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Business News/ Market / Mark-to-market/  Why Vishal Sikka and Narayana Murthy need corporate governance lessons

Why Vishal Sikka and Narayana Murthy need corporate governance lessons

The Tata group and Infosys, both hailed as shining examples of corporate governance in the past, have had dirty linen being aired in public

Graphic: Subrata Jana/MintPremium
Graphic: Subrata Jana/Mint

India hasn’t had a great reputation with regard to corporate governance.

Nevertheless, it has been ranked higher than some other Asian countries such as South Korea, China, the Philippines and Indonesia by Asian Corporate Governance Association. Even that reputation now lies in tatters. The Tata group and Infosys Ltd, both hailed as shining examples of corporate governance in the past, have had dirty linen being aired in public.

At the heart of Infosys’s problems lies an unusually high severance payment made to former chief financial officer Rajiv Bansal. While it’s fair to question N.R. Narayana Murthy’s wisdom in going to the press, especially with insinuations the payment may include “hush money", it’s also naive to brush the issue under the carpet.

ALSO READ | Infosys: Vishal Sikka, Narayana Murthy factions headed for all-out war

Bansal’s severance pay amounted to 24 months of salary. Two former Securities and Exchange Board of India officials say that the severance pay is excessive and raises eyebrows.

Worse still, while Infosys had announced Bansal’s resignation in October 2015, it was only in May 2016, when the company released its annual report, that it became known he had been given an extremely generous severance package.

Later, in August, the company’s audit committee commissioned Cyril Amarchand Mangaldas to investigate certain allegations about the payment.

The law firm found that the severance pay was “not with the intention of silencing him from disclosing any impropriety".

As things stand, the Infosys management and board believe they have done enough to address concerns and doubts about the issue. Even so, the issue raises a number of red flags with regards to transparency and propriety.

ALSO READ | Rajiv Bansal issue at Infosys could have been handled better: Kiran Mazumdar-Shaw

Both the company’s board and management would do well to give assurances that such mishaps don’t get repeated.

At the same time, the company’s founders and former officials should tone down the rhetoric. Infosys may have been known for good corporate governance standards in the past, but it was also because of poor standards elsewhere. In the land of the blind, the one-eyed man is king.

Under Murthy’s watch as executive chairman, the company followed poor disclosure standards when it came to a significant profit warning that sent its stock down by over 8%. Similarly, a number of analysts and industry experts had raised eyebrows when Murthy decided to bring his son along when he was appointed executive chairman in 2013.

So, while the corporate governance watch by the founders is generally welcome, they must realize going over the top comes across as extremely hypocritical.

In like manner, the company’s former CFOs who are demanding that the company returns a larger proportion of cash back to shareholders seem to have forgotten that Infosys has had a long history of holding on to hoards of cash, even under their watch.

Finally, those who defend Sikka point to the improvement in the company’s performance since he joined as chief executive officer in 2014.

Some investors and analysts point out to this as well, also suggesting that the new CEO must be given room to function freely and not bogged down by needless accusations. But being given freedom to function shouldn’t be used as a sanction for transactions that raise red flags.

Besides, it’s not like Sikka has had an outstanding run as CEO.

He’s certainly done better than the previous CEO, but that’s not saying much.

As the chart at the top shows, Infosys shares are only marginally better off since Sikka’s appointment was announced, especially when seen in the backdrop of enormous erosion in value (relative to peers) post the financial crisis.

Clearly, not all stakeholders are enamoured by the new CEO. There’s still a long way to go.

If Sikka and his well-wishers want the journey ahead to be smooth, they have a major role to play in it as well, especially with regards to good corporate governance standards.

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Published: 13 Feb 2017, 07:44 AM IST
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