Corporate governance may be the overarching theme in the unfolding slugfest between the founders and the current management of Infosys Ltd but one underlying trigger, sources said, appears to be cash worth $5.25 billion sitting on the books of the country’s second-largest software company — or the lack of its effective use. Rather than using this cash to improve shareholders’ return, the old guard believes, the current management rewarded certain employees with hefty compensation and severance packages.
The red flag was raised days after Vishal Sikka took over at the helm of Infosys on August 1, 2014. Three former Infosys executives D N Prahlad, T V Mohandas Pai and V Balakrishnan, had shot off a letter to the Infosys board asking the company to initiate a share buyback, saying that this would help check the “asymmetry of information” between management and investors.
Prahlad, who had left Infosys when the letter was written to the Board, is known to be close to founder NR Narayana Murthy and was subsequently re-inducted into the company board in October 2016 as an independent director. At least three persons close to the Infosys old guard hinted at the discomfort over the lack of utilisation of the cash on the company’s books to enhance shareholder wealth, a charge that the company has strongly denied in a statement made to the stock exchanges on Friday.
Pai confirmed that the letter was written by the three in August 2014 and that the company did not act on it. “(There was) No response, except their spokesperson saying that some shareholders have raised this issue and Board will consider… The company belongs to shareholders, the board is a fiduciary agent and not an owner and needs to respond to shareholder requests,” Pai said in response to a query from The Indian Express.
Investor interest, he said, “has suffered due to wrong capital allocation” and that the “compensation and promotion for certain people” did not follow processes. “People close to a group have been given an outsize compensation and position as well as fast promotions. High severance was not a practice in Infy but these norms have been given a go by for a few. Freshers have not seen an increase in their salaries for many years. All of these are against the value system of fairness and leadership by example of Infosys”, Pai said.
In an interview to The Economic Times, Murthy said that since June 1, 2015, there has been a drop in governance standards at Infosys. “Providing huge severance pay (with 100 per cent variable) to some departing employees while giving only 80 per cent variable for employees in the company is one such example. Such payments raise doubts whether the company is using such payments as hush money to hide something,” Murthy said.
Murthy also said that in companies with good governance in developed countries, the ratio of the CEO salary to the next lower level is generally 1:2. But currently at Infosys, it is about 2000 between the CEO salary and the entry-level salary for a software engineer.
“In poor countries like India where capitalism is still nascent, it is the responsibility of leaders of capitalism to ensure that these ratios are even lower. This is where the chair of the nomination and remuneration committee and the chair of the board have a huge responsibility,” Murthy said.
At the end of the quarter ending December 2016, the company had cash and cash equivalent and investments to the tune of $5.25 billion, up from $4.76 billion a year ago.
The unutilised cash on the books has come into focus among sections of shareholders, who have raised questions on why this is not being leveraged to improve the earnings per share (EPS) of the company, either through a buyback or any other mechanism.
After its October 2015 all-cash deal to acquire a 100 per cent stake in information management consulting firm Noah Consulting LLC for about $70 million, there has been no big-ticket acquisition by the IT company funded from its reserves.
In their August 2014 letter, the trio — Pai and Balakrishnan had both served as Chief Financial Officers at Infosys in the past while Prahlad was a Senior Vice President with the firm in his first stint — had said that: “Infosys should immediately buy back its shares to the tune of Rs 11,200 crore (which is roughly 40 per cent of the existing cash and cash equivalents)… Now, with the management exuding confidence and the Infosys’ share price still depressed, there is a need for the Board to announce a large and consistent buyback programme to show confidence in the management and the business model, going forward.”
On August 1, 2014, after a series of top level exits, Infosys inducted Sikka as its CEO and MD replacing S D Shibulal, who retired. Sikka is the first non-founder to head the company.