Enhancing Malaysia’s whistle-blowing provisions

By | April 30, 2014

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Executive summary

The Malaysian government, in its pursuit to forge higher ethical values among organizations and achieve the Vision 2020, has placed more efforts to ensure that proper mechanisms are in place to reduce corruption or failure in corporate governance through the various efforts that include the release of the Whistleblower Protection Act 2010 to promote the high ethical standard through encourging the employees to blow the whistle and necessary reward and protection has been wrriten in the act to ensure the viability of the new legislations. This research paper will focus on reviewing the relaltionship between corporate govenance and whistle blowing and also there is a careful and critical examination of the relevant acts and clauses regarding the whistleblowing behaviors in the Malaysian legal system.  
Table of contents

Table of contents 2
1. Introduction: basic concepts 3
1.1 Corporate governance 3
1.2 Whistle blowing 3
2. Literature review on corporate governance & whistle blowing 4
2.1 Whistle blowing as voice of unhappiness 4
2.2 Whistle blowing and legislation environment 4
2.3 Whistle blowing promotes integrity and corporate social responsibility 5
2.4 Whistle blowing and national cultural dimensions 6
3. Challenges of whistle blowing in Malaysia: Cultural avoidance of whistle blowing in Malaysia 7
4. Legislation of whistle blowing behaviors 8
4.1 Legislations before the Whistleblower Protection Act 2010 8
4.1.1 Companies Act 1965 (Act 125) 8
4.1.2 Capital Markets & Services Act 2007 (“CMSA”) 8
4.2 Whistleblower Protection Act 2010 9
4.2.1 Provision of legal protection to whistleblowers 9
4.2.2 Rewards and penalties 9
4.3 Critics over the WPA 2010 10
4.3.1 Narrow definition of whistleblower 10
4.3.2 Obscure rewarding system 11
5. Concluding remarks and recommendations 12
List of references 14

Enhancing Malaysia’s whistle-blowing provisions
Critical thinking of the Whistleblower Protection Act 2010 (Act 711)

1. Introduction: basic concepts

1.1 Corporate governance

Organisation for Economic Co-operation and Development (OECD), an international organisation helping governments tackle the economic, social and governance challenges of a globalised economy, provides a classical definition of the term corporate governance that it could be referred as the private and public institutions, including laws, regulations and accepted business practices, which together govern the relationship in a market economy, between corporate managers and entrepreneurs on one hand while those who invest resources in corporations, on the other (Fernando 2006, p. 12). The topic of corporate governance has received increased attention in the recent years in Malaysia as companies are becoming more and more internationalized and access the corporate governance related information has become an increased demand from the key stakeholders of companies, in particular those large public listed firms involves broad interest groups. Though the concept of corporate governance seems to be new, its relevant issues are actually not all new to us, in this paper we focus on the issue of whistle blowing.

1.2 Whistle blowing

Whistle-blowing refers to an employee’s informing the public about the illegal or immoral behavior of an employer or organization. Whistle- blowers frequently act out of a sense of professional responsibility (Shaw 2011, p. 406). While whistle blowing behaviors seem to be a conflicting issue since it on one hand requires the employees to “betray” the company to be contribute to the better corporate governance. In the following, we will discuss about the relevant issues of corporate governance and whistle blowing.

2. Literature review on corporate governance & whistle blowing

2.1 Whistle blowing as voice of unhappiness

Bovens (1998, p. 174) suggested that whistle blowing could be considered as a kind of civil disobedience and the management could be very unhappy with it. Bovens claimed that when whistle blowing such as an employee denounces some of the his or her company’s policies in public through any forms such as writing a book, it is actually a kind of reflection of his or her disappointment over the company’s certain behaviors or decisions. Together with this kind of unhappiness, some cost will be caused. The most direct and immediate cost is the breaking of the royalty between the employees and the companies. From the perspective of the company, if one employee expresses his or her unhappiness outside the company, there will be a natural sense of being betrayed perceived by the members in the company. And when the royalty is being broken down, corporate governance will certainly be affected to some extend. And from the perspective of the whistleblowers, they also suffer personal loss. According to Marek Arszulowicz and Wojciech Gasparski (2011, p. 89) whistleblowers always suffer from the serious threat of salary reduction, loss of chance of promotion, discrimination within the industry and even the loss of the job. Therefore, the behaviors of whistle blowing as the voice of unhappiness in most cases are not based on economic considerations but rather ethical and moral considerations.

2.2 Whistle blowing and legislation environment

Any whistle blowing actions happen in the specific legislation systems, in every case, the whistle blowing legislation will set in place different requests for agency-level procedures and different frameworks for securing or enhancing the likelihood of agency compliance (Brown 2008, p. 235). For example, as mentioned above there are various bad consequences that may come together with the whistle blowing behaviors to the whistle blowers, therefore if there should be insufficient laws and regulations protection the whistle blowers from these possible losses, it would actually transmit the information to the society that whistle blowing is a choice to disclose rather than a legal obligation.

