Why Infosys Matters

N. R. Narayana Murthy is an iconic business leader. One of the magazines in my media group nominated him Business Leader of the Year in 2004 when Infosys was possibly India’s most admired company.

Sadly, that’s not the case anymore. The reason isn’t just the accusations of poor governance levelled against the current management, ironically by Murthy himself. The story is far more complex.

Infosys began to falter soon after Murthy stepped down as chairman in 2011. By 2013 the problems – of direction, growth and profits – were grave enough for Murthy to return as executive chairman on June 1, 2013.

That was the first mistake in Murthy’s otherwise impeccable career. Founders, once they let go, must stay away. Returning to the company in an executive role demoralises the company’s top management, unnerves shareholders and sends a message to staff down the line that just two non-Murthy years (2011-2013) were enough for things at Infosys to go awry.

Murthy then made his second mistake: he hired his son Rohan Murty (who, in a show of independence, spells his surname differently from his father) to be his executive assistant.

While Rohan is exceptionally bright, he had years ago said categorically that he would not join Infosys like traditional family dynasts in India do. We applauded him. By reneging on that commitment, albeit for a one-year term and under special circumstances, Rohan did not burnish his reputation for high-mindedness.

The optics of “Murthy and Murty” in Infosys’ corner office took some of the shine off the company’s policy of promoting merit and abjuring family dynasties. None of the other founders’ children have a significant role in Infosys.

True to their word, the Murt(h)ys stepped aside after a year to make way for new management. Vishal Sikka was appointed CEO – the first non-founder to be given the top job which, when one thinks about it, is not a particularly inclusive policy for a company that by 2014, when Sikka was hired, had been run by founders for over 30 years since inception.

In principle, founders once they sell their majority stake and/or resign from an executive position, should not interfere with the new management.

When I sold the equity in my first media firm, Sterling Newspapers Pvt. Ltd., to the Indian Express group, I did not once step into my old office headquarters at Nariman Point in Mumbai’s premier business district. I remained on the board of directors of Sterling Newspapers along with the new owners, Viveck Goenka (chairman of the Indian Express) and Manoj Sonthalia (chairman of the Indian Express’ southern editions).

But for the next five years we let the new editor and publisher Maneck Davar get on with the job. Even when the magazines were floundering, after management passed on from Goenka to Sonthalia, we resisted the temptation to intervene.

Under Sikka, Infosys has actually done a lot better than it did under Murthy’s second stint. When Murthy left his one-year executive chairmanship in 2014, Infosys’ quarterly operating profit was around Rs 3,500 crore. Within two years of Sikka taking over, Infosys’ quarterly operating profit had risen nearly 40 per cent to around Rs 4,800 crore.

Murthy’s complaint against the Infosys board and Sikka isn’t of course, about performance. It couldn’t be, because the numbers show that Sikka has turned Infosys around in a way that Murthy in his short second tenure could not. The complaint is two-fold: governance and Sikka’s salary.
The second can be dismissed. Sikka is a US-based CEO and his pay hews to global standards. By those standards, he is not grotesquely overpaid. Satya Nadella, CEO of Microsoft, gets an overall annual package of $18 million.

Sikka’s consolidated $11 million salary package in contrast, includes a base salary of $1 million, a variable, performance-based pay of $3 million, and performance-based stock options and units worth $5 million. Other US-based CEOs obviously, receive far larger pay packets.

Even India-based CEOs like Kalanithi Maran and his wife Kaveri of the Sun TV network, get paid far more (Rs 122 crore or $18 million) than Sikka. For a company like Infosys, which makes profits of over Rs 15,000 crore a year, Sikka’s performance-based salary (unlike Maran’s fixed salary) should be a non-issue. Besides, to compare Murthy’s own modest salary years ago to Sikka’s today, is a red herring.

The only real issue for Infosys is governance. Was there wrongdoing in paying former CFO Rajiv Bansal over Rs 17 crore in a severance package (of which Rs + 5.2 crore has so far been disbursed)?

Did it have anything to do with the price Infosys paid to acquire the Israeli automation technology company Panaya Ltd. at an allegedly inflated price of $200 million in February 2015?

The anonymous whistleblower’s email addressed to the Securities and Exchange Board of India (SEBI), which is in the public domain, makes allegations of financial impropriety by the Infosys board: “The Board of Infosys blindly approved the deal,” the email claims.

“The CFO of Infosys at that point of time, Rajiv Bansal, refused to sign off on the deal and in fact, walked out of the discussion during the board meeting to approve this deal.”

The company has said it will probe the complaint: “Regardless of the malicious intent of this anonymous letter, the company will pursue its normal course of action and investigate the charges made.”

Whichever way this story plays out, and wherever the truth lies, Infosys’ reputation has been impaired. What now? For the company, two steps. First, instead of conducting an internal inquiry, hire a forensic audit firm to probe the Panaya deal, make the report public promptly and act decisively on its findings. Second, set up a special governance committee like the audit and remuneration committees to report independently and publicly on key governance issues in the company. Set term limits of five years for board members, including the chairman.

For the founders meanwhile, one step will suffice: move on.