance and whether a strong whistle-blowing policy can actually be a tool for transparency and help plug the larger ethical crises.

The transparency tool

The act of making a disclosure in public interest, whistle-blowing is the tool for an organisation’s corporate governance strategy that empowers employees to act on incidences of misconduct, while protecting profits, reputation and interest of stakeholders. The concept revolves around the idea that if the smallest incidents of wrongdoing are reported and rectified, larger problems can be prevented.

However, speaking up and questioning accepted norms doesn’t come naturally to collective and high context cultures like India, because people tend to view an issue with reference to the context that they are operating in. As Abhijeet Vadera, Assistant Professor at Indian School of Business says, “Unlike western cultures, respecting authority and being loyal to one’s ingroup is actually a question of morality in India.”

Then how do organisations encourage people to challenge when in doubt? Vadera says, culture aside, most employees choose not to speak out because they fear retaliation or they think that the organisation will not support them, or that nothing would be done about it even if they report.

In fact, the 2011 National Business Ethics Survey revealed that though 45 per cent of employees observe misconduct every year, more than one in five (22 per cent) employees who report it fear retaliation.

A practical solution to this is to have a guiding framework in organisations, says L. Gurunathan, Professor HRM & IR, Xavier Labour Relations Institute, Jamshedpur. “The presence of a policy framework that educates people about the right reporting mechanisms and gives a promise of no retaliation can encourage employees from bringing unethical practices to the forefront. It can actually serve as an effective way to curb unethical practices and can send out a strong message to people about accepted and unacceptable norms of behaviour.”

But does it pay to speak up?

As altruistic as it sounds, the simple act of making a disclosure in public interest comes with its share of high risk and whistle-blowers often put everything at stake and for most of them life has never been the same. Thakur quit his job in 2005, before he reported the fraud. Nine years later, once what he reported was proved, he received more than $48 million under the federal whistleblower law of the United States. In the meantime, he was running his own consulting firm. Others who hit the headlines are Cynthia Cooper of WorldCom and Sheron Watkins of Enron who were nominated as the TIME Persons of the Year in 2002.

Back home, probably Dinesh Thakur is the only corporate whistle-blower that India as ever had and even he is a naturalized US citizen, and reported the Ranbaxy fraud in the United States and not in India. The few whistle-blowing cases the country has witnessed have ended in tragedy. S.P. Mahantesh, Niyamat Ansari, Vijay Pandhare, S. Manjunath, Satyendra Dubey, MN Vijaykumar all spoke up against corruption in the system. Apart from Pandhare, whose expose of the irrigation scam led to the resignation of then Maharashtra Deputy Chief Minister Ajit Pawar and Vijaykumar, who was repeatedly transferred as he continued his fight against the power subsidy scam in Karnataka, all others were killed.

Despite a long list of scams in India, lack of protection to whistle-blowers and official apathy discourage people from speaking up. Apart from the lack of incentives, India does not even have a law on whistle-blowing.

A law for the conscience keepers

Following the murder of Satyendra Dubey, the Supreme Court in 2004 had made a strong pitch for a legal mechanism to protect whistleblowers. That got the Centre moving and finally The Public Interest Disclosure and Protection to Persons making the Disclosure Bill 2010 also known as The Whistleblower’s Protection Bill 2011 was drafted. The Bill that has been passed by the Lok Sabha in 2011 but is yet to be cleared by the Rajya Sabha seeks to establish a mechanism to register complaints on any allegations of fraud, corruption or willful misuse of power against a public servant.

While the legislation was necessitated in a bid to eliminate corruption in the system, it has faced considerable criticism because it leaves out many critical aspects. Unlike similar legislation in the US and the UK, its jurisdiction is restricted to government employees and those in societies or companies controlled by the government and does not cover private sector entities, which seems to be a strange omission considering India has witnessed two large corporate scams –Satyam and Reebok.

