Whistleblowing: Developments and Implementation Issues

1
Whistleblowing Developments and Implementation
Issues
Institute of Internal Auditors Annual Conference,
7 October 2005

• A/P Mak Yuen Teen
• Co-Director, Corporate Governance and Financial
  Reporting Centre

Powerpoints downloadable from www.cgfrc.nus.edu.sg
2
Introduction

• "For those who argue that employees owe strict
  loyalty to the company, whistleblowing seems to
  be an act of extreme disloyalty. It puts at risk
  the reputation of the firm. But this seems to be
  based on a narrow view of loyalty as if it
  demands that we do whatever the company or
  another individual believes to be in their best
  interest...Loyalty cannot imply that we should
  not report the unethical conduct of others...
  This may imply for an employee that he or she is
  most loyal when trying to prevent something that
  could lead to harm for customers, shareholders,
  or the general public. If there is no proper
  response internally, or if by the nature of the
  case, it is not possible to find an internal
  remedy, then it would seem ethically correct to
  blow the whistle. In fact, sometimes there can be
  a duty to do so. It would be obligatory for an
  employee to blow the whistle when the level of
  harm to others is serious, and the employee has
  clear evidence of the unethical practice that has
  led to this. This could, for example, be in terms
  of product safety or severe financial hardship
  for others.
• Michael Walsh, "Whistleblowing betrayal or
  public duty?," http//www.erc.org.au

3
Introduction

• "If you have God, the law, the press and the
  facts on your side, you have a 50 chance of
  defeating the bureaucracy
• As quoted in Joanna Gualtieri, "When the whistle
  blows," Corporate Governance Quarterly, Spring
  2005.

4
Introduction

• A broad definition of whistleblower
• one who reveals wrongdoing within an
  organization to the public or to those in
  positions of authority (Answers.com)

5
Introduction

• Whistleblowing arrangements increasingly seen to
  be an important component of the corporate
  governance framework of an organisation
• Why? Surveys and recent corporate scandals show
  that more frauds are uncovered through reports
  made by whistleblowers than through activities
  such as internal audits

6
Introduction

• The importance of whistleblowing is increasingly
  recognised
• legislation to protect whistleblowers (e.g.,
  Public Interest Disclosure Act 1998 in U.K.
  Sarbanes-Oxley Act 2002 Securities Industry Act
  amendments in Malaysia)
• legislative provisions mandating whistleblowing
  by certain individuals (e.g., the auditor under
  Singapore and Malaysia Companies Act auditor
  under Malaysia Securities Industry Act)

7
Introduction

• rewards for whistleblowers by government agencies
  or other organisations (e.g., IRAS, Business
  Software Alliance)
• corporate governance codes (e.g., U.K.,
  Australia, Singapore)
• companies codes of ethics/conduct encouraging or
  even imposing a duty on employees to report
  breaches

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Corporate Governance Codes and Whistleblowing

• The AC should review arrangements by which staff
  of the company may, in confidence, raise concerns
  about possible improprieties in matters of
  financial reporting or other matters. The ACs
  objective should be to ensure that arrangements
  are in place for the independent investigation of
  such matters and for appropriate follow up
  action.
• (Revised Singapore Code, Guideline 11.7)

9
Codes of Conduct and Whistleblowing
Source BP Code of Conduct
10
Codes of Conduct and Whistleblowing
Source BPs Code of Conduct
Source Qantas Code of Conduct
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Directors Duties and Whistleblowing

• S.157. (1) A director shall at all times act
  honestly and use reasonable diligence in the
  discharge of the duties of his office.
• S. 157C(1) - Use of information and advice

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Directors Duties and Whistleblowing

• S. 157C(2) - Subsection (1) shall apply to a
  director only if the director
• (a) acts in good faith
• (b) makes proper inquiry where the need for
  inquiry is indicated by the circumstances and
• (c) has no knowledge that such reliance is
  unwarranted.

13
Proposed SGX Rule Changes

• Proposed change to SGX Listing Rule 705
  directors to provide confirmation that, to the
  best of their knowledge, nothing has come to the
  attention of the board of directors which may
  render the interim financial results to be false
  or misleading.
• Proposed change to SGX Listing Rule 710 nothing
  has come to the attention of the Board and CEO
  with regards to internal controls that would have
  a materially adverse effect on their company

14
Key Considerations in Implementing
Whistleblowing

• How to submit complaints and who to submit to
  (e.g., legal/compliance, audit committee,
  external hotlines)
• Improprieties which are covered (accounting
  irregularities, theft, fraud, corruption/dishonest
  y, harassment, unethical behaviour, improper
  conduct, workplace safety hazards, breaches of
  legislation)
• Investigation, follow up and reporting procedures

15
Key Considerations in Implementing
Whistleblowing

• Types of prohibited reprisals (e.g.,
  discrimination, harassment, intimidation,
  demotion, termination, etc.)
• Policy regarding whistleblowers immunity from
  disciplinary proceedings and civil/defamation
  claims

16
Whistleblowing A Case Study

• Sequence of events
• Former manager informed Board Chairman about
  alleged wrongdoings involving potentially serious
  conflict of interest involving CEO. Alleged that
  she was forced out of company when she raised
  questions. Substantial evidence which appear to
  support her allegations was provided.

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Whistleblowing A Case Study

• Board agreed that the matter needs to be
  thoroughly investigated and appointed an
  Investigations Committee (IC) to oversee
  investigations, and to report and make
  recommendations to the Board
• range of initial reactions from Board members
• does duty of care compel the board to do a proper
  investigation?
• doing the right thing
• Board also approved appointment of an accounting
  firm to do an independent investigation and to
  report to IC
• Whistleblower was informed that her allegations
  will be investigated

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Whistleblowing A Case Study

• IC interviewed the CEO
• need to be handled sensitively to ensure natural
  justice is served
• Board may need to work with CEO again if
  allegations untrue
• need to decide status of CEO while investigations
  were proceeding (and contingency plans if
  necessary)
• Chairman briefed Heads (CEO allowed to continue
  working) before accounting firm commenced
  investigations

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Whistleblowing A Case Study

• IC and accounting firm prepared reports and
  presented findings to the Board
• Board approved list of questions prepared by IC,
  based on the findings, for CEO to address
• Second legal opinion sought in terms of actions
  that could be taken

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Whistleblowing A Case Study

• Special Board meeting was held to consider
  responses and make decisions on actions to take
  if any (plan A, plan B, etc.)
• what kinds of breach, if any (law? employment
  contract/code of conduct? good governance and
  management practices?)
• Board communicated findings and CEO resigned
• Interim management team appointed
• Whistleblower informed that CEO had resigned and
  case is closed

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Whistleblowing A Case Study

• Some follow-up issues
• Hire back the whistleblower?
• Review core values of company
• Review corporate governance and Code of Conduct
• Put in proper whistleblowing arrangements?

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Q A
Thank you!