Founders’ Keep­ers? A $5 Bil­lion Ques­tion

Due dili­gence and gov­er­nance may be se­ri­ous is­sues at In­fosys, but is it for Murthy & Co to play watch­dog af­ter ex­it­ing the man­age­ment? In­fosys needs to fig­ure the best way to utilise the cash it is stit­ting on

The Economic Times - - Deep Dive - Kala Vi­jayragha­van & Li­jee Philip Shel­ley Singh

They’re call­ing it Founder’s Remorse. NR Narayana Murthy founded In­fosys in 1981, re­tired three decades later, came back as ex­ec­u­tive chair­man in June 2013 and stepped down in a year af­ter hand­ing over charge to a pro­fes­sional man­age­ment led by CEO Vishal Sikka. In the process, he also left the board, which to­day com­prises a non-ex­ec­u­tive chair­man (R Se­shasayee), seven in­de­pen­dent di­rec­tors and two ex­ec­u­tive mem­bers (Sikka and COO Pravin Rao).

Last week, in a candid in­ter­view with ET, Murthy spoke of a “con­cern­ing drop in cor­po­rate gov­er­nance” at In­fosys. Sub­se­quent re­ports in ET also sug­gest the IT bell­wether may have fallen short of the stan­dards it’s been known for on the due dili­gence and dis­clo­sures fronts.

Murthy’s crit­i­cism led to the board ap­point­ing le­gal firm Amarc­hand Man­gal­das to act as an of­fi­cial com­mu­ni­ca­tion ve­hi­cle among its mem­bers, the com­pany’s founders and key stake­hold­ers. It will also guide the board on mat­ters such as the ap­pro­pri­ate form of en­gage­ment and shar­ing of in­for­ma­tion, while ad­her­ing to reg­u­la­tory norms.

In­fosys is a com­pany whose global de­liv­ery model was en­vi­sioned and nur­tured by the founder (along with six co­founders), which en­sures Murthy’s larg­erthan-life aura still per­vades the head­quar­ters in Ben­galuru’s Elec­tronic City. Murthy may have goaded the board into ac­tion, but in­creas­ingly, the ques­tion be­ing asked is, should the founder who stepped away from the board and man­age­ment be play­ing watch­dog? “Founders who step out should stay out,” de­clares M Damodaran, a for­mer chair­man of mar­ket reg­u­la­tor Sebi. “If they have con­cerns as share­hold­ers, they should write to the com­pany’s man­age­ment. If their re­sponse does not ap­pear con­vinc­ing, the mat­ter must be raised at the annual gen­eral meet­ing.” Damodaran, now chair per­son of Ex­cel­lence En­ablers, a cor­po­rate gov­er­nance ad­vi­sory firm, reck­ons that air­ing con­cerns in the me­dia in a con­fronta­tional man­ner, es­pe­cially if com­ing from per­sons closely iden­ti­fied in the pub­lic mind with the com­pany, can be “desta­bil­is­ing.” “While it seems odd for ma­jor share­hold­ers to en­gage with the board and the man­age­ment through the me­dia, it is equally odd for the board and man­age­ment to en­gage with share­hold­ers through a law firm,” he adds. “Such en­gage­ment is what the stake­hold­ers re­la­tion­ship com­mit­tee is specif­i­cally tasked with. In all of this, the prob­lem of asym­me­try of in­for­ma­tion should not be lost sight of.”

In­fosys is no fami ly-r un busi­ness, but since the founders col­lec­tively own 12.75% of shares, their po­si­tion is not too dif­fer­ent from a busi­ness in which the pro­mot­ers step back to leave day-to-day op­er­a­tions to a team of pro­fes­sional man­agers.

Take the Bur­mans of Dabur In­dia. Vicechair­man Amit Bur­man speaks about the role of the fam­ily in busi­ness. “They should be avail­able to give broad di­rec­tions or for any help re­quired, but should stay away from day-to-day man­age­ment. We be­lieve the fam­ily has a trustee­ship role to fol­low and, from time to time, give sug­ges­tions to the pro­fes­sional team, but the fi­nal de­ci­sion on whether to im­ple­ment that sug­ges­tion or not rests with the pro­fes­sional man­age­ment. The founder fam­ily, re­gard­less of the per­cent­age they own, is equal to all other share­hold­ers.”

To be sure, founders’ share­hold­ing does give them a right to make their voice heard. R Gopalakr­ish­nan, a for­mer Tata Sons direc­tor, says founders who have handed over to a suc­ces­sor may have ei-

The gen­eral feel­ing is that founders should give di­rec­tions, sug­ges­tions or help but stay away from day-to-day man­age­ment at the co

ther con­trol or in­flu­ence through their share­hold­ing. “In case the founder is a mi­nor­ity share­holder, they cer­tainly have the right to com­ment and in­flu­ence, prefer­ably through the board. The golden rule to re­mem­ber is that com­mu­ni­ca­tion, per­sua­sion and in­flu­ence are hugely valu­able in the gov­er­nance tri­an­gle among share­holder, board and CEO.” Shri­ram Subra­ma­nian, MD of cor­po­rate gov­er­nance firm InGovern, said founders are share­hold­ers who have the right to raise is­sues (and of­fer so­lu­tions) but can­not have pref­er­en­tial ac­cess to con­fi­den­tial in­for­ma­tion. “In­fosys has been less trans­par­ent on the ex­its of (for­mer chief fi­nan­cial of­fi­cer Ra­jiv) Bansal and (for­mer chief com­pli­ance of­fi­cer David) Kennedy and this shows that val­ues and prin­ci­ples were not right.”

