THRUST AND PARRY
Amid whistleblower accounts, anonymous complaints and other allegations, the promoters, board and management of Infosys have had a running battle on their hands
Inflated purchases
CHARGE In 2015, Infosys acquired Israeli automation technology company Panaya, at a highly inflated price of $200 million
RESPONSE Acquisition cleared by the board, internal committees
Kickbacks
CHARGE SAP co-founder Hasso Plattner, who is a former employer and mentor of Vishal Sikka, had investments in Panaya. The purchase at an inflated price was payout and involved kickbacks
RESPONSE Three independent probes ruled out hanky-panky. Sikka and the board acted in the interests of Infosys alone
Hush money
CHARGE Rajiv Bansal, Infosys CFO during the Panaya purchase, refused to sign on the deal because of various errors of ‘commission and omission’. He was sacked and an attempt was made to buy his silence with a severance package 30x what his contract stipulated
RESPONSE The payout was for Bansal’s long service and to ensure that company secrets weren’t compromised. Only Rs 5 crore of the Rs 17.4 crore has been paid, the balance suspended pending ‘clarifications with regard to rights and obligations’ of the parties involved
Nepotism
CHARGE Sikka hired almost 50 senior executives from his former employer SAP, at inflated salaries. Some directors like Punita Kumar Sinha (wife of a Union minister) were appointed to curry favour
RESPONSE Hirings were on merit, cleared by internal teams. Salaries were market-driven and the new directors approved by shareholders. Punita Sinha is highly qualified
Flouted rules
CHARGE Executives close to Sikka violated company policies. Ritika Suri, hired as M&A head, travelled first class and stayed in hotels above her entitlement
RESPONSE There may have been a few exceptions in cases of ill health, family emergencies or client requirements
Extravagance
CHARGE Under Sikka, executives took chartered flights, Infosys rented expensive offices in the US
RESPONSE Only 3 per cent of Sikka’s flights were chartered. The office was rented to present the correct picture of a company aspiring to do high-end work
Executive pay
CHARGE The CEO and COO gave themselves fat pay hikes while asking ordinary Infoscians to accept lower pay hikes
RESPONSE Salaries of senior personnel market-driven, benchmarked to global competitors
Sham investigations
CHARGE The clean chit report was produced by lawyers and firms hired by the accused
RESPONSE World-renowned firms carried out independent investigations
Average performance
CHARGE Under Sikka, Infosys grew slower than TCS and Cognizant. The revenue targets—$20 billion overall and $80,000 per employee by 2020—were mere talk
RESPONSE Infosys improved its margins under Sikka and grew faster than its peers. It has record levels of cash on its balance sheet
Failure of corporate governance
CHARGE The board—specifically the remuneration and audit committees—failed in its fiduciary duty to shareholders and stakeholders
RESPONSE The board has been transparent and forthright in all its dealings. It has tried to engage with the founders to understand their viewpoint and has worked in the interests of all shareholders, not just promoters
from wife Sudha is part of corporate folklore.)
In post-1991 liberalised India, that story of growth, on the basis of merit, not ‘sifarish’ (recommendation or connections), had a powerful appeal. It was also a carefully nurtured narrative, from the frugality of its successful founders who still held on to middle-class values to their willingness to share wealth in an egalitarian manner.
By setting standards in financial disclosure, transparency and pioneering industry standards such as the generally accepted accounting principles (GAAP), global delivery model (GDM) or sharing wealth through ESOPs (employee stock option plans), it didn’t take long for Infosys to become a national institution.
However, with promoters deciding to take turns at the top job in the company, a changing industry landscape which had moved beyond ‘lift and shift’ as well as ‘labour arbitrage’ meant that Infosys, like others in the Indian IT sector, began to feel the effects of a slowdown.
To his credit, Murthy, who had come back to lead Infosys through this sluggish phase, realised the industry had changed and required a fresh pair of young, energetic hands to steer the company into the next phase of growth. Thus the Sikka hire (though it came after intense pressure from shareholders, as Murthy’s second stint was marked by a spate of high-level executive exits).
A few analysts had, at that time, questioned Sikka’s suitability, given that he had no knowledge of the IT services industry and was more of a software product guy, a different beast altogether.
THE SIKKA WAY
Despite its pretensions of being a global company, 90 per cent of Infosys employees were based in India. Sikka, while born in India, had spent much of his adult and professional life in the US and was removed from the strong culture, systems and processes Infosys had carefully built over the years. Also, by deciding to locate himself in the US rather than in India, he shifted the company’s centre of gravity, creating unease within.
