RENEWING CORPORATE EXCELLENCE IN THE 21ST CENTURY
Whistle blowing: Subversive Spy or Responsible Corporate Citizen?
YBhg Datin Zarinah Anwar
Deputy Chief Executive, Securities Commission, Malaysia
Regional Conference on ‘Agenda for the 21st Century –
Revitalising the Corporation
29 September 2003
JW Marriott Hotel, Kuala Lumpur
Distinguished speakers and guests, ladies and gentlemen.
First of all, I would like to thank The Malaysian Association of the Institute of Chartered Secretaries and Administrators (MAICSA) for inviting me to speak in this Regional Conference themed: Agenda for the 21st Century: Revitalising the Corporation”.
The conference is timely; in the current post-corporate scandal environment, company directors, company secretaries and corporate advisers face multiple challenges – addressing public disquiet, preserving market confidence and concerns and performing well within a competitive environment, as well as upholding moral and ethical practices and professionalism.
This morning’s Plenary Session 1 “Renewing Corporate Excellence in the 21st Century” centres on issues relating to responsibility for disclosure to authorities in situations where employees have to face the ethical dilemma of informing against management indiscretions and misconduct. Indeed the organisers ought to be commended for focusing on such a challenging and relevant issue.
This dilemma is reflected by the theme I have been asked to speak on: “Whistle blowing: Subversive Spy or Responsible Corporate Citizen?”
Whistle blowing is a term used to describe the disclosure of information that one reasonably believes to be evidence of contravention of any laws or regulation or information that involves mismanagement corruption or abuse of authority. The whistle blower is like the referee in a football game, using his/her whistle to call a foul. The major difference is that the whistle blower has no authority to do this – which explains the controversy surrounding it.
The whistle blower can be internal, someone who works within the organisation or he/she can be an external party who is not employed by the organisation but nevertheless is privy to the workings of the organisation.
Although the session is intended to focus on the ethical dilemma facing the employee, I hope you will allow me to stretch the issue a little more in my discussion so that I can address whistle blowers holistically – i.e. the employee as well as the outsiders, for example, the independent auditor particularly in light of the recent scandals of Enron and WorldCom.
Whistle blowing – the benefit
The potential value of employees coming forward and raising concern over workplace malpractices with a view to defending the general public is self-evident. A report driven by the Organisation for Economic Co-operation and Development (OECD) confirms that investigations on corporate disasters that have taken place around the world have shown that in most, if not all cases, employees were either aware of the problem and too worried about damaging their jobs and careers to raise their concerns, or that employees had raised concerns but these had been ignored. Unfortunately, the cost of this silence and non-action to the environment, public health, livelihoods, employment, financial security, the public purse and in extreme cases, human life is high.
The reality is that until recently, the term “whistle blowing” has always had a pejorative slant. Today, post Enron and Sherron Watkins; whistle blowing is viewed more favourably than it had been historically but it was not long ago that whistle blowers still found themselves stigmatised as disloyal employees creating trouble for their employers.
Only now are perceptions beginning to change, whistle blowing is now viewed as an accountability and risk management tool that can be used to safeguard the interest of the company and the public. This shift in perception is reflected in the introduction of new provisions dealing with whistle blowing in multiple jurisdictions, the major ones being the Public Interest Disclosure Act (PIDA) in the UK in 1999 and the Sarbannes-Oxley Act in the USA in 2002, hot on the heels of the Enron debacle.
New whistle blowing provisions
Changes are taking place in Malaysia too. As some of you may already know, the Securities Commission had taken steps to amend the securities laws in Malaysia to make provisions for whistle blowing. I am pleased to announce that these amendments were passed in the Parliament on 11 September 2003 and now await the approval of the Dewan Negara.
In Malaysia, the issues that gave rise to the need for whistle blowing provisions in the law were identified and addressed in the context of auditors in the Report by the Finance Committee on Corporate Governance. The Report included the recommendation to enhance the current provisions in the Companies Act 1965 to extend the auditor’s duty to report to include any serious offences in addition to breaches of the Companies Act. Additionally, it was recommended that the subjective element be removed and the auditors be required to base their decision on their professional opinion. It also recommended that protection be afforded to auditors against defamation suits in respect of the reporting obligation. These recommendations were taken up and given effect by the amendments to the Securities Industry Act, 1983.
In essence, the amended securities laws passed by the Parliament are two pronged, one dealing with the putative external whistle blowers i.e. the auditors and the other to the putative internal whistle blowers, the key officers dealing with the financial statements of the company.
Under the new provisions, auditors who play a key role in assessing the financial position of listed corporations, will be obliged under law to submit a report to the Securities Commission or the stock exchange as the case may be, if in the course of their duties in auditing a listed corporation, they uncover corporate misdeeds which in their professional opinion constitutes a breach of securities laws, breach of the rules of the stock exchange or is a matter which adversely impacts on the financial position of that listed corporation. In return, auditors are protected from liability if they are sued in any court in respect of that report, provided that the report is submitted in good faith and in the performance of that statutory duty.
