Tales of Caldbeck, Kalanick, Tejpal, Murthy… Breaking the Bro-Code

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The heat generated by the ubiquitous bro-code and sexism that became part of Uber’s culture is yet to cool down, and we are hit by another tale of sexual harassment in the savvy Silicon Valley. Well known venture capitalist, Justin Caldbeck of Binary Capital has proceeded on an indefinite leave after several female entrepreneurs came out with details of advances made by him.

Is sexual harassment on the rise? Perhaps not — this is a deep-rooted issue that has marred working women in a patriarchal society for a very long time. With the advent of social media and legislation of supportive laws against sexual harassment, working women are better placed now to talk about it.

The Venture Capital and Private Equity industry has had its fair share of involving sexual harassment at workplace. In the recent past itself, Benchmark, the Silicon Valley-based Venture Capital firm, and Fidelity Investments sought resignation of Travis Kalanick for failure to take necessary measures at Uber.

Unfortunately, India is not far behind. Several incidents have come to light in the past few decades, including involving Senior IPS Officer KPS Gill, former Infosys senior executive Phaneesh Murthy, claims of an intern against Supreme Court judge Justice AK Ganguly, TERI ex-chairman RK Pachauri, and the infamous ex-Tehleka chief Tarun Tejpal.

The venture capital and private equity industry in India itself has seen a number of episodes ranging from departure of Phaneesh Murthy from Apax Partners-backed iGATE Corporation, stepping down by The Viral Fever (TVF)’s CEO Arunabh Kumar, a company backed by Tiger Global, to FIR against Kalaari Capital backed ScoopWhoop’s founder Suparn Pandey.

Venture capital and private equity investors take a great degree of care prior to making investments in their portfolio companies, and employment agreements with key employees are extensively negotiated. “Misconduct” of any kind can lead to termination of employment of key employees. Such protections are not pre-emptive in nature.

While extensive diligence is undertaken to look into issues of money laundering and ethical practices, it is time for investors to evaluate culture prevalent at portfolio companies and do a thorough key-men diligence.

The need is for affirmative action from investors, companies and all its stakeholders to comprehend seriousness of this issue. Not only such incidents increase reputational risk for all stakeholders, it may erode value in fairly quick time (especially for start-ups which anyway have to deal with several other survival issues).

In my view, the biggest challenge is to overcome the sheer insensitivity towards sexual harassment, and continuing with the bro-code that has seeped deep into our patriarchal society.

Law may not be, but gender diversity could be, the answer here.

Author is a Partner at Khaitan & Co, one of India’s premier law firms. Views are personal.

If you don’t like it, say (and record) it!

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Refuge under law for non-executive directors possible only when they act with prudence.

Private equity is not just another source of capital for companies but it also thrives on the experience that general partners bring to portfolio companies. One of the common ways to add value by general partners is through nomination of persons who have experience in relevant sector or business nominates as directors to the board of directors of portfolio companies. Such directors are typically non-executive.

Extensive literature can be found on the question of liability of non-executive directors. Knowledge or connivance are core elements to implicate non-executive directors for their actions or omissions.

3 recent orders passed by Securities and Exchange Board of India (SEBI) and Securities Appellate Tribunal (SAT) brings to the fore significance of such non-executive directors acting with prudence.

In April 2016, SAT found 2 independent directors of Edserv Softsystems (BSE: 533055) guilty for suppression of material facts and misstatements made in the prospectus of its initial public offering. Ignoring submissions of the independent directors that they were not liable for acts of the management that was not brought to their notice through board process, SAT (while observing that these directors were members of the audit committee as well as signatories to the offer documents) temporarily barred them accessing capital markets.

In another order passed by the SEBI on 2 June 2017, a non-executive director of Newland Agro Industries (who claimed to have resigned during non-compliant capital raising processes run by Newland Agro Industries) was held liable to refund the capital, along with interest, to the subscribers. SEBI relied on the Madras High Court’s decision in Madhavan Nambiar (2002 108 Comp Cas 1 Mad) and, in context of duty of a director to act diligently, noted that “…there is no difference or distinction between whole-time or part time director or nominated or co-opted director and the liability for such acts or commission or omission is equal.

As much it is the fiduciary duty of a director to act in the best interest of the company, it is equally important a duty of a director (and in particular of non-executive or independent directors) to record her or his dissent. This vital principle came to the rescue of two independent directors of Zylog Systems (BSE: 532883) who SEBI very recently (20 June 2017) exonerated from liability for non-payment of dividend. Even though one of the independent directors was the chairman of the audit committee of Zylog Systems, the directors not only resigned soon after becoming aware of the non-compliance but, even prior to their resignation, had expressed their dissent with request to take appropriate steps.

Considering the way jurisprudence is evolving in India, it is critical for non-executive or independent directors now than ever before – if you don’t like it, say (and record) it!

Author is a Partner at Khaitan & Co, one of India’s premier law firms. Views are personal.