2.3 Whistle blowing promotes integrity and corporate social responsibility

By recalling the definition of whistle blowing which refers to an employee’s informing the public about the illegal or immoral behavior of an employer or organization we can see that whistle blowing behaviors are in accordance with the individual ethical and moral requirements that promote personal integrity. As for the corporate social responsibility which is the obligation of an organization to behave in ethical ways in the social environments in which it operates. According to Debra L. Nelson,James Campbell Quick (2011) employees’ individual ethical behaviors could be translate to corporate social responsibility in an organizational level. And based on the views of Samuel O. Idowu and Walter Leal Filho (2009, p. 87), corporate governance is a critical factor for securing the corporate social responsibility effectiveness and efficacy. For example, the well established corporate social responsibility (CSR) structures and functional department such as the CSR board committees and annual CSR reports as well as the monitoring function of the companies will help ensure the CSR behaviors are well and clearly managed by the certain responsible departments and persons.

2.4 Whistle blowing and national cultural dimensions

Professor Geert Hofstede conducted one of the most comprehensive studies of how values in the workplace are influenced by culture and he formed the famous model researching the national cultural systems: the Hofstede’s Five Cultural Dimensions. The five national cultural dimensions are: Power/Distance (PD), Individualism (IDV), Masculinity (MAS), Uncertainty/Avoidance Index (UAI) and Long Term Orientation (LTO). And he provides a definition of culture as “Culture is the collective programming of the mind distinguishing the members of one group or category of people from others” (Geert-hofstede.com 2011). Though Professor Geert Hofstede did not directly research into the issue of whistle blowing, his model is widely applied in many of the relevant studies aiming at looking for explanations of the different ideas over the whistle blowing behaviors.

According to the findings of Terry Halbert and Elaine Ingull (2009, p. 76), among the five cultural dimensions Power/Distance (PD) and Individualism (IDV) are closed related to the to the behaviors and performance of the whistle blowing, national cultures with a high score in the dimension of Power/Distance (PD) and a lower score in the dimension of Individualism (IDV) will tend to avoid or discourage whistle blowing behaviors. On one hand, cultures with a high score in the dimension of Power/Distance (PD) will tend to accept highly unequal distribution of power and interest and they tend to obey the direction from the upper management and authorities. On the other hand, national cultures with a lower score in the dimension of Individualism (IDV) will tend to be responsible and care for the group as the members of the group. This rationality may help us to apprehend why western countries such as the US and Australia are among the first countries to have whistle blowing legislation and in the end it also explains why whistle blowing is not well accepted in some countries such as Japan and Malaysia, and the relationship between whistle blowing and national cultural system in Malaysia will be elaborated in the next part of the study.

3. Challenges of whistle blowing in Malaysia: Cultural avoidance of whistle blowing in Malaysia

Chart 1 Malaysia and Australia in cultural dimensions

As demonstrated in the chart above, in term of the power distance Malaysia scores a very high mark of 104 in this dimension indicating that in Malaysia power inequality and centralization could be accepted and people accept the hierarchical order without the necessity of further explanations. The 104 score is much higher than that of Australia. Another extreme could be found in the next dimension: the Individualism (IDV). The score of Malaysia is 26 while in contrast the score is as high as 90 in Australia. Since the features of the culture with high individualism are mainly referring to the focus of individual interest and protection of the immediate families, and people in the individualist societies like Australia would challenge the group because it is their interests or their rights to do so. Contrasting facts would be found in Malaysia in which group interests are more important and in particular loyalty in this collectivist culture is paramount and overrides most other societal rules and regulations. And together with an extremely high score in the dimension of Power/Distance (PD), it is understandable that there is actually cultural resistance of whistle blowing behaviors in Malaysian cultural system which accepts and respects power (the management of the company in the business sector).

4. Legislation of whistle blowing behaviors

4.1 Legislations before the Whistleblower Protection Act 2010

4.1.1 Companies Act 1965 (Act 125)

Section 368B(1) CA 1965 provides that an officer of a company who has reasonable belief of any matter which may or will constitute a breach of CA 1965 or its regulations may report the matter in writing to the Registrar of Company (’Registrar‘). The company (officer’s employer) is prohibited by Section 368B(2) from removing, demoting, discriminating or interfering with the officer’s lawful employment due to the report that he made to the Registrar (ipedr.com 2009).

