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Infosys has had a leadership crisis for a decade; this one’s the worst

LiveMint logoLiveMint 29-08-2017 Mobis Philipose

Infosys Ltd’s shares have fallen more than 12% since chief executive officer (CEO) Vishal Sikka announced his sudden resignation. Investors have been dealt a double whammy.

Not only do they have to live with the uncertainty of another leadership transition—the fourth in the past 10 years—but they also have to contend with the rapidly increasing hostility between the company’s board and its founders.

Infosys’s board of directors has put the blame squarely on the company’s founder, N.R. Narayana Murthy, saying his continuous assault is the primary reason behind Sikka’s abrupt exit.

Infosys has struggled in finding strong leadership for nearly a decade now. It had given up the mantle of technology bellwether years before Sikka appeared on the scene—during the tenure of S. Gopalakrishnan, to be precise (See bit.ly/2wmKsyN). S.D. Shibulal’s tenure made things far worse, forcing Murthy to take back the reins for a brief period.

Sikka brought some stability at the top, and as the chart alongside shows, Infosys shares had completely wiped out the valuation discount vis-a-vis Tata Consultancy Services Ltd’s (TCS’s) shares within two years of his joining the company.

In the past year, however, the regular skirmishes with the founders have taken a toll on the company’s shares. The selling was led by foreign investors, whose ownership in the company has dropped from 40.4% in the year-ago June quarter to 37.5% in the preceding quarter.

Analysts at Nomura Research said in a note to clients that the reason for this is possibly that they gave “higher weight to recent issues with promoters or senior management attrition”.

Domestic mutual funds, on the other hand, increased their exposure to Infosys considerably in the past year. They were in for a rude shock.

After all, the current leadership crisis is the company’s worst. The board’s confrontational release on its views about Murthy is particularly worrying.

Murthy, on his part, isn’t backing away from his role as an activist shareholder; which begs the question: Who’s to say there won’t be a repeat with the new CEO?

Put differently, who would want to apply for the Infosys CEO’s position, after what happened to Sikka?

It’s little wonder some commentators are suggesting that the best solution is to hand the reins back to the founders. Some investors have even written to the company to bring back Nandan Nilekani, a founder and former CEO, on the company’s board.

For now, that seems like the only workable solution, given the level of hostility between the current board and the founders.

But bringing the founders back is not a guaranteed recipe for success either. Look no further than the tenure of 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 the lurch.

In the short term, the company’s Rs13,000-crore buyback will provide a slight relief. But gains owing to the buyback are negligible (except for small shareholders—see bit.ly/2wDR5MB), since less than 5% of the company’s shares are being bought back.

More importantly, investors should be worried that the leadership crisis has come at a time when the IT industry is already in a precarious position.

Indian IT companies are 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 paper 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.

It’s true that Infosys has taken some steps to assuage concerns about corporate governance—it has commissioned three investigations on these issues, it stopped severance payments to former chief financial officer Rajiv 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. 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. 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.

As things stand, Murthy and his strained relationship with the board is the biggest risk factor for Infosys.

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 the 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 redacted versions of the investigation reports, especially if there’s nothing to hide. But the big damage is already done, and Infosys’s board will do well to bring about a quick resolution to the current crisis.

And while doing so, it also has the unenviable task of instilling confidence that it represents the interests of all shareholders, and doesn’t veer towards either the management or the founder shareholders.

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