Failure on multiple fronts at Infosys
When N.R. Narayana Murthy quit the Infosys board in 2014 after his second stint, he wanted to be reclassified from promoter to public shareholder. That never happened. But even if it had, it would have been disingenuous—along with his family, Murthy holds close to a 3.44% stake in the company. However, the influence he continues to wield in the company he founded is demonstrably outsized. His expectations for off-board consultation and the Infosys board’s failure to establish appropriate firewalls are commensurate with that influence.
Given this, Vishal Sikka’s decision to quit as chief executive officer (CEO) of Infosys late last week should not—given the benefit of hindsight, at least—be particularly surprising. The tension between the two sides had been ratcheting up since last April, when Sikka’s reappointment as managing director and CEO garnered only 23.57% of promoter votes—reportedly because of the founders’ unhappiness with a 55% hike in Sikka’s compensation package. Other complaints, such as Sikka’s travel expenses, surfaced as well. These, however, were small beer compared to the central point of contention: Infosys’ $200 million acquisition of Israeli automation company Panaya in February 2015.
Whistleblowers’ letters subsequently made various allegations. They ranged from Panaya being overvalued to top Infosys executives having personal interests in the acquisition, and the large severance packages of former chief financial officer Rajiv Bansal and former chief legal officer David Kennedy constituting hush money. The periodic rapprochement that followed Murthy’s public championing of the allegations and the board’s efforts to accommodate him never lasted long enough to be convincing. Murthy’s ostensible target for the alleged slippage in corporate governance norms may have been the board, but Sikka was clearly under fire. His position was, as he put it in his exit letter, increasingly untenable.
There is plenty of blame to go around, starting with Murthy. He has claimed in his response to the board blaming him for Sikka’s exit that the co-founders have no interest in “money, a position for our children and power”. There is no reason to doubt the first two. The last is unconvincing. In his conduct through the entire affair and his positioning the co-founders as the guardians of Infosys’ admirable history of high corporate governance standards, he has shown that he is as susceptible to corporate India’s promoter culture as anyone else. The manner in which he has conducted a public dispute with the Infosys board is not that of the minority shareholder he wished to be in 2014, after stepping away from company leadership. His calls for nominations and remuneration panel head Jeffrey Lehman and non-executive chairman R. Seshasayee to “show contrition” and “atone for” their role in Bansal’s severance package summon a moral authority that positions the co-founders as a separate power centre.
The board must share the blame. It has been strangely vacillatory in its handling of the Panaya affair and in its dealings with Murthy. Given that the concerns and allegations about the acquisition and the subsequent severance packages came from multiple sources, it did well to engage multiple reputed law firms to investigate. They gave Infosys a clean bill of health—which makes the board’s refusal to release the reports puzzling. The board’s lack of unity—at least some of them have engaged with Murthy in off-board consultations and been sceptical of Sikka’s credentials—and failure to set the terms of Murthy’s involvement have been just as damaging. Certainly, it should engage with shareholder concerns. But in attempting to accommodate Murthy repeatedly, it has failed to establish appropriate boundaries and collaborated in its own diminishment.
These are not problems unique to Infosys. The domination of first-generation companies in the service sector—and of family owned businesses in India’s corporate sector at large—mean that succession planning is a weak spot. In large part, Infosys has fallen prey to this. Sikka was brought on board after the co-founders had had their turn at the helm. A culture clash was inevitable—particularly at a time when the information technology sector is on the cusp of necessary change and difficult times due to technological advances and political conditions in the US. Shifts in the manner in which IT companies do business—such as the acquisition of bleeding edge firms that may seem a risky gamble to a more thrifty founder generation—are inevitable. Whether the old guard is able to step back and allow those shifts—and whether boards are able to manage it—may determine the sector’s future.
Is the Infosys board correct in holding Narayana Murthy culpable for Vishal Sikka’s exit? Tell us at email@example.com
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