22 Feb 2017 20:50 IST

Infosys: Focus on corporate governance issues

In Pure Stratrgy, Suresh Srinivasan writes that the IT major should not have made knee-jerk announcements

Recent developments and voices raised by a section of founder shareholders in Infosys have been blown up, exaggerated and, in some cases, misinterpreted in business stories. Some even compared these developments within Infosys to the Tata group crisis!

To be fair, the two situations are significantly different in nature and intent. However, my discussions on this subject with even some ‘well-informed’ business readers seem to suggest that an explanatory note would be useful. The idea behind this piece is to clearly define the differences and similarities, if any.

Need for transparency

Fundamentally, the tussle in the Tata group is between the shareholders who control the group companies — the majority versus minority shareholders at Tata Sons. The Infosys issue deals with a small section of shareholders controlling close to 12.75 per cent of the company’s equity who are demanding that the board should be more transparent in its dealings with them.

The IT major’s founder shareholders have held the board and its Chairman responsible for a lack of transparency in compensation paid to senior managers (which includes CEO Vishal Sikka) and the exorbitant severance packages paid to other key executives. The shareholders believe that the board did not take them into confidence when these decisions were made.

They have demanded that the company buy back shares to return value to shareholders. There is nothing new in such a demand from minority shareholders. Globally, such shareholders, on a number of occasions, have made such demands, even to well-run boards. Although a buyback generally signals robust management confidence, there have been instances when investors perceive a lack of innovation or inadequate use of the idle pile of cash, that could have funded new projects.

Efficient use of resources

Cognizant recently came under pressure to return the excess cash it held from activist investor Elliott Management, which holds around 4 per cent equity stake in the company. CTS’ share buyback is estimated at more than $3 billion, or over ₹20,000 crore.

TCS, another cash-rich software giant, has read the writing on the wall and is considering a buyback. Apple, which held close to $200 billion in cash in 2015, has been extensively buying back its shares. It bought back shares worth almost $90 billion over the last three years and the company has earmarked another $30 billion in 2016. Activist investors continue to push Apple to buy back more.

On issues such as compensation, share buyback, and so on, there is always a difference in theperception of shareholders and the board’s assessment of the ground reality. There is a continuous dialogue between the two sides and constantly engaging with shareholders is the board’s prime responsibility. In fact, the very existence of a board is to ensure that the interests of every shareholder are protected, given the potential misalignment with the interests of the executive managers running the company.

The appointment of DN Prahlad, a former employee and a relative of one of the founder-promoters, as an independent director at Infosys also came under fire from proxy advisory firms. Again, it is quite common globally that a section of ‘large block’ shareholders demands board inclusions, if it believes such a personality will safeguard the interests of shareholders. Unless there is a demand for appointing an ‘executive vice-chairman’, which can directly interfere with the role and authority of the chief executive officer, the issue is not worrisome.

On the same page

There is another dimension where the Tata case differs from Infosys: there were a number of contentious strategic decisions taken earlier by the Tata group companies that have sharply eroded shareholder value, and there is a strong need to address such leakages quickly. The appropriateness and timing for such strategic restructuring is being debated between the two groups of shareholders. Moreover, the Tata issue turned out to be a personality clash between two key individuals.

In the case of Infosys, the shareholders, the board and the executive managers seem to be on the same page with respect to the company’s growth. Hence, there are no major issues, especially ones that need to be shouted from rooftops. It could have been handled behind closed doors, between shareholders and the board.

A major overhaul

Infosys is in the midst of a transformation where its ‘time-tested’ traditional skill-sets may be less relevant in the short to medium term, and this calls for a major overhaul. The company is working hard to align itself with the changing market conditions, customer preferences, technology shifts and regulatory uncertainties in its key markets such as the US.

The company is also culturally reinventing itself; under Vishal Sikka, the company, although headquartered in Bengaluru, has a large set-up in Silicon Valley, which is essential in the current context of technology, innovation and product focus.

With a challenging transformation underway, any issue that has the potential to distract and dilute the focus of the executive managers can negatively impact the shareholders. Also, the lessons that Infosys learnt during the period 2011 to 2014, are quite valuable and it cannot afford to send inappropriate signals to the market, knowing well that recovery takes time. From that perspective, the public statements could have been avoided, for sure!