An uneasy truce at Infosys
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Whispers that all wasn’t well between the founders of Infosys Ltd and management led by Vishal Sikka, its first non-founder chief executive officer, have been heard for months now in Bengaluru, where India’s second largest computer services firm is based.
The founders led by N.R. Narayana Murthy, it was said, were unhappy with corporate governance at Infosys, particularly a hefty severance package of Rs17.38 crore given to former chief financial officer (CFO) Rajiv Bansal and a 55% hike in pay awarded to Sikka.
The whispers steadily grew louder over the past few weeks and then, everything burst into the open when Narayana Murthy, in a published interview on 10 February, tore into the Infosys board headed by non-executive chairman R. Seshasayee and the nomination and remuneration committee led by Jeffrey Lehman.
“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 and on Nasdaq,” Murthy told The Economic Times.
“We won several awards for good governance all over the world. However, since June 1, 2015, we have seen a concerning drop in governance standards at Infosys. Let me illustrate this with just one example.
“Providing huge severance pay (with 100% variable) to some departing employees while giving only 80% variable for employees in the company is one such example. Such payments raise doubts whether the company is using such payments as hush money to hide something,” said the 70-year-old who co-founded Infosys with six other software engineers and built it into what is today a $10 billion company by annual revenue.
The board and management scrambled to control damage caused by a tussle that some analysts had begun to liken to the feud in Tata Sons Ltd, where the board in October ousted chairman Cyrus Mistry, who has dragged the Tata group holding company to the courts.
On the evening of Monday, 13 February, Seshasayee said the Infosys board was addressing issues all stakeholders, including the founders, have “within the overall framework of the fiduciary responsibility it has to all shareholders.” He denied that the payment to Bansal was “hush money,” and said only about a third of the severance payment had been made.
Seshasayee said: “Here we have some stakeholders, founders and others along with them, who have nothing other than the best interest of the organisation on their mind and obviously, there will be a lot of passion.”
The same day, Narayana Murthy seemed to press for a truce. “Let me stop. I have made a point, paying such large sums of money is confusing,” he told Bloomberg. “Now they have to sort it out. I felt that I don’t want it to snowball. I don’t have the time. Neither should the board and the management be spending time on it.”
The truce may be uneasy at best. Just hours later, Narayana Murthy said he wasn’t withdrawing his concerns, expected the board to address them with full transparency, take corrective action and fix responsibility.
Questions over corporate governance at Infosys, one of India’s most admired companies, had been simmering for close to 10 months. Along with slow growth since the start of the financial year in April, 2016-17 has marked a dramatic reversal in fortunes for Infosys and Sikka, who appeared to be cruising along in the previous year.
Under the leadership of Sikka, who assumed the helm in August 2014, Infosys reported industry-leading 9.1% dollar revenue growth to $9.5 billion in 2015-16.
So where did it all go wrong?
Trouble had been brewing for sometime.
On 12 October 2015, Infosys announced that CFO Bansal, had decided to leave the company. Sikka, as expected, thanked Bansal and commended his stint. What was not disclosed was that Sikka and Bansal had differences and Bansal was asked to leave the company in return for Rs17.38 crore in severance pay. At Monday’s press conference, Sikka explained Bansal’s departure as an outcome of “team chemistry” issues.
This offer of a severance payment was brought to light only seven months later when Mint first wrote about it. The company later disclosed, as footnote to its annual report, that it had paid Rs23.08 crore in severance pay, salary and other benefits to Bansal.
The news made a few analysts, some proxy advisory firms and a lot of shareholders take note, and in June, at Infosys’s annual general meeting, the management and board were questioned about the rationale of making these payments.
Seshasayee disclosed that the Rs17.38 crore in severance pay was to be paid over 10 instalments, and by then two instalments had already been paid. The founders were unhappy, but kept their peace.
In between, two other developments took place that the founders took notice of.
In January 2016, Infosys decided to appoint Punita Kumar Sinha, wife of then minister of state for finance Jayant Sinha, as an independent director. Next month, Infosys’s board announced that under Sikka’s leadership, Infosys had made a good start, and the company was increasing his salary from $7.08 million to $11 million, linked to the targets he set for himself. Sikka is aiming to double revenue to $20 billion, achieve an operating margin of 30% and reach revenue per employee of $80,000 by the end of March 2021.
