Non-disparagement pact: Transparency, corporate governance norms may be hit

The practice of companies entering into non-disparagement pacts with departing board members is raising questions related to transparency and breach of corporate governance norms for corporate India.

Non-disparagement pacts are not inherently illegal and mostly visible in severance agreements and commercial contracts that involve senior executives, say HR experts. But presence of these provisions display a rising trust deficit between companies and departing directors, say proxy advisory firms.

IT bellwether Infosys Ltd disclosed in its 2018 Annual Report that it had entered into non-disparagement pacts with three former board members, including former chief executive Vishal Sikka, as part of their exit agreements.

However, proxy advisory firms and legal experts are divided over the impact of non-disparagement agreements on transparency and corporate governance norms. “A pact of this nature is not in the broader interest of transparency, especially for Infosys,” says Hetal Dalal, chief operating officer, Institutional Investor Advisory Services. According to J N Gupta, managing director, Stakeholders Empowerment Services, another proxy advisory firm, such pacts are not good from a governance perspective. “There is an in-built feeling that something is wrong. The director entering into such a pact is unlikely to be a whistleblower, unless forced by law,” he says.

However, Shriram Subramanian, managing director, InGovern, does not feel that such pacts run afoul of corporate governance practices. “A non-disparagement clause restricts individuals from taking any action that negatively impacts an organisation, its reputation, products, services, management or employees,” says Subramanian. A non-disparagement clause does not prevent an ex-director from discussing issues with regulators if there is any regulatory investigation, he adds.

Legal experts point out that that the idea behind the clause is to protect both the company and the director from reputational risk. “This provision is yet to be tested by the courts for whether it is against public policy,” says Kalpana Unadkat, partner at law firm Khaitan & Co.

Some legal experts feel that non-disparagement contracts may not be enforceable vis-à-vis corporate governance principles. This is more so where there are restrictive clauses that prevent an employee from disclosing malpractices, true information or even information that is for public good. “A clause that is so restrictive will be against corporate governance principles and cannot be upheld, either under civil or criminal law,” says Rajesh Begur, managing partner, ARA Law.

An ex-director could still choose to be a whistleblower for actions or non-compliance during his or her tenure as a director. “However, safeguard mechanism provided to whistle blowers under the Companies Act, 2013 may not be available to an ex-director,” points out Unadkat.

Begur say an ex-director who wishes to become a whistleblower may do so under the vigil mechanism policy of the Securities and Exchange Board of India (Sebi) under the Listing Obligations and Disclosure Requirements. “The company is obligated to protect such a person against victimisation,” he adds. However, legal experts agree that in India the whistleblower mechanism is not as well developed or tested as that in developed jurisdictions.

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