Capitalism needs to have one very basic element in place if it is to thrive. That is, security of and faith in property rights. Investors, the lifeblood of a capitalist economy, need to feel completely secure that what rightfully belongs to them will remain with them. And not be taken away from under their nose by the very fiduciaries who are entrusted with protecting their assets.
To encourage this confidence is one of the most important jobs of authorities and regulators. The US Securities and Exchange Commission (SEC) made a very smart move recently in this regard. Some sweeping Wall Street reforms became law in the country last month. As part of that, it has put in place significant new financial incentives for securities fraud whistleblowers.
A whistleblower is any informant who exposes wrongdoing within an organization. He can be part of that very company, or even outside it. Whatever may be the case, the point is to encourage people to come out and report to the authorities any wrong doing that they may come across. People seldom do that. And it would be a huge boost to a capitalist economy if people did.
The US is now expecting employees and managers across various levels to come out more frequently and expose any unethical or illegal activities in a company. To achieve this, people who provide original information that leads to a successful SEC enforcement action will now be entitled to quite an attractive sum of money. The figure can go up to 10% to 30% of any penalties collected over US$1 m. They will also get a share of the proceeds from any related regulatory action.
Recent settlements of SEC actions have been to the tune of up to US$ 800 m. This translates into an extremely large incentive for someone to come out and tip off the SEC. The SEC has also publicly stated that the scale of the awards reflect the high quality of whistleblowers they hope to get. Even members of the top management of companies coming forth cannot be ruled out anymore.
It would not be way of the mark to think that many of the irregularities that caused a credit boom and bust of such magnitude could have been avoided. If such a rule were already in place that is.
Our very own regulator SEBI has been quite aggressive in making the financial industry more investor friendly recently. It would indeed be a smart move for it to extend something similar in the Indian context.