Corporate reputation vs the cover-up

One of the ways in which India Inc is becoming increasingly "global" in its HR practices is the blizzard of documents people sign when they join a corporation, setting out the terms of employment and employee obligations. Until recently, the most threatening of these documents were Codes of Conduct, Non-Disclosure Agreements, and restrictive covenants that preclude employees from working for competitors or doing business with customers for a specified period after they leave a company. Now, a new contractual animal has been lurking in the paperwork: The nondisparagement agreement.

The term recently attracted attention when Infosys' 2018 Annual Report revealed that Vishal Sikka, the IT major's first non-promoter chief executive who left in controversial circumstances, and three senior executives had signed them as part of their exit packages.

Infosys may be in a minority in this respect in India. Non-disparagement agreements appear to have been used sparingly here not least because Indian business is yet to reach that pitch of professionalism that marks out the western corporate world.

Besides, the ambit of these agreements is yet to be defined by Indian corporate law, nor have they been tested in the courts. So unless the stakes are significant, Indian companies would be disinclined to contend with the country's judicial system to check the legitimacy of this type of contract. It is principally companies with global reach and the financial heft to afford offshore arbitration that rely on such agreements in employee contracts and settlement pacts as a means of safeguarding their reputations.

If we assume that Indian companies are slowly getting there — and the chaotic business environment is certainly encouraging more businesses to explore overseas opportunities — then the non-disparagement agreement could become part of the standard package that employees sign here, too.

Would the mainstreaming of non-disparagement agreements be a healthy development in a business milieu in which good governance comes at a premium? Several governance advisories in India have raised doubts on ethical grounds. They have company in their counterparts in jurisdictions that are frequent users of such contracts.

In the US, for instance, about a quarter of listed companies use non-disparagement contracts for employees, external contractors and in settlement agreements. Silicon Valley is a particularly enthusiastic user because corporate reputation is the gold dust for an industry that runs on human capital. American law firms say most state and federal courts enforce them if they are narrowly worded, on the principle that a contract is a binding agreement if you've signed it, whatever the contents. Yet more and more lawyers are advising employees to be ultra-cautious about signing on the dotted line. Why?

Several recent cases have revealed that by muzzling employees, non-disparagement agreements act as proxies for concealing serious governance failures. An article in The New York Times last year set out multiple examples of the ethical conundrums embedded in non-disparagement agreements in Silicon Valley, especially in enabling habitual sexual predators to get away with, well, more harassment. The "tech start-up world has been roiled by accounts of workplace sexual harassment, and non-disparagement clauses have played a significant role in keeping those accusations secret," the article said. The consequences can be more serious than just one company's reputation. As the article pointed out, "Harassers move on and harass again. Women have no way of knowing their history. Nor do future employers or business partners."

This is one dimension of the problem. Several US federal agencies, the NYTarticle said, were examining non-disparagement agreements to see whether they are being leveraged to mask broader violations of workers' rights and other transgressions.

The NYTpiece did not examine the status of whistle-blowers vis-a-vis these agreements and the relationship with the laws protecting them. About two years ago, the Securities and Exchange Commission said it would consider as illegal restrictions on employees to disclose confidential information about irregularities in corporate practices. This has prompted some companies to hone non-disparagement agreements to leave employees free to disclose unethical or illegal practices but unlisted companies can probably continue to arm-twist employees into silence.

Whatever the ethical enablers, here's the catch. Disparagement is a flexible term that is open to wide interpretation. Who will decide what is an unethical practice and what is not? Legal opinion in the US is increasingly leaning towards more disclosure, not less. And that's happening in a country where the judicial system functions more or less efficiently. Given India's family-dominated corporate ownership with its reflexively opaque traditions of corporate governance, the non-disparagement agreement is a global "best practice" that is best discouraged.