CRISIS OF CREDIBILITY
WITH ITS CO-FOUNDERS RAISING ISSUES OF CORPORATE GOVERNANCE AT INFOSYS, THE INFOTECH MAJOR IS FORCED TO TAKE A HARD LOOK AT THE WAY IT DOES BUSINESS
The Infosys board battles serious allegations of falling corporate governance standards.
Never before in his 45-year-old career has R. Seshasayee, 68, the soft-spoken and reclusive chairman of Infosys, hogged so much media limelight. All through his professional life, mostly with automotive major Ashok Leyland and as chairman of IndusInd Bank since 2007 and as a board member of ICICI Bank for five years till 2003, he has steered clear of controversies. But the past few days, perhaps, have been his most challenging as he battled accusations of laxity in corporate governance at India’s second-largest IT services company, with its co-founders wanting to settle for nothing less than his resignation from the board.
But ‘Sesh’, as close friends and colleagues call him, is nonplussed. On February 13, as the Infosys board presented itself before the media for the first time since controversies shook its seemingly unshakeable edifice, Seshasayee wore a confident demeanour, setting out to clear the air on a series of allegations against the one-time IT bellwether, by none other than its iconic co-founders, including former chairman N.R. Narayana Murthy, former CFO V. Balakrishnan and Mohandas Pai, who was part of the early leadership of the company.
Admitting there could have been cultural differences between the current board and the founders, Seshasayee deflected questions regarding the demand for his ouster: “There is a board that has reposed full faith in me and what I am doing. As long as I enjoy that faith, I shall continue.” Minutes after the press meet, reports quoting Murthy said he was sticking to his demands (including appointing a co-chair for Infosys, inducting new independent directors on the board and scrutinising pay and severance packages for top Infosys executives). Balakrishnan insisted the Infosys board had lost credibility and pressed for Seshasayee’s removal.
At the heart of the problem at Infosys is a certain ‘erosion in values’, allege the co-founders. They cite the exorbitantly high salary drawn by CEO Vishal Sikka, 49, who was brought in from German software company SAP AG in June 2014. Sikka draws $11 million, or around Rs 74 crore, annually, including stock options (revised from $7 million last year). Murthy says this is 2,000 times the entry-level salary at Infosys. The pay might correspond to global standards or could be lower (Microsoft CEO Satya Nadella drew $18 million in fiscal 2016), but according to reports, it’s much higher than Sikka’s counterparts in the industry—former TCS chief N. Chandrasekaran was paid Rs 25.6 crore for 2015-16 while Wipro CEO Abidali Neemuchwala’s annual pay was Rs 12 crore.
“When Vishal’s compensation was raised to $11 million, the fixed component came down from $5.8 million to $4 million,” Seshasayee explained. The variable component went up, and was tied to the length of the CEO’s association with Infosys and his performance. “We had a global consultant look at his compensation, and it was benchmarked with his peers before taking the decision,” he added. On allegations that Sikka used private jets to attend meetings, Seshasayee said Sikka had occasionally used chartered flights, but it constituted only 8 per cent of his travel for NovemberDecember 2016. “While we need to look at the cost, we should not forget the value part,” Seshasayee said, alluding to Sikka’s contribution to Infosys’s turnaround.
Sikka, who holds a PhD in computer science from Stanford University, got a relatively free hand in his first year at the helm. He came up with a slew of buzzwords and policies, such as ‘design thinking’, ‘new & renew’ and ‘zero distance’ to re-energise the company. Several senior Infosys employees who had helped build the firm left as Sikka brought in his own team, causing heartburn, say insiders.
One of the first things Sikka did was do away with the strategic business unit format in favour of a consolidated delivery approach to achieve greater economies of scale. He set a $20 billion revenue target by 2020 (from $10 billion at present). This couldn’t be achieved with traditional business methods. More automation and digitalisation is Sikka’s vision for Infosys. “The endeavour is to transform to a reality where automation is coming in a big way,” he said on February 13. “My target for the company is for it to become more innovative and go higher in the value chain.”
No wonder Infosys investors have thrown their weight behind Sikka and the board. Oppenheimer Funds, Infosys’s third-largest institutional investor controlling about 2.7 per cent in the company, said the founders needed to accept the firm was publicly listed and no longer ‘their’ company. The open support from a foreign institutional investor should come as a boost to Seshasayee and Sikka, as it sends a positive signal to the firm’s overseas clients. Infosys, which employs 0.2 million people, earns 97 per cent of its revenue from overseas business. It has over 18 clients in the
Infosys investigated, but found nothing untoward. However, Infosys board member Kiran Mazumdar-Shaw said Bansal’s severance package could have been handled better and “moderated”.
Punita Sinha’s appointment as an independent director in January 2016 was also questioned over corporate ethics, as her husband, Union minister Jayant Sinha, was MoS finance at the time.
Insiders say Sikka’s drive for mergers and acquisitions hasn’t gone down well with some co-founders. In its previous three decades, Infosys acquired just two companies. Sikka acquired four in 2015 alone, at $550 million.
The Infosys crisis mirrors somewhat the developments at the Tata Group where the promoters, mainly Tata Trusts led by Ratan Tata, which hold over 60 per cent stake in Tata Sons, ousted Cyrus Mistry in a boardroom battle. The difference is Infosys shares are mostly held by the public (87 per cent), including FIIs, while Murthy and 18 others, part of the promoter family, hold 12.75 per cent. So, the latter’s statements can influence public opinion, but they don’t have much say in the firm’s day-to-day management. Murthy and his family are the largest shareholders (3.44 per cent stake, worth Rs 7,800 crore).
“Murthy and the others have the right to raise issues, but it should not have been done in public,” says Shriram Subramanian, MD, InGovern, a proxy advisory firm. In 2013, when he returned as Infosys chairman, Murthy himself had faced flak for inducting son Rohan Murty as his executive assistant.
The way forward? Some experts feel the Infosys board should be reconstituted with some new independent directors. The severance payouts should be reviewed. By agreeing to listen to the stakeholders, including the co-founders, more keenly, Seshasayee may have put an end to the public battle for now. But only a step-by-step mending of the firm’s processes, including the slack governance standards, as alleged by the co-founders, will bring lasting changes as the IT giant struggles to compete in a tough global competitive environment. agreement”. The amount paid was just Rs 5.2 crore; the balance remains suspended since April 2016, he said.
But Murthy alleged the payouts could be “hush money”. An anonymous whistleblower had written to the management (the letter was leaked to the media), alleging Bansal was paid Rs 17.4 crore to buy his silence, since he was privy to details of the February 2015 $200 million acquisition of Israeli software firm Panaya, which he felt was overpriced. $100 million revenue zone, an IT industry benchmark for high-value clients.
Another issue is the severance payouts. In a January filing with the US market regulator, Infosys said former general counsel David Kennedy would get a severance payout of $868,250, or Rs 5.8 crore. In October 2015, CFO Rajiv Bansal got a severance package of around Rs 17.4 crore. Seshasayee said Bansal’s package “took into account complex circumstances and it was a bona fide business
HOLDING FORT Infosys chairman R. Seshasayee and CEO Vishal Sikka at the press meet held by the company’s board in Mumbai on February 13