Wanted: Whistle-blower specialists to expose malpractices

A mechanism on whistle blowing is mandated from October and third-party entities managing such services give staffers far more confidence to blow the lid on wrongdoing.

The promoter of a foreign company had a complaint that its country manager was making use of the entity’s intellectual property and customer database for personal gain. 

A probe revealed the person had been selling goods 20 per cent cheaper to certain customers through an intermediary and taking part of the profit. 

What the foreign promoter later found was that its employees knew. However, they were reluctant to provide a tip-off, since the person involved was known to be close to the promoter.

It was only after the implementation of a whistle-blower mechanism, managed by a third-party service provider, that things finally came to light. 

Such third-party whistle-blower management services might well find their place in the sun with the implementation of new corporate governance norms for listed companies next month.

These require the establishment of a reporting mechanism for malpractices and a third-party manager of such services are likely to be more effective, say experts. 

There are at least seven companies which provide such services. Essentially, these companies set up mechanisms for employees to report wrongdoing.

Since they are managed outside the company framework, employees are seen to be more comfortable with them, as opposed to those managed by the company itself. 

Arpinder Singh, partner and national leader - fraud investigation and dispute services, EY, said use of companies providing such services help the whistle-blowing process.

“Employees feel safer if it is through a third-party rather than someone within the organisation. Such agencies also typically provide multiple channels for entities to report issues, including through hotlines as well as through the web,” he said. 

Yatish Mamniya, founding partner at Integrity Matters, a company providing the service, said using a third party provider helps instill confidence in people who might not otherwise be comfortable providing information on malpractices. “The Companies Bill does not mandate outsourcing to a third party but it helps, especially since we have seen a tendency to track down such individuals, who have later been victimised,” he said. 

While most multinational companies have put in place such mechanisms, only 32 per cent of Indian firms have done so, according to an EY survey, titled ‘The whistle-blowing quandary: India Inc’s journey from oblivious to obvious’ issued in August, in which the story of the country manager was mentioned.

The low percentage of use is despite the new norms taking effect next month. A April 17 circular issued by the Securities and Exchange Board of India (Sebi) says: “The company shall establish a vigil mechanism for directors and employees to report concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy.” 

The regulator revised the provisions of the listing agreement and a new one takes effect from October 1. Sebi’s move is in line with Clause 177 (9) of the new Companies Act. This says listed companies need to have a mechanism allowing people to take up issues of malpractice. 

“The majority of firms that outsourced their whistle-blowing mechanisms were from the consumer product and media and entertainment sectors (24 per cent and 23 per cent, respectively),” added the EY survey. 

Outsourcing the whistle-blower mechanism

What are third-party service providers?

These are firms which manage the whistle-blowing mechanism for companies externally

What do they do?

They provide hotlines and other platforms for employees to expose wrongdoing

What are the advantages of outsourcing the function?

Employees are more confident if the tip-off goes to someone outside the company, especially if senior management is involved

How many companies use it?

Only 32 per cent of Indian companies use it, though most MNCs have already adopted the practice

Which companies provide such services?

Navex Global, Network Inc, In Touch India Ltd, Whistle-blowers Pty Ltd, Spectra Management and Integrity Matters are some such companies

Photograph: Reuters