4.1.2 Capital Markets & Services Act 2007 (“CMSA”)

The whistle-blowing provisions in the Securities Industry Act amendments involve the disclosure of information to the relevant authorities by auditors and specific employees of a public-listed company who in the course of carrying out their duties, discover any breaches of the securities laws or the rules of the stock exchange or any matter which may adversely affect, to a material extent the financial well being of the listed corporation (sc.com.my 2009).

The whistle blowing provisions in Malaysia as provided in the CMSA 2007 generally apply to breaches of securities laws and stock exchange rules. The whistle blowing provisions are also confined to the auditor and specific employees of public-listed companies. Whistle blowing under Section 320 and 321 of the CMSA involves the disclosure of information to the relevant authorities by auditors and specific employees of a public-listed company. Unlike in other jurisdictions, the whistle blowing provisions do not explicitly use the term “whistleblower” (mia.org.my 2009). Therefore while the Capital Markets & Services Act 2007 did mandate the said staffs or auditor to disclose the misconducts identified during their professional work under duty, it does not impose any mandatory requirement to other employees.

4.2 Whistleblower Protection Act 2010

4.2.1 Provision of legal protection to whistleblowers

Whistleblower Protection Act 2010 (clause 7 to 10) provides the legal protection of the whistleblowers in three major ways: 1) protection of confidential information; 2) immunity from civil and criminal action; and 3) protection against detrimental actions. First of all, any person who initiates or receives the disclosure of the improper conduct or is exposed with the confidential information during the investigation should not disclose the relevant confidential information to any party (the issue about this regulation regarding prohibiting the whistleblower to disclose the event to other parties will be elaborated in the critics part); secondly, the whistleblower should be immune from any civil or criminal liability and also no actions should be done to go against the whistleblower’s decision to report the misconduct; thirdly, any detrimental actions against the whistleblower in reprisal for the reporting of the misconducts should not be taken including those from the enforcement body.

4.2.2 Rewards and penalties

Regarding the offence of the Whistleblower Protection Act 2010, clause 25 states that “any person who commits an offence under this Act which no penalty is expressly provided shall, on conviction, be liable to a fine not exceeding twenty thousand ringgit or to imprisonment for a term not exceeding five years or to both”; and in term of the rewards which both the public and the whistleblower have concerned a lot, any disclosure of improper conduct or any complaint of detrimental action in reprisal for a disclosure of improper conduct that result in the detection of misconduct or detrimental action against whom the disclosure of misconduct was made to. But the standard to justify an action that deserves a reward and how the reward is given is not mentioned in the act and we will further this topic in the following part.

4.3 Critics over the WPA 2010

4.3.1 Narrow definition of whistleblower

Many critics are focusing on the lack of whistleblower protection over those who blow the whistle to the public and social media rather than to the “enforcement agency”. The definition of whistleblower in the WPA 2010 clearly states that “whistleblower” means any person who makes a disclosure of improper conduct to the enforcement agency under section 6. And the enforcement agency includes only ministry, department, agency or other bodies established by a Federal law or State law with investigation and enforcement functions. But as we have mentioned, whistle blower refers to those inside the company who inform the public about the illegal or immoral behaviors of an employer or organization. Therefore the legal definition of the term whistle blower has actually been narrowed. To explain this, Deputy Minister in the Prime Minister’s Department Datuk Liew Vui Keong answered: “We have to distinguish the matter involved in Balasubramaniam and Raja Petra’s case. They are not whistleblowers because they re­­vealed their identity. They told the world who they were. A whistleblower is someone whose identity we don’t know” (whistleblowersblog.org 2010). And apparently, this explanation is very reluctant for two major reasons: fist of all, the whistleblower protection should be designed to protect those who are exposed to the relevant risks and revenge actions from the management of the company as well as discrimination, and obviously those who blow the whistle to the public will be more in need of such protection than those who report the misconducts anonymously; secondly, as we can learned from the experiences in the major western countries such as in the Unites States, public whistle blowing is probably the most effective and efficient way to uncover the misconducts in particular when the companies are too large and they have good relationship with the government forces and may possibly cover up the scandal even though some departments of the government already have noticed about the possible misconducts.

4.3.2 Obscure rewarding system

Though the Whistleblower Protection Act 2010 does provide the permission for the enforcement agency to offer rewards to the whistleblowers under some circumstances, but there are also critics over this rewarding system. And these critics are majorly coming from a comparison made between the Malaysian whistleblower protection act and that in the US. Under the Dodd-Frank Wall Street Reform Consumer Protection Act (Dodd-Frank or the Act), whistleblowers are protected from retaliation and are eligible for an award of between 10 percent and 30 percent of the total monetary award recovered by the SEC if it imposes a sanction exceeding $1 million (pepperlaw.com 2010). In comparison, there are several drawbacks of the current Whistleblower Protection Act 2010. First of all, no specific amount of the reward is mentioned in the act regarding how the reward will be calculated (certain amount or percentage of the total monetary award recovered by then enforcement agency); secondly, the WPA 2010 does not clearly specify which governmental department or unit will be in charge of the release of the reward once the reward is granted; thirdly, the WPA 2010 is rather obscure and general in identifying an action which should receive relevant rewards and the act only generally talks about that the enforcement agency could award such rewards if the disclosure of the misconduct could result in the detection of misconduct or detrimental action against whom the disclosure of misconduct was made.

