The article was first published in GARP Risk Intelligence, August 23,
2017
A clash over the
Indian IT giant’s corporate governance plays out in public – and a CEO departs.
“. . . the
distractions that we have seen, the constant drumbeat of the same issues over
and over again, while ignoring and undermining the good work that has been
done, take the excitement and passion out of this amazing journey. Over the
last many months and quarters, we have all been besieged by false, baseless,
malicious and increasingly personal attacks. Allegations that have been
repeatedly proven false and baseless by multiple, independent investigations.
But despite this, the attacks continue, and worse still, amplified by the very
people from whom we all expected the most steadfast support in this great
transformation.”
Thus wrote
Vishal Sikka, the ex-CEO of Infosys Ltd., in his August 18 resignation letter
to the company’s board. He further asserted that such distractions were
damaging to the company and inhibit value creation.
Earlier, in
June, Infosys, the NYSE-listed Indian company that was the quintessential dream
of information-technology job seekers in the 1990s and early 2000s, had made a
veiled reference in SEC filings to its seven founders as a risk:
“Negative
media coverage and public scrutiny may divert the time and attention of our
board and management and adversely affect the prices of our equity shares and
ADSs”.
“Actions
of activist shareholders may adversely affect our ability to execute our
strategic priorities, and could impact the trading value of our securities”.
R. Narayana
Murthy, Infosys founder and CEO from 1981 to 2002, chairman and chief mentor
from 1981 to 2011, and chairman emeritus from 2011 to 2013, was, and still is,
one of the most admired entrepreneurs of his generation – not just for what he
achieved with Infosys, but also for the values that he stood for and an
attitude that inspired millions who dreamt of a better India with economic
liberalization in 1991.
“Activist
shareholders” in the SEC filings is an obvious reference to the seven
founders of Infosys, now collectively holding about 13% of its shares
(including shares of their family members), who are no longer associated with
the company in any executive or non-executive position.
This article
looks at the history of Infosys and the reasons that compelled the company to
list the actions of its founders as a risk. The experience suggests that for
the well-being of the company, the “founder’s mentality” must be retained, but
the founders themselves must let go.
The
Journey
Seven
friends, with a personal capital of $250, started what is now the
second-largest IT company in India, with revenues exceeding $10 billion, a
market capitalization of more than $36 billion, and more than 200,000
employees.
Infosys
ushered in an era of global IT services outsourcing, giving India the tag of
“back office for the world,” in turn inspiring other entrepreneurs to start
similar ventures and put money in the pockets of the country’s educated,
English-speaking youth.
Apart from
its significant contribution to the Indian IT industry, Infosys stood out from
most others in its corporate governance practices. Under Murthy’s leadership,
Infosys established itself as one of India’s best-governed and most transparent
enterprises. It was one of the first in India to adopt the U.S. generally
accepted accounting principles (GAAP). It received one or more governance and
other corporate excellence awards in most of the years since it listed on the
Indian bourses in 1993.
Management
Succession
In a country
where more than 90% of listed companies are family businesses and it is taken
for granted that succeeding generations will join the firms when they are
ready, Infosys was an exception. The founders had made it clear at a very early
stage that their relatives would not follow in succession. Infosys was not run
as a family business, even though Murthy often referred to the company as his
child.
After Murthy
stepped down as CEO in 2002, other founders followed in that role until 2014.
Their taking turns did not match the highest of governance standards set by the
founders in other aspects of running the company. Despite holding senior
positions, they were not necessarily the best people to run the company.
T. V.
Mohandas Pai, a former board member, CFO and head of human resources, education
and research at Infosys, said in a 2011 interview, when he resigned after 17
years at the company, “What goes against me? Seniority. You are
discriminated against because the founders have spent longer years.”
Pai added: “I
don't agree . . . you have to go by the person best suited for leadership over
the next five years.”
Aside from
going against meritocracy in appointing founders as CEO, Murthy was brought
back in 2013 in an attempt to stabilize the company. Infosys was criticized for
not finding a suitable leader from within or outside, and for not looking
beyond the founders. Pai said that many good senior people left the company
because of the succession of founder-CEOs.
When the last
of the founder-CEOs, S.D. Shibulal, expressed his desire to retire, the search
for a non-founder began. The board’ s Nominations and Governance committee
selected Vishal Sikka, a member of the executive board and chief technology
officer of SAP and a Stanford University Ph.D. in computer science, as CEO,
effective August 1, 2014.
The remaining
founders, including Murthy, voluntarily stepped down from all Infosys positions
by October 14, 2014, and are no longer on the board of directors.