The process of disclosures states that anyone can make a disclosure to the Central or State Vigilance Commission and the complaint has to include the identity of the complainant. To protect complainants, it has a penalty for disclosing the identity; however, the Bill has limited the definition of disclosure. It neither defines victimisation nor provides any penalty for victimising a complainant. Financial incentives to encourage whistle-blowing is another critical provision that has been skipped out.

With such obvious deficiencies in the Bill, its effectiveness to curb corruption is questionable even when it comes into force as a law. If the government is serious about creating a transparent and corruption free governance framework, it needs to encourage and enable people to speak up, and the country does need a wider and more comprehensive whistle-blower protection mechanism that safeguards people against retaliation, incentivises those who come to the forefront to report malpractices and takes corrective actions against the perpetrators. In fact at the Seoul Summit in November 2010, G20 leaders identified the protection of whistle-blowers as one of the high priority areas in their global anti-corruption agenda.

Rajiv Kumar, former Secretary General of FICCI, concurs, “It is all very well to say that anyone can lodge a complaint against anyone who engages in misconduct etc, however that is not practical. We need to have a law, a framework which defines the reporting mechanisms and ensures zero retaliation for people who speak up. And we need to start with the politics and bureaucracy before having it for the organisations. That is where norms must be set.”

Where does HR come in?

HR needs to step up and create a robust framework that defines the acceptable and unacceptable in the organisations, create governance and control mechanisms, assign owners, define the investigation process and ensure protection for those who speak up. Once the policy is in place, HR needs to consciously and consistently work towards building the culture, because that is what enables people to act upon the policies.

K. Ramkumar, Executive Director (HR, Customer Service & Operations), ICICI Bank, envisions HR as the conscience keeper of the board and not just concerned with policies and processes, because by training, an HR person can understand human psychology and group dynamics better. Anand Mahindra, the Chairman and Managing Director of Mahindra & Mahindra asserts, “While having the right set of policies in place is crucial, actions, as the saying goes, speak louder than words. Policies alone cannot ensure compliance, but it is the company’s reaction to non-compliance that is a true test of its commitment to corporate ethics. ” Creating a policy especially for whistle-blowing and implementing it beyond bias needs tremendous efforts but it is beneficial to the business and directly impacts the bottom line and this indeed is a significant contribution that HR can make.

Not just a feel good factor

71 per cent of the respondents to the KPMG 2012 fraud survey accepted that fraud is an inevitable cost of doing business in India. With corruption so pervasive the obvious logical deduction would be that organisations that focus on being ethical may actually lose out to on profits and revenues.

However it is the contrary. “A study done in the UK shows that that ethical organisations are 18 per cent more profitable than similar firms in the UK which did not believe in ethics. Another cent study in the journal of management found that organisations that have a strong internal and external ethics policy did very well in terms of market performance. Also, studies of consumer behaviour suggest that people buy products and readily pay a small premium for ethically made products but demand a huge discount for those that are made unethically. Although we do not have India specific research, we do have anecdotal evidence that suggest that a similar relation between ethics and shareholder value will exist in India as well,” quotes Vadera from his research. John Mackey, CEO, Whole Foods and Co-Founder of Conscious Capitalism Institute makes the case for ethical business, citing the example of 18 publicly traded companies that are members of the conscious capitalism institute that outperformed the Standard & Poor index by a factor of 10.5 over the years 1996 to 2011.

All eyes on us

India is an emerging economy and the most populous in the world. And the next phase of growth has to be fueled by new investments. While India has been ranked as the second most important foreign direct investment destination for transnational corporations in a recent survey conducted by UNCTAD, that organisations are skeptical about their success in India reflects in the country’s low rank in the ease of doing business and corruption perception index.

We need to take strong steps to regain investor confidence and must create an environment that fosters ethical standards in business practices in order to achieve that. While the government needs to create and enforce a law that defines reporting mechanisms and assures protection against retaliation, organisations need to have an internal policy that enables people to differentiate the right from the wrong. Unless that exists, we will continue to make the same mistakes and scandals will continue to emerge because human beings when confronted with ethical dilemmas are unable to decide and tend to make the easier choice. As Max Bazerman says, “We are not as ethical as we think we are.”