This provision complements the existing statutory duty imposed by the Companies Act for auditors to report on breaches of the Act, in instances where it cannot be dealt with merely by comment in the report to the accounts or by bringing it up to the directors of the company.
The new provisions under the Securities Industry Act also affect key officers of listed corporations who are responsible for preparing or approving those financial statements or financial information. These key officers include the chief executive, internal auditor, company secretary or any officer involved with preparing or approving financial statements or information. If in the course of performing their duties, they also uncover a breach of securities law, breach of the rules of the stock exchange or a matter which adversely impacts on the financial position of that listed corporation, and they wish to report it to the Commission or the stock exchange in good faith, they are protected from liability if they are sued in court, as well as be assured protection of their jobs and livelihoods.
The point has to be made that in drafting the amendments, we took note of the need for a healthy corporate environment to prevail, where management of the company are not constantly undermined by accusations that are made in bad faith. It is in consideration of this that a decision was made not to impose a mandatory requirement on employees to whistle blow. Instead we looked at ways to positively encourage these key employees to whistle blow on any malpractice. Key officers are already under a moral duty to report on any wrongdoing. The law is intended to provide protection by shielding them from dismissal, discrimination or interference and harassment, such as demotion and suspension that could adversely affect their livelihood.
The whistle blower – a subversive spy or responsible corporate citizen?
Whistle blowers have become controversial figures. On the one hand, they have been viewed as responsible corporate citizens sacrificing their careers and livelihoods to protect the public from unethical business practices. On the other hand, they have also been portrayed by some as traitors and troublemakers. Notable whistle blowers like Sherron Watkins, Cynthia Cooper and Coleen Rowley are being feted as champions of the public and were even awarded the “Time Persons of the Year 2002” and yet for every Sherron Watkins there are the Jeffrey Wigands associated with the ‘insider tobacco story’ and Roger Boisjolys of the Challenger – who were vilified by the press during their time.
True, the latter cases happened much earlier and that there is a palpable shift in perceptions relating to whistle blowing these days. However, here are some points to bear in mind. In real life,
- Such success stories are few and far between – they are the exceptions rather than the norm.
- Not all whistle blowers get their cause taken up or supported by the media and the public.
- Most people are at best ambivalent and at worst hostile towards a whistle blower.
- Those who do try to bring to light unethical or illegal practices by their employers are criticised, treated like outcasts, fired or find themselves and their family harassed.
- The prevailing view of the whistle blower within the corporate environment is that the person is a traitor to his/her colleagues and the company, a turncoat, a troublemaker and a spy.
Let us face it – it is not easy for the whistle blower to disclose information on the abuse, mismanagement or corruption that he/she believes is taking place within the work environment especially if the transgressors are people that he/she knows and works closely with. Undoubtedly, the whistle blower will face the struggle between acting in the public interest and the sense of loyalty to management and colleagues.
This struggle is heightened in an environment where the concept of overarching loyalty to superiors, colleagues and protection of the public image and reputation of the corporation is constantly re-enforced within the structures of the corporation. Whilst it may be useful for the organisation to inculcate a corporate culture where the organisation is viewed as a “team” or “family” for the purposes of increasing productivity and profitability and to effectively manage issues like compliance, integration and control, the downside is that it can alienate those who stand up to questionable practices. The general impression of a whistle blower thus becomes someone who is not a team player, who has the need for personal aggrandizement, or has a strong sense of paranoia.
It is not surprising therefore that experience shows that whistle blowers find themselves isolated from their colleagues and management, sacked, demoted, sued or otherwise victimised, usually for beach of confidence or for defamation.
Loyalty vs. whistle blowing
The situation can get more complex for example in Asia, where “loyalty” is a particularly strong value both within the office and outside. Our environment and culture is such that respect for authority is ingrained since young and re-enforced by the education system and traditions. It is important therefore that this sense of loyalty and respect of authority does not overshadow the more basic values – that of ethics and morality and the duty to be true to these principles.
We must work to reinforce acceptance of the fact that loyalty to employers stop when public harm becomes an issue. The employee has a higher responsibility, an ethical and moral duty to society to report an immoral act by an employer. This shift in approach involves a major change in corporate culture.
Let me reiterate the point I have made in previous talks. Ethics and morality are not just about refraining from doing the wrong thing but also about doing the right thing. In this context, an employee should not only refrain from committing a wrongdoing, but should not hesitate to report when a wrongdoing has been committed. Ethics is also about duty to society; it is about the obligation of individuals to others in the community they live in. Viewed in this context, whistle blowing is thus not so much about retribution against the transgressors but about society and protecting society from harm. It is also a part of a chain of actions that may lead dishonest individuals to recognise the harm that they do to others and ultimately to themselves.
What, in my view, is essential is for there to be a changes in mindset so that society recognises and accepts that everyone has a moral duty to say no when asked to do something inappropriate and to whistle blow on the transgressors. Whistle blowers act to expose a wrongdoing they feel need attention, because they believe that it is the correct and moral thing to do. It is only right therefore that whistle blowers be seen as responsible corporate citizens who have the fortitude and strength to stand up against the transgressions and their perpetrators.