5. Concluding remarks and recommendations

There is no doubt the pass of the WPA 2010 remarked the progress in protecting the whistleblowers and also in encouraging the employees at any level to monitor and disclose the relevant misconduct according to the guideline stated in the act. There are two major benefits with the pass of this act: on one hand, it enhances the social justification of the whistle blowing behaviors which are rare in Malaysia, a country with high power distance and low level of individualism in a legal manner that brings forward the message that it is a legal requirement with relevant protection rather a voluntary option that might be taken; secondly, whistle blowers are protected against detrimental actions to ensure that the whistle blowers would not need to worry about the consequences that may come together with the whistle blowing behaviors.

But critics also suggest that there are deficiencies in the act. First of all, the coverage of the whistleblower definition is too narrow and the conditions to provide whistle blower protection is too strict as it exclude those who disclose the events to social and public media; secondly, the legal rewarding mechanism in the WPA 2010 is not clearly stated and it will discount the attractiveness of the reward to the potential whistle blowers. Taking into consideration of the Malaysian cultural system shows some resistance of the whistle blowing behaviors because of the high power distance and focus of the group interest rather than individual interest, below are three recommendations for the further improvement of the WPA 2010 to encourage and better protect the whistle blowing behaviors:

First of all, certain protection should be offered to whistle blowers who choose to disclose the misconducts under his or her name rather than being in an anonymous manner. This kind of protection could be conditioned and could be less than that enjoyed by those who report to the enforcement agency. This change will at least acknowledge the whistle blowing behaviors under different ways while at the same time still encourages the whistleblowers to turn to the enforcement agency where they will receive the best protection as stated in the act; secondly, the government could set up a fund to be in charge of the release of the rewards while at the same time clearly states the amount and how the amount would be calculated to be reward to the whistleblowers under specified conditions; thirdly, promotion of the whistle blowing behaviors should be more effective if the government tries to invest in the promotion of a more open and free business environment to reduce the impact of the high power distance national culture.  
List of references

Arszulowicz, M. & Gasparski, W. 2011, Whistleblowing: In Defense of Proper Action. New Jersey: Transaction Publishers. p. 89

Brown, A. J. 2008, Whistleblowing in the Australian Public Sector. Canberra ACT: Australian National University. p. 235

Fernando, A. C. 2006, Business Ethics And Corporate Governance. New Delhi: Pearson Education India. p. 12

Geert-hofstede.com 2011. National cultural dimensions. Accessed on 30 May 2012 [online] http://geert-hofstede.com/national-culture.html

Halbert, T. & Ingull, E. 2009, Law & Ethics in the Business Environment. Natrop Boulevard Mason, OH: South Western Cenage Learning. p. 76

Idowu, S. O. & Filho, W. L. 2009, Professionals ́ Perspectives of Corporate Social Responsibility. New York: Springer. p. 87

ipedr.com 2009 Adequacy of Employee Whistleblower Protection (EWP) in Malaysia. Accessed on 30 May 2012 [online] http://www.ipedr.com/vol5/no2/9-H10073.pdf

mia.org.my 2009. Auditors and the Whistleblowing Law. Accessed on 30 May 2012 [online] http://www.mia.org.my/at/at/2009/04/04.pdf

Nelson, D. L. & Quick, J. C. 2011. Organizational Behavior: Science, the Real World, and You. New Jersey: Cengage Learning.

pepperlaw.com 2010. Whistleblower Provisions of the Dodd-Frank Act Clarified by the SEC’s Proposed Rules. Accessed on 30 May 2012 [online] http://www.pepperlaw.com/publications_update.aspx?ArticleKey=1937

sc.com.my 2005. AMENDMENTS TO SECURITIES LAWS. Accessed on 30 May 2012 [online] http://www.sc.com.my/main.asp?pageid=353&menuid=&newsid=&linkid=&type=

Shaw, W. H. 2011, Business Ethics: A Textbook with Cases. Boston: Cengage Learning. p. 406

whistleblowersblog.org 2010. Malaysia passes limited whistleblower protection. Accessed on 30 May 2012 [online] http://www.whistleblowersblog.org/2010/04/articles/legislation/international-1/malaysia-passes-limited-whistleblower-protection/