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Double whammy for Infosys investors as Vishal Sikka quits, but Narayana Murthy won’t

LiveMint logoLiveMint 19-08-2017 Mobis Philipose
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Infosys Ltd’s chief executive officer (CEO) has quit and the company’s board has put the blame squarely on the company’s founder N.R. Narayana Murthy, saying his continuous assault is the primary reason behind the abrupt exit.

The board’s confrontational release on its views about Murthy has naturally got investors worried. The Infosys stock fell 10% on Friday, despite the comfort of knowing that a large buy-back of shares is on its way.

Not only do shareholders have to live with the uncertainty of another leadership transition—the fourth in the last 10 years—but they also have to contend with the rapidly increasing hostility between the company’s board and its founders. It’s little wonder some commentators are suggesting that the best solution, for now, is to hand the reins back to the founders.

Click here to read full text of Vishal Sikka’s resignation letter as CEO and MD of Infosys

After all, since Murthy is in no mood to quit his role as an activist shareholder, who’s to say there won’t be a repeat with the new CEO? In fact, a moot question is who would want to apply for the Infosys CEO’s position, after what happened to Sikka.

But bringing the founders back is not a guaranteed recipe for success either. Look no further than the tenure of S.D. Shibulal, a co-founder, whose appointment as CEO had the blessing of Murthy. The company underperformed peers by a huge margin during his tenure. In short, investors are left in a lurch.

Complete coverage on Infosys row

Indian IT companies are already struggling in a rapidly evolving technological environment, and are losing share to multinationals and some newer, nimbler firms that specialize in digital technologies. If things are rocky at the top, navigating the changes in the industry will be all the more complicated.

For any relief, both the Infosys board and Murthy need to back down from their respective positions. This column has argued in the past that Sikka and Infosys’s board needed to pull up their socks when it comes to good corporate governance standards; but also that Murthy should tone down the rhetoric, especially since his own track record isn’t impeccable (see bit.ly/2fQetjP). One concern raised by Murthy was that severance pay of as much as 24 months’ salary to former chief financial officer Rajiv Bansal could potentially be viewed as “hush money”, presumably to silence him on irregularities he probably witnessed. The other was that there were some improprieties when Infosys acquired Panaya.

Infosys has taken some steps to assuage concerns about corporate governance—it has commissioned three investigations on these issues, it stopped payments to Bansal and made changes to its board, which were signs that it wanted to appease the company’s founder.

But none of this has helped. Instead, Murthy’s attacks have intensified (see bit.ly/2vILOm7). One way to look at this is that Murthy isn’t behaving very differently from an activist shareholder.

It’s quite common for activist shareholders to constantly raise questions on a company’s practices, and this isn’t always frowned upon. For instance, the Children’s Investment Fund had even dragged Coal India Ltd to court some years ago, saying that the miner’s pricing policy went against shareholder interests.

However, in Murthy’s case things get complicated as he is also the company’s founder. Public criticism from him can be counterproductive. For instance, a large number of employees still look up to the founder, and his comments may well undermine the CEO’s authority. It makes sense, therefore, for Murthy to quit his role as an activist shareholder.

If things remain the way they are, Murthy and his strained relationship with the board would be a big risk factor for Infosys, as the company had alluded to two months ago in a statutory filing (see bit.ly/2rqBZZy).

But again, he isn’t entirely to blame. The board could have handled his complaints in a far better way. Murthy’s latest bone of contention is that the investigation reports commissioned by the Infosys board relating to corporate governance concerns should be made public. The company has only shared a gist of the reports, which essentially give Sikka a clean chit.

The board has argued that reports by auditors contain one too many details, and aren’t meant for public consumption. But on many occasions such as with the “London Whale” investigation at JPMorgan, investigation reports or their redacted versions are shared with all shareholders. There is no harm if Infosys releases a redacted version of the investigation reports, especially if there’s nothing to hide.

But the big damage is already done; the only silver lining is that the Infosys board has woken up to this and wants to find a tenable solution to the problem it is facing with Murthy.

Still, the board will do well to instil greater confidence that it represents the interests of all shareholders, and doesn’t veer towards either the management or the founder shareholders.

The writer does not hold positions in the companies mentioned above.

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