RBC DIRECTOR’S ARREST UNLIKELY TO HURT BANK.

Accused of importing cocaine

The sudden resignation of l ongtime Royal Bank of Canada director Joao Pedro Reinhard, who faces a drug- related charge, should mitigate “reputational contagion” at Canada’s largest bank, corporate governance experts say.

It is understood Reinhard, an independent director since 2000 at RBC, was asked to resign.

RBC disclosed the resignation Thursday. Hours l at e r, Bloomberg News published a report saying the 70- year- old had been charged i n Canada with cocaine- related offences in February.

The Financial Post subsequently verified that Reinhard, who lives in Key Biscayne, Fla., is charged with importing cocaine under the Controlled Drugs and Substances Act. He was released on bail.

In a statement, Royal Bank said the matter is “between the authorities and Mr. Reinhard,” and declined to explain when RBC officials learned of the criminal drug charge.

The allegations against Reinhard have not been tested or proven in court.

Richard Leblanc, an associate professor of law, governance and ethics at York University, said companies are wise to act quickly in such circumstances, rather than wait for serious allega- tions to play out in a court of law or public opinion.

Waiting can cause ongoing distraction, and the potential for constant repetition of the allegations can lead to “reputational contagion” beyond the individual director, Leblanc said.

This is particularly true in an era of popular social media, he added.

“Good boards are taking integrity and reputation checks very seriously, not only at the retention stage but also on an ongoing basis,” Leblanc said, noting many boards have adopted codes of conduct f or directors with strict reputational and integrity clauses, similar to morals clauses for athletes.

“You can even have letters of resignation signed when the director comes on to the board, to avoid disputes and entrenchment, and make it easier to compel director resignation for integrity or behavioural breaches,” he said.

Claire Holland, a spokeswoman for RBC, said the bank has pre- screening procedures and background checks in place for directors, as mandated by the federal banking regulator, the Office of the Superintendent of Financial Institutions.

“Attestations made through this process are reconfirmed in writing on an annual basis, she said, adding that assessments are updated between specified intervals “if RBC learns of material adverse information about a director.”

Carol Hansell, a partner at Hansell LLP, a law firm specializing in corporate governance, said she could not speak specifically about the case at RBC. But she said it is not unusual for a couple of weeks to pass between an allegation of improper conduct and definitive action by a board of directors.

“Giving an i ndividual time to take whatever action they need to to make sure this is a matter that is not going to go away, I don’t think that’s unreasonable,” Hansell said.

In addition, “it takes more than a moment for the organization to be thoughtful about how to deal with things.”

When faced with accusations of conduct by a director or an executive that is inconsistent with the franchise or reputation of the organization, Hansell said, boards must weigh whether the alleged conduct compromises the ability of the individual to do their job. A company must also look beyond board function to “reputation management,” she added.

GOOD BOARDS TAKE INTEGRITY AND REPUTATION SERIOUSLY.