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Case Study Corporate Governance Infosys Placement

The two are iconic names. They command enormous brand equity. They had been in the news for all the wrong reasons. The happenings at Tata Sons and Infosys have brought the focus firmly on corporate governance. Some may call them board-room tussles. Others may view them as owners-versus-the-board fight. The question is: Have these episodes hurt governance in these organisations?

In both instances, owners or the founders (Ratan Tata in Tata Sons and N.R. Narayana Murthy in Infosys) were in the eye of a storm. While the Tata board was run by a mix of promoters-cum-professionals, Infosys founders had left it to professionals to run the show. At Bombay House, it all started with the ouster of Cyrus Mistry as the chairman, resulting in Mr. Tata taking over as the interim chairman of Tata Sons. The development led to a slew of allegations and counter-allegations. Questions were raised on the way business had been run and certain strategic decisions made. The Mistry-Tata battle also reached courtrooms. In the case of Infosys, Mr. Murthy flagged issues involving higher compensation to executives, acquisition strategy and appointment of independent directors. He publicly expressed unhappiness over the current management. In the case of Tatas, they chose to remove Mr. Mistry.

At Tata Sons, the controlling shareholder (Tata Trusts, which own 68% stake) had lost faith in its chairman to lead the group and subsequently replaced him. In Infosys, the founders own only 13% stake. Still, they expressed dissent.

After an ugly fracas, N. Chandrasekaran has taken over as Tata Sons chairman. His elevation has been smooth. There are signs of the group looking to resolve many a contentious issue that dominated the headlines in the wake of the Mistry-Tata fight. The group’s cash cow TCS has announced a ₹16,000-crore share buy-back programme. Tata Sons has indicated that it would also participate. The funds thus obtained would help pare its debts. Tata Sons also has worked out a settlement with DoCoMo, which was one of the key friction points between Mr. Tata and Mr. Mistry. All the subsequent events have been very smooth with almost the entire shareholding community supporting the promoter’s initiatives. It is also a happy ending to one of the major controversies with DoCoMo. The way the settlement is being done indicates clearly Mr. Tata’s ways of doing business.

At Infosys, the board was quick to clarify issues raised by the promoters.

Targets differ

There is a crucial difference between these two episodes, however. In the case of Tata Sons, the target was the chairman, Mr. Mistry. At Infosys, the whole board and, by inference, the senior management, were the targets for the founders. The Tata issue turned legal because there was definite action by the controlling shareholder. In Infosys, it was about the founders expressing their dissent on certain decisions taken by the board. Do the owners or founders have the right or obligation to an organisation that they have assiduously built over many summers? More precisely, can the board or management just brush aside the view of a ‘quality shareholder’ (Mr. Tata and Mr. Murthy in these instances)? It is never in doubt that Mr. Tata is a globally revered name. It is also well known than Mr. Murthy is the password for India in gaining global recognition. Events at the Tata empire have subsequently proved that shareholder supremacy prevails in the end. The succession at Tata Sons has turned out to be a smooth affair, and the operating companies did not see any performance dislocation in those troubled times.

Analysts also point to a core difference between these two cases. In the case of Tata Sons, the owner and quality shareholder (read Mr. Tata) was pitched against a chairman (read Mr. Mistry). In Infosys, Narayana Murthy-led founders were largely responsible for professionalising the organisation right from the time of inception. The current professional management headed by R. Seshasayee, not surprisingly, felt no constraint in admitting to their mis-judgement, if any, and papering over their differences with the founders who are professionals in their own right.

According to S. Santhanakrishnan, an expert on corporate law and governance and also a director on the board of Tata Global Beverages, corporate governance has succeeded in both instances. “While the issues were handled differently, what is to be appreciated is how quickly the problems were resolved. Infosys board was quick to address issues raised by the founders. At Tatas, the leader had to be replaced because of lack of confidence.

“It is also further strengthened by the fact that shareholders have full faith in Tata’s name and brand and all stakeholders including stock markets have veered positively, at the end, towards the Tata group,” he said. Shriram Subramanian, Managing Director of InGovern, a firm tracking corporate governance issues, said that the differing methodologies pursued in these instances should be understood in the context of targets of founders and owners.

