RBC vetting process in spotlight after director resigns over cocaine charges

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The resignation of a Royal Bank of Canada director who is facing charges for cocaine possession is raising questions about RBC's vetting process, given that the director's behaviour at Dow Chemical Co. raised red flags about his suitability several years ago.

RBC announced on Thursday that J. Pedro Reinhard had tendered his resignation from the 14-member board of directors, effective immediately, after serving on the board since 2000.

Mr. Reinhard also resigned from the board of Colgate-Palmolive Co., where he served as a director since 2006.

Bloomberg News reported on Thursday that Mr. Reinhard, who lives in Key Biscayne, Fla., was charged in Mississauga on Feb. 23 for unlawful importing and possession of cocaine, citing the Royal Canadian Mounted Police as a source.

The charges were laid a day before RBC reported its fiscal first-quarter financial results, an event that usually coincides with a board meeting.

Mr. Reinhard, 70, did not attend RBC's February board meeting after attending all eight regularly scheduled meetings for the fiscal year ended Oct. 31, 2015.

In a statement, RBC said: "This is a matter between the authorities and Mr. Reinhard."

The bank followed with a statement on its vetting process for directors: "Directors must confirm in writing that he or she has no conflict that could create a material risk that he or she would be unable to discharge their duties; and has not been held liable in connection with business or financial misconduct, fraud or mismanagement."

But Mr. Reinhard's history with Dow Chemical, which included dismissal from its board of directors and litigation, should have been enough for RBC to question his suitability as a member of the lender's board, according to an expert on governance issues.

"For many boards – and banks should have the highest standards because of the nature of what they are doing and their public profile – there would have been less tolerance for that [history]," said Richard Leblanc, associate professor of law, governance and ethics at York University, noting that RBC's board is probably one of the most important in the country.

Mr. Reinhard retired from Dow Chemical as chief financial officer in 2005 but continued to serve on the company's board of directors until 2007.

He was dismissed along with a senior executive, Romeo Kreinberg, after conducting unauthorized discussions about the potential takeover of the company through a leveraged buyout (LBO).

A joint statement from Mr. Reinhard and Mr. Kreinberg in 2008, which settled litigation between Dow Chemical and the two men, acknowledged activity that the company had previously called "highly inappropriate and a clear violation of Dow's Code of Business Conduct."

"Mr. Reinhard and Mr. Kreinberg agree it would have been appropriate to have informed the CEO and the board of the LBO discussions," their joint statement said.

While this ended a civil matter between Mr. Reinhard and Dow Chemical, Mr. Leblanc believes Mr. Reinhard's behaviour would have been unacceptable for many boards, raising the question of why RBC tolerated it.

"You had this red flag in 2008. Why didn't you act in 2008?" Mr. Leblanc said. "The director admitted to engaging in unauthorized discussions. That is inappropriate behaviour for a director."

Mr. Reinhard served on RBC's board for 15 years and his resignation – likely at the request of RBC – comes just weeks before he was set to step down from the board after serving a maximum 15-year tenure.

In fiscal 2015, RBC paid Mr. Reinhard compensation totalling $210,000.