This article was
first published in www.forbesindia.com
on August 22, 2017; Co-author- S.
Subramanian
The founders may be right in fighting tooth and nail to uphold the
standards of governance at Infosys, but the approach is at fault
When in
doubt, disclose
Infosys
came out with its Initial Public Offering and raised around Rs 90 crores in the
year 1993. As the company waited for the
government approvals for capital investments, the board decided to invest part
of the funds raised in the stock market. Unfortunately, those investments
suffered losses due to weak market conditions. The laws and regulations at that
time did not require Infosys to reveal it to the shareholders. However, Infosys
leadership decided to disclose it in the annual report, arguing that the funds
belonged to the public and hence they were ethically bound to disclose the
stock market misadventure. They refused to be merely legally complaint. They
ignored the warnings by experts that Infosys being a new company, disclosing
such misadventure would result in severe shareholders’ backlash. Thankfully the
shareholders were appreciative of the transparency and supported the
leadership. Mr. Narayana Murthy famously said at that time “When in doubt,
disclose”.
Something
dubious?
In
February 2017, two anonymous whistle-blower letters alleged that the USD 200
million Panaya acquisition by Infosys in 2015 was overvalued. Similar
allegations were made against the acquisition of Kallidus Inc. (d.b.a Skava). The complaints to SEBI indicated that the
unusually high severance package to the former chief financial officer, Rajiv
Bansal, was to cover up the wrongdoings in Panaya and Skava deals. Bansal
resigned in October 2015. His annual compensation in the financial year 2014-15
was Rs 4.72 crores. On his resignation, Infosys agreed to pay him Rs 23.02
crores that included a severance package, accumulated bonuses and salary.
However, this high severance package was not disclosed immediately and was
revealed only when the company published its annual report in May 2016. After
the shareholders’ backlash, in September 2016, the company announced that it
had stopped the remaining tranches of payments to Bansal. The whistle-blower also questioned the high
severance package to general legal counsel David Kennedy who quit in January
2017. It was alleged that Kennedy wrote an email to the CEO, Vishal Sikka, that
he could no longer hide the reasons behind Bansal's high severance package.
The Issues
Disclosure:
The company set up an independent probe by international law firm ‘Gibson Dunn
& Crutcher’ and risk investigation firm ‘Control Risks’ after Murthy went
public in February 2017 with his displeasure over the alleged wrongdoings and
non-disclosure/non-timely disclosures by the board and leadership. The probe
submitted its report in June 2017 clearing the company of any wrongdoing in
Panaya and Skava Deals. However, the company refused to make the report public.
This precisely is the problem that the founders have with the top management of
Infosys- their refusal to disclose the report is against the motto that
founders followed at Infosys, “When in doubt, disclose”. Under the founders,
Infosys always set the standards in Corporate Governance whether it was
disclosure or board practices or top management compensation. However, it is
those corporate governance standards that the board and Sikka were compromising
on while running Infosys, feared Murthy.
Independence
of the Board: Murthy also indicated that the appointment
of Punita Kumar Sinha, wife of Union Minister Jayant Sinha as an Independent
Director in January 2016 was a violation of Infosys principles, despite the
credentials of Sinha. He argued that
Infosys competes with its peers for Government contracts and having a highly
politically connected person on the board creates a conflict of interest
situation. This is against the board
standards set by Infosys, which had constituted committees like the Audit
Committee in the late 1990s, well before they became a regulatory requirement.
Compensation:
Similar was the case with top management compensation. Despite the fact that
Infosys market capitalization had been growing at CAGR of more than 50 percent
between 1993 when the company listed and 2014 when the founders quit the
company, the founders were never known to take high salaries. However, Sikka’s
compensation was Rs 48.73 crore for the financial year 2015-16 and the
compensation of Mr N. Chandrasekaran, then CEO of TCS, the bigger peer of
Infosys was Rs 25.66 crore. Murthy argued that such high salaries were against
Infosys's 'compassionate capitalism' philosophy.
Infosys
was a bellwether company that always set the standards, against the tide. There
are many instances in the 1980s and 1990s, to indicate the ethical practices of
Infosys, well before the stakeholders accepted that Infosys is an ethical
company. The founders refused to bribe the customs officials to get duty
exemption in the 1980s when Infosys imported its first computer. The founders
did not accept that paying a bribe was the reality and fought against it. That
became the culture of Infosys. This is exactly what Murthy is concerned about
in Infosys and not the strategies adopted by the professional CEO.
Founders
faltered in succession planning
While
Murthy’s concern’s on the corporate governance issues in Infosys may be valid,
the fact is that the founders are also responsible for the issues in
Infosys. They failed in succession
planning. Did the founders, who took turns to become CEO of Infosys, whether or
not they were best suited to run the company, nurture a successor who would be
entrenched in Infosys’s value? Did the founders spend enough time working
alongside Sikka to hand hold him and nurture him? The founders voluntarily
stepped out just a couple of months after Sikka took over as the CEO. Why did
they do it? They could have ensured continuity by spending some more time with
the new leadership, as has been the case in many companies with ‘legacy’ in
India.
The
changing times
In 2013,
Sikka’s compensation at SAP was Euro4.2 million. When he joined Infosys, his
compensation was set at $5.08 million and stock options worth $2million- not a
major hike from his compensation at SAP- and lower than peers globally. While
Infosys founders may believe in ‘compassionate capitalism’, Sikka or any other
professional CEO, would expect to be compensated for the opportunity cost.
Besides, the professional CEO does not have the benefit of high shareholdings
that the founders have.
In the
entire battle between the Board and the founders, the loser is brand ‘Infosys’.
The founders must realize that taking their battle to the media would not go
down well with the external stakeholders. While the founders may be right in
fighting tooth and nail to uphold the standards of governance at Infosys, the
approach is at fault. So much so, that Murthy who was a ‘Hero’, is now being
seen as the ‘villain’. Even the other shareholders had shown overwhelming
support to the board at the 36th annual general meeting of the company held in
June this year.
The
founders started this public spat, and they must end it too for the future of
the company. It is time that they truly move on, especially since they are the
ones who voluntarily stepped down and did not do enough to groom their
successor!
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