The tone at the top dictates the Company's culture, and the Company's culture has a wide-ranging impact on its performance, valuations, and long-term sustainability. While the aggressive approach and risk-taking attitude of promoters and CEOs are often the cause for the bullish growth of a company, the same aggression can manifest in different ways and be the cause of the Company's demise. Investors are particularly wary of management behaviour and demand that they uphold themselves to the highest standards for prudent behaviour. Recently, the Chairman of Credit-Suisse was asked to step down after a board investigation showed that he breached the COVID quarantine rules watching the Wimbledon and European Championship finals and also used the office jet for personal trips.

Further, Company policies and CEO employment agreements typically contain provisions for termination of employment due to improper behaviour. In turn, a trigger of such provision could have consequences under other arrangements such as shareholder agreements. Thus, while senior management behaviour creates larger issues for the Company's overall health, the removal of senior management pursuant to such behaviour can also have consequences for the shareholders and individuals involved. Thus, the Board of Directors tread carefully in such circumstances and undertake detailed investigations before deciding.

In India, we now see the "voluntary leave" announced by the Managing Director and Co-founder of Bharat Pe and his wife, as the Board conducts an internal investigation pursuant to the alleged incident of inappropriate behaviour towards a certain bank employee.

The Emerging controversy

Ashneer Grover is the co-founder and Managing Director of Bharat Pe. Bharat Pe is recognised as one of the biggest fintech companies in India after it raised an amount of $370 million from its investors, with Ashneer Grover being at the helm of it all.¹ It boasts of equity funding from top equity funds, including Sequoia, Coatue Management, Insight Partners, Dragoneer Investment Group, Steadfast Capital and Tiger Global.[AK1]

In October 2021, Ashneer Grover and his wife, Madhuri Grover, had sent a legal notice to Kotak Mahindra Bank ("Kotak") for its failure to provide them funding for the Initial Public Offering ("IPO") of Nykaa², a fashion and cosmetic e-commerce startup in India and to allocate its shares in the HNI/NII category.³  The notice alleges that after having been given repeated assurances that Kotak would ensure the allotment of shares in the IPO to the Grovers, Kotak later communicated its inability to provide IPO financing for the Nykaa IPO.⁴ Kotak reportedly replied to the said notice and also objected to inappropriate language used by Mr. Grover. [AK2]

While the existence of such a dispute was itself not an issue, a leaked audio clip brought this particular dispute to the front page of every major newspaper! At the beginning of January 2022, an anonymous Twitter handle had posted an audio clip that showcased three persons in a heated conversation, a couple and a bank employee. It showcased the male's abusive tone and scurrilous approach towards the bank employee. This was alleged to be the voices of Ashneer Grover, his wife and an employee of Kotak Mahindra Bank.⁵

While this audio clip was of a dispute between Grovers and Kotak, it brought the behaviour of the senior management to the fore.⁶ The discussion quickly escalated into the managing director's behaviour in the Company and the 'toxic' work culture. On January 19, 2022, the Board of Directors of Bharat Pe approved the voluntary leave of Mr. Grover till the end of March 2022. They stated that the move is "in the best interests of the company, our employees and investors, and the millions of merchants we support each day."⁷ Currently, an internal investigation is underway.

Potential Consequences

Such issues can have consequences which are bigger than what a short voluntary leave by the Managing Director of the Company can solve. It was not very long ago that Rahul Yadav, the CEO of Housing.com, an Indian startup, was fired by the Board of Directors pursuant to similar controversies, which had connections with his "often-abrasive communication with investors and media" and his conduct within the Company as well.⁸ Similarly, Michael Lofthouse, the CEO and Founder of Soli8, a cloud computing agency in the USA was filmed making racial comments during an occasion, pursuant to which, he was seen leaving the Company after a huge upheaval.⁹ A similar issue had arisen in 2017 in context of Uber, where its founder-director infamously stepped down due to the issues with prevailing corporate culture.

A removal of Bharat Pe's Founder could have wider implications for the Founder himself and the investors. As per the Articles of Association of Bharat Pe, if the Founder's employment is terminated due to a material breach of the employment agreement or for any gross negligence or wilful misconduct as determined by a Big4Firm, a large chunk of the shares held by such Founder can be bought out at the lower of the fair market value or the price paid by the Founder for such shares. Thus, understandably all parties are immediately lawyering up as if pursuant to the internal investigation, an appropriate cause is identified for termination of the Founder's employment, it can have a significant monetary consequence for all players involved.

India Inc. is at an age where the norms and recognition of ESG metrics is on the rise. Investors and shareholders are seen taking a front seat to ensure that their rights are acknowledged and enforced.¹⁰ The approach taken by the Board of Bharat Pe showcases how matters, which are not necessarily within the four corners of a company's business, can, very quickly, escalate and have a direct impact on a company and all its stakeholders.