Just when lo­cal IT ser­vices com­pa­nies are al­ready on the edge with ris­ing pro­tec­tion­ism and tight­en­ing visa norms in their big­gest mar­ket, the US, In­dia’s sec­ond-largest player is bogged down by gov­er­nance chal­lenges.

Al­though In­fosys CEO Vishal Sikka de­scribed is­sues raised in the me­dia as a dis­trac­tion, in­vestors await­ing a de­noue­ment are con­cerned about the ef­fect of this cor­po­rate gov­er­nance wran­gle. Share­hold­ers are anx­ious about what In­fosys plans to do with its stack of $ 5.25 bil­lion in cash. In ad­di­tion, they want to know how quickly Sikka will shift to the dig­i­tal model he’s driv­ing, from the worker ar­bi­trage sys­tem dom­i­nant when the founders ran the show. The CEO’s am- bi­tious goals in­clude $20 bil­lion in sales, 30% op­er­at­ing mar­gin and rev­enue per em­ployee of $ 80,000 by March 2021.

“The mar­ket is getting im­pa­tient about what In­fosys will do with the cash,” said a top man­ager at a se­cu­ri­ties firm, who asked not to be iden­ti­fied. “As they raise gov­er­nance is­sues, can the In­fosys board, man­age­ment and founders af­ford to take eyes off the com­pet­i­tive en­vi­ron­ment? IBM and Ac­cen­ture are getting stronger in dig­i­tal busi­nesses.” The con­sen­sus among in­vestors ap­pears to be that In­fosys must use its cash pile to ei­ther re­ward share­hold­ers or ac­quire as­sets. “First choice will be to look at busi­ness ex­pan­sion and strate­gic ac­qui­si­tion,” said the man­ager quoted ear­lier. “If there is no ac­qui­si­tion, In­fosys should re­ward share­hold­ers. Ei­ther way, In­fosys has to spell out the al­ter­na­tives.”

“Sit­ting on cash is drag­ging re­turn on eq­uity,” said Sarab­jit K Nan­gra, vi­cepres­i­dent, re­search, IT, An­gel Broking. “The only way to lift it is to in­crease the pay­out ra­tio (as TCS and Wipro have in­di­cated) or ac­quire as­sets.” Ac­cord­ing to an­other Mum­bai-based an­a­lyst who wished to re­main anony­mous, a buy­back is an op­tion to in­crease share­holder value. “Not do­ing any­thing is not a great sit­u­a­tion. It’s an op­por­tu­nity they are miss­ing,” said the an­a­lyst.

“They should use the cash to buy tech­nol­ogy prod­uct and so­lu­tion com­pa­nies in the US and spin off low-mar­gin busi­nesses like infrastructure man­age­ment ser­vices,” said Pari Natara­jan, co­founder, man­age­ment con­sult­ing firm Zin­nov. The other dilemma be­fore In­fosys is whether to get on to the dig­i­tal-first strat­egy or to con­tinue with the work­er­ar­bi­trage strat­egy, which al­lowed it to send soft­ware en­gi­neers from In­dia to client sites abroad at a lower cost than hir­ing them over­seas.

Un­der the ar­bi­trage model, “In­fosys will build on its rep­u­ta­tion for pre­mium ser­vices to pro­tect its in­dus­try-lead­ing mar­gins and off­set im­pact on share price by re­turn­ing cash to share­hold­ers,” said Peter Ben­dor-Samuel, CEO, Ever­est Group. How­ever, un­der the dig­i­tal-first vi­sion, In­fosys will ac­cel­er­ate in­vest­ments in au­toma­tion, an­a­lyt­ics, cloud and cog­ni­tive tech­nolo­gies. While In­fosys does not give rev­enue share for its dig­i­tal busi­ness – Sikka said last year that the com­pany’s “busi­ness is 100% dig­i­tal as we write code” – ri­vals are tak­ing to the new model. IBM and Ac­cen­ture have built strong dig­i­tal con­sul­tancy arms. Lo­cal ri­val Wipro bought Dan­ish agency De­signIT in 2015 to launch its dig­i­tal divi­sion and has spent $1.13 bil­lion in ac­quir­ing global firms in­clud­ing HealthPlan and Ap­pirio to boost its dig­i­tal of­fer­ing. TCS claimed a 30% growth in dig­i­tal busi­ness and Cog­nizant said 23% of rev­enue came from dig­i­tal busi­nesses in 2016. That in­cludes au­toma­tion, ma­chine learn­ing, AI and data an­a­lyt­ics, as op­posed to tra­di­tional bu s i ne s s s o f t wa r e main­te­nance ser­vices.

An­a­lysts be­lieve dig­i­tal busi­ness for top com­pa­nies is less than 10% at present. While the man­age­ment should fo­cus on busi­ness, the board­founders gov­er­nance tus­sle threat­ens to dis­tract ex­ec­u­tives and dent the brand im­age of In­fosys, which is grap­pling with shifts to a dig­i­tal strat­egy, slow­ing growth and moves on H-1B visas, which could im­pact mar­gins sig­nif­i­cantly.

Nan­gra of An­gel Broking be­lieves more on­site hir­ing and dou­bling the min­i­mum wage for H-1B visas could re­sult in a 30% hit on net profit for top play­ers.

In­fosys has to act fast to strengthen its gov­er­nance, show how it’s mak­ing the tran­si­tion to dig­i­tal and de­cide on what to do with its cash. Month/Year, Tar­get, Cost ($ mil­lion)

NoahCon­sult­ing, Kal­lidus Inc, Panaya*,




US *This is In­fosys’ sec­ond-largest ac­qui­si­tion; largest was Zurich-based Lode­stone for $350 m in 2012

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