Remembrance Parks Central Victoria (RPCV) chief executive Emma Flukes has been stood down as the board reviews the policy banning grave adornments.
Trish Connor put lights on the resting place of her four-year-old granddaughter Patiya.
The lights were then removed and binned without her knowledge.
"The lights had been there nine years," Ms Connor said.
"I always replaced the old ones with new ones to keep her headstone nice and bright.
"My granddaughter needs her lights back on.
"What they've done is absolutely disgusting and cold-hearted."
Ban partially reversed
In a statement, a spokesperson for RPCV said items had been removed from Eaglehawk Cemetery.
"This is a deeply emotional issue," the statement said.
"While our actions have been motivated by compliance with occupational health and safety laws, we recognise that we should have provided better support to families and communicated more widely before acting the way we did."
The spokesperson also said the policy was designed to protect the health and safety of staff and visitors.
It has now reversed the ban and some exceptions have been made for what is allowed on gravesites.
"The RPCV Trust has stopped the removal of items from memorials unless they are specifically dangerous," the spokesperson said.
"Specific items that will be removed are alcohol, anything with a metal spike or sharp edges, broken items and glass items.
"If a glass item has flowers in it our staff will replace the glass holder with a plastic RPCV vase."
'Very heartbreaking'
Hundreds of outraged residents rallied at Eaglehawk Cemetery in Bendigo earlier this week when they found out their special ornaments were removed from their loved ones' graves.
Jenny Gray-Knight's parents have been buried at the cemetery for many years.
"The containers holding flowers and a statue of an angel have been there for 17 years, secured properly and never broke," she said.
Ms Gray-Knight said the glass containers were smashed when they were removed.
"It was very heartbreaking to find the way Dad's grave had been left," she said.
"They say it was a health and safety issue … but the way they left it was more dangerous than the items that were already there.
"I had to pick the shards off the grass and off the headstone."
The RPCV said it was working to engage with families about what items could be placed on memorials.
"We have a responsibility to families who want to decorate graves of their loved ones and we must do better to explain to families what is permitted and not permitted on interred sites," the spokesperson said.
"We will support any person or family who wants to work with us to navigate the rules to ensure they are compliant."
