The #MeToo movement has snowballed into one of the largest social movements against sexual harassment at the work place, claiming several high-profile CEOs, directors and senior management personnel. Allegations of misconduct against key personnel and lack of effective action by the management can cause extensive reputational damage and lead to business disruption. For a venture capital (VC) investor, such damage could impact returns and jeopardize a successful exit. This has driven investors, globally, to add another dimension to their diligence and build in additional safeguards to ring fence their investments from such risks.
As the movement gathers steam in India, it is becoming increasingly apparent that, so far, startups have paid no more than lip service to the requirements of the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act (act), 2013. While the enactment of the act was a momentous step towards ensuring safe workplaces for women, its implementation has been patchy. Many startups have yet to put in place appropriate policies and also do not have adequately trained staff to deal with the complaints.
It is therefore imperative for a VC investor to ask a few fundamental questions regarding the investee company’s work culture:
Have there been allegations or claims against key employees? How were these allegations handled?
Does the company have robust processes to handle any such allegations?
Has the company made an effort to promote a safe and egalitarian work environment?
The first question is easier to examine. VCs must do background checks on key employees of the company to ensure that they have not been involved in acts that could be construed as sexual misconduct and that no such allegations have been made against them. Due diligence should include review of compliance requirements under the act and specifically seek details of any allegations or complaints relating to sexual misconduct received by the company, irrespective of whether these resulted in any formal complaint(s) or settlement, and examine the steps undertaken by the company to address these allegations.
As far as investment documents are concerned, contractual safeguards should be built in, which act both as a deterrent to misdemeanour at an individual level and as an inducement for the company to provide a safe working environment. For example, adequate representations and warranties confirming that the company has appropriate policies and systems to prevent sexual harassment at work place are essential. Further, key employees must be required to provide confirmation that there have been no such allegations or claims against them nor have they been involved in any events that may give rise to such claims. Promoters must also be required to provide corresponding indemnity obligations that are not limited in terms of value or time.
The scope of the “material adverse change” clause, which triggers an accelerated exit for the investors, should be broadened to include allegations of sexual misconduct by the key employees of the company. Specific clauses must be added in the employment agreements stating that termination of employment pursuant to allegations of sexual misconduct will be treated as termination for “cause” and consequently, the employee will be ineligible for any severance benefits. Such termination for “cause” should in turn trigger an event of default under the investment agreements.
The second and third questions go hand in hand and must be addressed together. Internationally, there is an increasing trend to introduce clawback provisions to deter or disincentivize key employees from undertaking any action that could pose such a risk to the company.
Contractual provisions, however, can only be deterrents. What is far more critical is driving a cultural shift in an investee company. Companies must adopt robust measures to increase awareness among their employees, create frameworks to ensure that any misconduct can be detected early and addressed appropriately, and encourage gender diversity. The investor is in a strong position to drive this change by sensitizing the management team to the benefits of a secure working environment. We are already seeing an increasing trend among VCs to insist on the appointment of women independent directors to the boards of their portfolio companies and it will be interesting to see how market practice is shaped by a growing consciousness among investors that safe working environments are crucial to the protection of their investments.
Natasha Mahajan is a partner and Neeraj Vyas is an associate at the Bengaluru office of Samvad Partners
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