Murthy and Infosys initially defended the choice of Sikka as CEO saying that was the way to go and Sikka with his technocratic credentials and ‘hail-fellow-well-met’ exuberance was the perfect face to lead the company.
But even as Sikka would become the face of the company—for customers, analysts, government and media— Infosys, which always had excellent backroom execution skills, would continue to be run by Pravin Rao, a Murthy hire and a company veteran of three decades.
By the time Sikka came in, Infosys, which had listed on Indian bourses in 1993 and on Nasdaq in 1999, was a widely-held stock. Through its ESOPs, hundreds of its employees became dollar millionaires. So, by the time the first non-founder CEO came in, the promoters held just about an eighth of the company (12.8 per cent, as on June 2017).
However, the promoters, and specifically Murthy, had considerable clout, which owed more to the aura of having built the company than their actual shareholding (Murthy held just 0.38 per cent in Infosys). Famous for his temper and his tendency to micro-manage, Murthy vowed to keep away from the company’s decisions and let the new CEO take the firm in whatever direction he saw fit.
Infosys had traditionally also been fiscally prudent. The reward for its executives lay in the stock options, which fetched humongous returns in the go-go years of growth. Their salaries, however, were modest by global standards.
In contrast, Sikka’s salary of $11 million or over Rs 70 crore per annum (following a revision last year), while corresponding with global standards, caused much heartburn, with Murthy saying it was 2,000 times the entry-level salary at Infosys. It was also reportedly much
higher than his counterparts in the industry: Former TCS chief N. Chandrasekaran was paid Rs 25.6 crore in 2015-16, while Wipro CEO Abidali Neemuchwala’s annual pay was Rs 12 crore.
Infosys also preferred to grow organically, with Murthy valuing profitability over revenue growth. This meant that it enjoyed the highest margins. At its peak, Infosys enjoyed over 30 per cent net margins, more than double its global peers such as Accenture and IBM, and higher than Indian competitors with similar cost structures, indicating that it took on only high margin work and squeezed better efficiencies.
Recognising this, markets gave Infy shares a premium over its peers. The company, therefore, was always careful about making acquisitions that could dilute its margins. In 2008, when they made a bid for the UK-based package implementation company Axon, and HCL Tech swooped in with a counter-bid, Infy refused to raise its price, citing likely price and margin issues, and lost the deal. Acquisitions it typically made were small and mostly for either technology or for customers of the acquired company.
In 2014, when Sikka came in, Infosys was sitting on a huge cash chest of $4.9 billion. The new CEO wanted to deploy it in making acquisitions that could add value.
CLOUD OVER PANAYA DEAL
Six months into Sikka’s tenure, in February 2015, Infosys announced that it would acquire Panaya, an Israeli provider of automation technology as a part of its ‘new and renew’ strategy. While Infosys never disclosed how much it paid for Panaya, market analysts estimate the payment at between
Chairman of the board R. Seshasayee says there have been no payoffs and all valuations were subjected to the usual due diligence Ex-Microsoft India chairman R. Venkatesan and now the Infy board co-chair, says the targets that Sikka set will now get “pushed back by a couple of years”
$200 million and $230 million. But what made the move interesting was that Panaya had been partly venture funded by Hasso Plattner, the billionaire founder of SAP and Sikka’s former mentor, with whom he retained excellent relations despite his departure from the company. Sections of the market were surprised at the valuation at which Panaya was acquired; murmurs that persisted over other high-value acquisitions, such as of Skava, a Silicon Valley based e-commerce start-up that Infy acquired.
A whistleblower complaint alleged that the then CFO Rajiv Bansal had raised concerns on the Panaya deal but was allegedly sacked. To buy his silence, he was allegedly paid a severance package 30 times what his actual contract stipulated.
Sikka, meanwhile, hired a number of ex-SAP colleagues for senior roles at Infy, forcing the departure of some of the old-timers, derisively referred to as ‘deadwood’. The new hires came at salaries substantially higher than departing ones. Ritika Suri, one such former SAP colleague, was made the M&A head (she quit in July this year).
There was also a clash of cultures between some of these new hires and the traditional company. Historically, the company encouraged senior executives to travel economy class and the top leadership by business class. Sikka himself was alleged to have flown around in chartered flights, a charge chairman of the board, R. Seshasayee, said was “unfair as only 3 per cent of his flying was done using (chartered planes)”. However, a few of the new hires started flying first class and stayed in hotels much above company norms.
Several of the senior executives forced to depart had worked at the company for decades. So they started reaching out to promoters and specifically Murthy when they felt “injustice had been done and wrong decisions taken”.