Changing the mindset
The initiative to inculcate integrity and ethical considerations should be taken by all market participants be it on a micro as well as a macro level. The public and private sector must promote a system, which aligns profit-making activity with ethics and morality – it can be done.
The laws have been amended to afford the independent auditors and key officers protection when they whistle blow. Such legislation will help to de-stigmatise and provide legitimacy to whistle blowing. However, it is important that we recognise that whilst laws and regulations may protect whistle blowers who act in good faith from law suits and harassments, it cannot regulate mindsets, nor can it regulate ethics and morality. It is impractical for the regulator to prescribe a full-scale ethical code for the market. The role of law and regulation in this field is to provide a level playing field so that all players are treated fairly. The laws also have to ensure that there is fairness and equity without stifling the market and impeding competitiveness.
Thus while legislation provides an important back stop, civil society have an important role to play to support the implementation of legislation. Professionals must be made to realise that, in certain circumstances, they must whistle blow even if it seems disloyal to do so. Accountants have a statutory and fiduciary responsibility to report certain illegal or potential harmful activities if they encounter them in the course of their auditing. This obligation comes from their professional status and from a moral and ethical human duty to prevent harm to others. Thus I would venture the view that the moral obligation to blow the whistle on colleagues who violate canons of appropriate behaviour does not just apply to accountants but all professionals including financial services professionals and lawyers who have obligations to their profession and the public.
Training and education
One of the ways in which awareness and the sense of public duty can be heightened is through training and education. It is essential that awareness of legislation on whistle blowing be enhanced, and advice and training provided on making whistle blowing procedures effective. In this respect, MAICSA and other similar associations and organisations must continue with these conferences and other training programmes not only to enhance awareness of legislation and provide guidance on acceptable procedures and practices for whistle blowing, but also to facilitate a change in culture by promoting ethical behaviour and creating awareness amongst the professionals – not just on their legal obligations but also their moral duties that accompany their position and power.
In addition, more effort must be made to train middle and upper managers so that they may play a key role in communicating ethical awareness within their respective organisation and the industry at large. From there on, steps can be taken to develop structures that foster ethical conduct and institutionalise ethical practice.
Leading through example
In this endeavour, the role of the CEO cannot be over-stated. CEOs must lead the way, and indeed they have a duty to do so, by ensuring that ethics pervades the working environment to such an extent that it becomes the culture of the organisation. They can do this by demonstrating ethical leadership through example. Captains of industry are in a position to shape a strong ethics message that focuses industry on values and ethical conduct and to infuse corporations with principles that will guide the action of all within that environment. The benefits of an ethical corporate culture must not be underrated, for the corporation’s culture is what determines how people behave when they are not being watched.
Companies to make it conducive for wrongs to be reported
Ladies and gentlemen
Companies must make it conducive for wrongdoings to be reported. It is important that companies demonstrate their legitimatisation of whistle blowing in the workplace by establishing structures and systems that facilitate the reporting of wrongdoing. This would include developing internal grievance procedures, encouraging and rewarding use of these procedures, appointing senior executives to be responsible for investigating and reporting wrong doing and imposing punitive sanctions for wrongdoing. Disciplinary procedures should make it clear that harassing or victimising a whistle blower is considered a serious misconduct which will subject the perpetrator to disciplinary proceedings.
Organisations are also encouraged to provide a secure environment in which whistle blowers will feel safe discussing their suspicion. Very few employers are willing to do so, not surprising, since whistle blowers rarely bear good tidings for a company’s share price. Yet in the end, they the whistle blowers save their companies far more than they cost.
In conclusion, it should be reiterated that whistle blowers are responsible corporate citizens who have the courage to do as their conscience dictates. However, they face huge risks of reprisals as a result of their actions. To this end, securities laws have been amended so that auditors and key officers dealing with the company’s financial reports who whistle blow will be afforded protection against any retaliation arising out of their action. But the challenge for all of us is to create the conditions where all who wish to, can become actively involved, can understand and participate, can influence, persuade, campaign and whistle blow.
As regulators, while we acknowledge that practical realities do not yet allow us to impose a statutory duty on everyone to whistle blow, we hope that the new provisions will encourage those who are privy to malfeasance to listen to their conscience and speak out against such wrongs.
This notwithstanding, the point must be emphasised – there are limitations to the law; law cannot regulate ethics and morality nor can it force mindsets to change and yet this is what is needed most. The many financial debacles that have taken place recently are testament that there is a great void of ethical behaviour in today’s business world.
Therefore, it is important that there is a concerted effort by all – the public as well as the private sector to emphasise on ethics and morality. Companies must make it clear to employees that unethical behaviour will not be permitted; and ensure that there are adequate mechanisms to deal with whistle blowing effectively.
The point must also be made that revelation of wrongdoing within organisations cannot be left only to whistle blowers. Defences against fraud and other wrongdoing need to be all-round, interlocking and in-depth. The key to this is good corporate governance and above all, sound ethical behaviour.