There is a lesson to be learnt from these episodes. The trust of the shareholders — more so that of quality shareholders — can never be wished away, Mr. Santhanakrishnan said.

The Indian IT industry is facing uncertain times, thanks to the recent political and social developments taking place globally. In such a time, India’s second largest software firm - Infosys - flagging concerns over transparency and corporate governance by questioning the compensation package of CEO Vishal Sikka may have a strong impact not only on Infosys as an organization, but on the Indian IT sector in general.

Sources said the founders did not raise questions on Sikka’s performance as such, given that the entire IT industry has been witnessing slowing growth. However, some of the founders, led by NR Narayana Murthy, raised questions on certain decisions taken by the company in the last one year that they perceive as questionable.

According to them, the transparency and corporate governance at the company has been hit by the huge pay package paid to Sikka as salary and the amount paid to its former chief compliance officer David Kennedy, reports Business Standard. They also wanted the board to be prudent on setting the ambitious goal of achieving $20 billion in revenues by 2020. Under the current circumstances, achieving this ambitious target would mean doubling of revenues in the next three years.

Read more: 3 Ways Infosys Can Hit $20-Bn By 2020

Founders of Infosys also felt that the board should have been more proactive in questioning the decisions taken by the executive team of the company. There were even suggestions that “value based members” namely TV Mohandas Pai, V Balakrishnan and Marty Subramanian should be brought back into the board. However, any likely decision regarding the composition of the board or the future plans of the company will be taken after discussion with key investors, the company said. [Read the full article here]

In response to a query by CXOtoday, Infosys said: “The Board receives suggestions and inputs from various stakeholders, including promoters, which are evaluated with due importance. The firm will continue to be guided by the overall interests of all stakeholders. With regard to concerns on governance being discussed in the media, we would like to reiterate that all decisions have been made bona fide, in the overall interest of the Company, and that full disclosures have already been made thereon.”

It’s Sikka vs. founders

Since his appointment in August 2014, Sikka has been focusing on automating the back-end operations, and growing the company’s portfolio of innovative offerings. He enhanced the company’s engagement with the global entities by setting up an investment arm that backs new technologies.  

Read more: 5 Game-Changing Ideas Of Vishal Sikka

Despite these efforts on staying relevant amid a rapidly changing business environment, the founders led by NR Narayana Murthy have had an uneasy relationship with the current board ever since the non-promoter CEO Sikka took over as CEO, said a report on The Indian Express [Read the full report here]. 

The report suggests, the founders were divided in their votes on the issue of Sikka’s annual compensation increase from $7.08 million to $11 million. Undoubtedly, they are now desperately seeking to safeguard the interests of the shareholders.

However, Infosys’ success story for years has not been built on its profits and revenues alone, but the company leads by example for its high standards of corporate and ethical governance. So, when its founders have expressed concern about issues related to pay and governance, it is important for them to provide greater clarity to the matter, said a source familiar with the incident.

Infosys becoming a Tata like war?

Some observers believe that the boardroom tension at Infosys could lead to a Tata-like war. In October 2016, Tata Sons, the Tata Group’s holding company, unceremoniously removed chairman Cyrus Mistry, and brought back former chairman Ratan Tata to the corner office, even though it was a temporary arrangement. [Read the full story here]

Likewise, Infosys’s founding team, too, may try to oust Sikka, Shriram Subramanian of proxy advisory firm InGovern told ETNow. “They (founders) may move as a shareholder and try to either remove Vishal Sikka or even some other board members who are on Vishal Sikka’s side or supporting Vishal Sikka,” he said.

Needless to say, India’s present Corporate governance is in a depleting state and is dissuading global investment potential in the country, according to a recent report by Kroll, which suggests conflicts and misconducts in Indian corporate are adversely affecting the trust among the global investors.

“The corporate governance environment in India is worse and more importantly, how the Indian promoters behave in the Corporate environment is not in a direction to promote healthy business practices. Because many businesses in India are still family controlled and promoter run, the internal controls are often tend to be are designed in a way to shield the promoters,” Reshmi Khurana, Managing Director and Head of South Asia for Kroll, said, adding that they need to make sure that the external audits are completely independent, internal audits are truly meaningful and the board is completely independent to ensure higher level of transparency regarding any matter.

Tags: Vishal Sikka, Infosys CEO, corporate governance

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