SIKKA’S CUP OF WOES
While Infosys, which had been lagging in growth prior to Sikka’s arrival, saw some improvement, it did not grow above the industry average. In fact, some players like Cognizant and TCS grew faster, though people sympathetic to Sikka say that their growth came at the expense of margins. Sikka’s claim of generating $20 billion in revenue by 2020 and ensuring per employee revenue of $80,000 also seemed fantastical.
But the Infy board flashed key figures to show how the company had fared much better under Sikka. Revenue went up from $2.13 billion in the first quarter of FY2014-15 to $2.65 billion in the June quarter this fiscal. Operating margins, a measure of the company’s efficiency, stood at 24 per cent, bettering some competitors for the first time in many years. Revenue per employee grew for six consecutive quarters, even as the company brought down attrition to 16.9 per cent from 23.4 per cent a year ago.
Ravi Venkatesan, a former Microsoft India chairman who had been inducted into the board and is said to have been made the co-chair after the promoters lost confidence in Seshasayee, has publicly admitted that the targets Sikka announced with much fanfare have now been “pushed back at least by a couple of years”.
Murthy is believed to have repeatedly talked to the board and the executive team including Sikka about the so-called missteps in corporate governance. While he had earlier chosen to give up even the position of honorary chairman emeritus and not stay on the board, the ensuing fissures in relations between the founders and the board led to D.N. Prahlad, who is rumoured to be a relative of Murthy, being inducted into the board. A decision some board members are believed to have criticised. Prahlad, though a former employee of Infosys, now ran Surya Software, which was arguably a competitor.
Both Sikka and Rao, now current interim MD and CEO, were given substantial salary hikes when other employees were asked to either forgo raises or received paltry ones. This also raised questions among promoters.
Building up over a period of time, these issues spilled out into the open six months ago, when an anonymous whistleblower wrote a mail to market regulator Sebi (a copy of which india today reviewed) making several accusations against Sikka, including some of those listed above. Murthy and the promoters used the mail to publicly accuse Infosys of corporate governance failures and demand a probe.
POINT, COUNTERPOINT
Initially, the board resisted and first appointed Cyril Amarchand Mangaldas to look into the allegations. The law firm gave Sikka and the board a clean chit. When this did not satisfy the promoters, global law firm Gibson Dunn & Crutcher LLP were asked to investigate. They too gave Sikka a clean chit. Murthy has responded to these clean chits saying “…shareholders who have read the whistleblower report have told me it is hard to believe a report
produced by a set of lawyers hired by a set of accused giving a clean chit to the accused and the accused refusing to disclose why they got a clean chit!... This is not the way an impartial and objective investigation should be held.” In a letter to the Infosys board in July, he had raised a set of eight questions, mostly pertaining to the Panaya deal and the executive payoffs, and asked the board to come clean. One of his key demands was that the entire investigation conducted by the law firms be made public. Murthy immediately made the letter public following Sikka’s resignation. He was also miffed by Venkatesan’s letter to him saying the board has ‘closed’ the Panaya matter.
It didn’t help that the Panaya acquisition didn’t pay off, though the company does not agree with this assessment by some external analysts. “That is the nature of acquisitions. Some pay off, others don’t. Look what happened to $350 million Lodestone acquired when a promoter was the CEO. It was a spectacular failure,” says an Infosys executive sympathetic to Sikka.
Seshasayee rubbished the allegations of payoffs and defended valuations saying the company had been subjected to the usual due diligence of external and company filters. Speaking at a press conference in February, Seshasayee said, “Multiple independent investigations have said there is no such thing (as kickbacks).”
Seshasayee also defended the payment to Bansal, saying “it was an error of judgement and made only because of his long service to the company”. The promoters did not buy this argument. Murthy kept talking to the media, expressing unhappiness over the way things were being run at Infosys and even said he had been advised that Sikka was just CTO—not CEO—material.
The continuous criticism and the selfdestructive battles seem to have left Sikka exhausted, leading to his resignation. “It is clear to me that despite our successes over the last three years, and the powerful seeds of innovation that we have sown, I cannot carry out my job as CEO and continue to create value, while also constantly defending against unrelenting, baseless/ malicious and increasingly personal attacks… I am proud of how our Board has worked, tirelessly, selflessly, these past quarters, despite intense, unfair and often malicious and personal criticism, in not only upholding our standards of governance and integrity but also indeed raising these,” he said in a mail to Infosys staff.