Alleged
Governance Lapses
Reports of
the founders’ dissatisfaction with the board and management began surfacing in
April 2016, when a majority of the founders abstained from voting for an
extension of Sikka’s term as CEO. Just a couple of months before, Sikka was
given a 55% raise in compensation, to $11 million (including both fixed and
variable components) for the 2016-’17 financial year. Perhaps this did not go
down well with the founders. Murthy has said that he is “a capitalist in mind,
a socialist at heart – a compassionate capitalist.”
There was
further reaction in May 2016 when Infosys disclosed in its annual report a
severance package of Rs 174 million ($2.7 million) – considered well above
industry norms – for former CFO Rajiv Bansal, who quit in October 2015. The
founders were reportedly unhappy with the delay in disclosure was well as the
amount. There were also reports that the founders objected to the $868,250 severance
paid to former chief compliance officer and executive vice president David
Kennedy, who resigned January 2, 2017.
Murthy
Speaks Out
A series of
media interviews with Murthy in February 2017 brought the founders’ displeasure
into the open: They were unhappy with governance standards, timeliness of
disclosures, due diligence at the board level, the role of independent
directors, and a perceived straying from the core corporate values.
“Overall,
the issue is whether the remuneration and nominations committee and the board
is actually spending adequate time on these issues,” Murthy said. “Are
they asking questions like, is this what happens normally in India, or what
will the world think of us if we pay such huge sums? Third, are we going to pay
such huge sums to future key people that leave the company? What is the
financial implication on the company, financial liability for the company?
“There are
lots of questions that need to be asked before you come to a conclusion to
change the policy from one of three-month severance to such a large sum.”
In a February
10 interview with the Economic Times, Corporate Governance Badly Down at
Infosys . . ., Murthy said, “We
strove hard right from the day Infosys was founded till the day we left the
company voluntarily on October 14, 2014, to make Infosys the best-governed
company in India . . . However, since June 1, 2015, we have seen a concerning
drop in governance standards at Infosys.”
Figure 1
In an April
2017 letter to the media, Murthy raised questions about the compensation hike
of chief operating officer U.B. Pravin. The heart of the matter was “striving
towards reducing differences in compensation and equity in a corporation,”
Murthy wrote.
The
Company Responds
Infosys
denied any wrongdoing, said the salary increases of both Pravin and Sikka were
justified, and acknowledged misjudgment in the severance package to Bansal.
R.
Seshasayee, independent director and current chairman of Infosys’ board, said,
“It is a challenging transition [from being promoter-managed to professionally
managed] and we have to deal with it in a sensitive fashion. This does not mean
that the board and the founders have divergence. I passionately believe that
this model of professional board and management is the right model for the
country.”
Murthy, by
airing his grievances through the media, forced the company to go on the
defensive and counter the negative publicity – no doubt at some expense and
explaining why “activist shareholders” represented a risk to be cited in SEC
filings.
On August 10,
the Economic Times reported that the Infosys board, while fully
supporting CEO Sikka, was open to giving Murthy “a formal role if [he] wishes
it.”
The following
week, on August 18, Sikka resigned as CEO and managing director of Infosys.
Pravin was made interim CEO and MD, and a CEO search began yet again.
Founders’
Qualities
Research
reveals that companies that consistently grow and perform well retain their
founders’ mentality; an insurgent’s mission, an owner’s mindset, and obsession
with the front line. (See: Chris Zook and James Allen, “The Founder’s
Mentality: How to Overcome the Predictable Crises of Growth,” Harvard Business
Review Press, 2016). The ones that don’t tend to face problems of bureaucracy,
loss of accountability, lack of clarity of roles, etc. A founder’s mentality
can overcome these, and it can be leveraged by effective leadership, not
necessarily that of a founder.
From the
beginning, Infosys’ founders had the qualities necessary for creating a great
company. But that did not mean that Sikka was not capable to carry out the
mission.
While the
values of “compassionate capitalism” are appreciable, why would an executive
who might be able to earn much more elsewhere agree to work at Infosys? While
founders might be in a position to sacrifice high salaries because they own
shares that appreciate and pay dividends, non-founders do not have comparable equity
stakes.
Letting Go
The Infosys
board members are people of eminence and
extremely well qualified. There is no reason to believe that they will not act
in the best interests of the company and its shareholders. There can be
mistakes of judgment, to which they must be held accountable, but there does
not have to be a sword hanging on their heads.
The founders,
meanwhile, must have faith in their decision to hand over the company to a
non-founder, non-family professional. And they must let go. Now Sikka has
resigned; tomorrow it will be somebody else if they don’t allow the executive
to function.
They can, as
shareholders, question policies and seek answers. But founders are not ordinary
shareholders. Their words have greater impact; they must keep their position in
mind and choose the right platform to raise any issues. Inviting unwelcome
public attention in a “trial by media” is not the best course for corporate
governance.
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