Both decisions were put up for shareholders’ approval in April, and that is when for the first time the founders aired their displeasure. Sinha’s appointment was against the founders’ practice of avoiding appointments of people linked to politicians. And the founders didn’t think the raise offered to Sikka was reasonable.
Only 23.57% of promoter votes were cast in favour of a resolution reappointing Sikka as managing director and CEO, according to disclosure filings the company. The differences were now in the open.
Infosys reported poor first quarter earnings in July, when it managed a sequential growth of just 2.2% in dollar revenue (traditionally a strong quarter). But what was particularly disconcerting was that the management cut its full-year growth outlook to at-best 12.3% from the earlier guidance of at-best 13.8% outlined in April.
Also read: Look beyond Tata and Infosys
Falling growth was only part of the problem. Senior leaderships exits had started. Even Sikka looked a little shaken, as by September, he had already reversed two of his decisions on heads of business divisions in a little less than 18 months, even as three other executives appointed by him left the company.
“The question is not why there are so many exits even after two years, although by now there should be some stability. But why did the CEO appoint leaders in the first place, only to move them out later?” a senior executive then said.
Against this backdrop, some of the founders were more concerned about what they believed were falling corporate governance standards, and it was sometime in July at a meeting in New Delhi that Narayana Murthy first asked Seshasayee to consider inducting D.N. Prahlad, a relative of the co-founder, as an independent director. Narayana Murthy also asked the board to stop outstanding severance payments to Bansal, which was done. Infosys had paid Rs5.6 crore of the Rs17.38 separation money.
By the first week of October, a decision to induct Prahlad as independent director had been taken, and on 12 October, Infosys made this public. Proxy advisory firms expressed their unhappiness over this decision, as they believed this was part of an effort by Murthy to gain control of the board.
On 22 October, 10 days after Infosys inducted Prahlad, the company in a press statement acknowledged that it had halted payments to Bansal, pending clarifications. The company also said that a probe had found no wrongdoing in the decision to award severance pay.
Also read: Limerick: On the Infosys row
By now, some of the founders were agitated, and started privately discussing if it was time for Seshasayee to step down.
In December, Infosys sacked its former chief compliance officer David Kennedy, and proxy advisory firms again questioned the rationale of the company paying him $868,250 in severance pay. Infosys then said that Kennedy and the company had mutually agreed to part ways but clarified that severance pay was part of the employment agreement he signed when he joined in November 2014.
“(We were told) management had negotiated well to lower it to two years, and David also justified by it saying paying severance money is well within acceptable standards,” an independent board member later said.
“Kennedy was made the fall-guy in the Bansal episode as by now the founders had lost complete faith in the board,” another executive said. Infosys denied this suggestion. An email sent to Kennedy seeking comment went unanswered. Still, in the same month, some of the founders finally decided to convey what they had been discussing privately: In December, the founders asked Seshasayee to consider stepping down. The chairman was non-committal, but people close to Seshasayee said he will not step down—an assertion he repeated at Monday’s press conference.
“Infosys’s shareholders have elected the chairman to do a job. So, there is no reason for him to give up this job,” one executive close to the chairman said in January. “So, unless the chairman himself believes that he is not doing the job or the board loses faith in him or the shareholders vote him out, the question of him stepping down does not arise.”
By now, Seshasayee was under pressure, and in what now appears to be an accommodative stance, the board in January made Prahlad the fifth member of the nominations and remuneration panel that oversees the incentives and pay offered to Infosys’s senior-most executives, including the CEO.
Infosys’s nomination and remuneration panel is headed by independent director and professor Jeffrey Lehman, and includes Biocon Ltd chairman and managing director Kiran Mazumdar-Shaw and Stanford University provost John Etchemendy, besides Seshasayee.
Executives familiar with the situation say the decision to add Prahlad to the committee was on account of fresh differences between some of the founders and the board over how to administer the CEO’s salary.
With an uneasy standoff in place, where does Infosys go from here?
Narayana Murthy is clear about what he wants, telling the board: “They (his concerns) have to be addressed properly by the board and full transparency should be displayed and people responsible for it should become accountable... I hope they take corrective action soon and improve governance for a better future for the company.”
Seshasayee says he hopes another flare-up doesn’t take place. “I cannot assure you anything, but me and Mr Murthy have spoken, and I hope something like this doesn’t happen again,” Seshasayee said.