Former CFO V. Balakrishnan, perceived to be a Sikka critic, has asked for the board to be completely reconstituted. Another former HR and finance head, Mohandas Pai, accused Sikka of using Murthy as an excuse for the company’s poor performance.
While Sikka said he would take on the role of Executive Vice Chairman till a new CEO and MD could be found, the battle between founders and the board at Infosys is hardly over.
With a divided board, an interim CEO and an executive VC bitter about his sacking, Infosys will find it hard to continue on its journey of industry-leading growth. Inexplicably, Nandan Nilekani, a co-founder and one of the most successful CEOs of the company, has been quiet, amid clamour for his return.
DANGERS AHEAD
R. Ray Wang, principal analyst & founder, Constellation Research Inc., a Silicon Valley-based tech industry research firm, says, “Vishal’s departure is a loss for both Infosys and the industry because he succeeded in giving Infosys a shot at the art of the possible.” IT services vendors will have to make some very hard choices in order to successfully negotiate the next wave of disruptive change, Wang argues. “So the next Infosys CEO must have the backing of the full board to get there.”
Sanchit Vir Gogia, CEO of research and analyst firm Greyhound, says competitors are already delighted at Infosys’s plight. “Large clients don’t like turbulence,” he says. “Satyam was an Indian company, too, and everybody wants governance issues fully addressed. Talent will flee. Clearly, the promoters have raised some serious ethical and corporate governance issues that need to be addressed. It is in the interests of the board, the executive team and the promoters to sit across the table and sort this out. Not to say about the two lakh employees, investors and clients.”
There is a lot of interest in how foreign portfolio investors (FPIs) such as Oppenheimer, Vanguard, Abu Dhabi Investment Authority and the Government of Singapore, who collectively own 37.5 per cent in Infosys, will react to the Sikka resignation and the ongoing tussle at Infosys. Oppenheimer, for one, had come out publicly in his support this February, when Murthy had raised the same issues and demanded Seshasayee’s scalp. After a brief lull, the tensions have resurfaced. However, the FPIs have not responded in public so far. “The investment team’s thesis on Infosys has not been materially affected by the CEO’s resignation,” was all that an Oppenheimer spokesperson would say.
People are hoping for Nandan Nilekani, a co-founder and one of the most successful CEOs of the company, to intervene in the matter
With Sikka’s departure, Infosys’s immediate challenges include finding a suitable replacement against the backdrop of his acrimonious exit, finding closure to the ‘founder issues’ and maintaining business traction, especially in large accounts, says Vaibhav Dhasmana, equity analyst at global investment banking firm, Jefferies. In the long term, Infosys will need to create mechanisms to shield management from ‘external noise’, he said. Preventing attrition in senior management and sales becomes crucial too.
Questions have been raised about the boundaries of promoters and the alignment of their interests with those of the minority shareholders. Since attracting an external candidate could be difficult, an internal hiring is more likely, says Pankaj Kapoor, an analyst with the brokerage firm JM Financial, arguing that this would ensure continuity in strategy, minimise cultural conflicts and maintain the continuity of client interface. Some observers speculate that the Infosys board and Murthy could come under pressure from institutional shareholders and regulators to reconcile, which could lead to the induction of a couple of Murthy representatives into the board and/ or a titular role for him in the company.
The events at Infosys could also lead to greater shareholder activism. With many more such instances expected to happen in India as companies transition from being founder- to professional CEO-led, institutional investors need to step up their act, says Shriram Subramaniam, MD of InGovern. The proxy advisory firm had red-flagged Murthy’s induction of son Rohan as executive assistant during his second stint at Infosys.
One immediate danger for Infosys is that of increased attrition among its unsettled employees. Already, CVs of senior Infosys executives are floating in the market, says Kris Lakshmikant of Headhunters India. “The more this issue is allowed to fester, the more damage it will cause on all fronts. They need to resolve this quickly.”
While Murthy is said to be adamant about ensuring that ‘truth prevails’, the former senior executive of the company quoted above claims that “Nandan (Nilekani) and other well-wishers are working behind the scenes to arrive at a compromise that might involve reconstituting the board and having a strong internal candidate who understands the Infosys culture succeed Sikka”.
InGovern’s Subramaniam says there are only a few scenarios that can play out. “Either promoters sell their stake and exit, or get themselves or their nominees on board and work with other shareholders, or there is an external bid to acquire the company, with or without their help. Either way, shareholders would want greater clarity and transparency at the earliest.”
How the Infosys saga plays out is important not just for the company but for Indian IT, as most companies in the sector face the same set of market challenges. Can Infosys get back to its winning ways?