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THEIR FAILINGS, OUR LEARNINGS

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LEGALITY AND PROPRIETY

Context:

Fit and proper is not an empty phrase when it comes to Corporate Governance, as can be seen in the case of this large FMCG company. Hiding behind technicalities is never the best response to the issue of reputational risk. Was the Board’s decision appropriate?

  • A Promoter-Non Executive Director (NED) of an FMCG company was given a two-year prison sentence for possession of cannabis (drugs) in Japan, although the execution of the sentence was suspended for a period of five years.
  • In response to a clarification sought by the Stock Exchanges, the Company stated that it had, at the instance of the Independent Directors (IDs), sought a legal opinion over his continuation.
  • There were questions raised by investors too on the suitability of his continuing as a Director, especially since the sentence had only been suspended, and the conviction remained. There were some stakeholders who also stated that the Director should step down on moral grounds.
  • It was alleged that the IDs met the Director one-on-one, without the presence of any other promoter or management person, post the happening.
  • Following a Show Cause Notice from SEBI, the Company entered into a settlement for not making timely public disclosure of this news, including reporting it to the Stock Exchanges. The Company, along with two other listed companies, where the Promoter Director was a Board member, paid a settlement.
  • The Annual report did not mention this incident.
  • The Company finally stated that there was no question of disqualification/ vacation of office of the Director since the matter related to a Court outside the territory of India, and since the sentence has been suspended, and is without effect. It also stated that he would continue to be a Promoter Director as the Company did not involve itself with the personal litigation and affairs of its directors, employees and promoters.
  • The Code of Conduct for NEDs, published on the website of the company, mentioned that “Each director is urged to read this document and take pride in upholding the high standards of corporate and personal behaviour on which the company’s reputation and respectability have been built over the past 86 years”.