A few days before the Infosys board met on June 14, 2014, to formally approve Vishal Sikka’s appointment as Chief Executive Officer, N R Narayana Murthy, then Executive Chairman, told a select gathering that Sikka would become the ‘CFO’ and MD on August 1 that year. Quick to realise the slip, he corrected himself: CEO, not CFO. Pointing to then CFO Rajiv Bansal, he added in a lighter vein, “Rajiv, your job is not in doubt, don’t worry. I mean, it only shows I have a lot of affection for Rajiv.” A senior Infy executive, narrating this incident, recounts how Murthy, in the same breath, wondered how many knew what ‘sikka’ actually meant. “I being a South Indian, didn’t know and asked him (Vishal) what does your last name mean. He said, it means money, it means coin. My good friend Rajiv (Bansal) said ‘Vishal’ Sikka means ‘lots of money’, ‘big money’.”
This was precisely what Infosys needed at that juncture. Someone with sizeable intellectual competence and someone who could bring big revenues. In the five-six years after the global financial crisis of 2008, the company’s revenues had decelerated, it was hit by lack of focus and weaker control over costs, and its employee morale had plummeted, says Anantha Narayan, an analyst with Credit Suisse, who tracks the information technology industry closely.
When Sikka took charge, one of the founders quipped, “He is a rockstar, and we needed one.” Judging by Infosys’s stock performance, Sikka appears to have lived up to some of that promise. The company’s market capitalisation has jumped over 37 per cent since June 2014, much higher than TCS (16.5 per cent), and HCL Technology (20 per cent).
The recent controversy comes in the midst of Sikka aggressively implementing his Vision 2020 plan for the next big leap, to catapult Infosys into the $20 billion revenue orbit by 2020 from $9.5 billion in 2015-16.
At the crux of Murthy’s outburst over “the drop in corporate governance standards” at Infosys, in an interview to The Economic Times, were two specific issues — the Rs 17.38 crore severance package to Bansal, after he quit in October 2015; and the $11 million (Rs 73 crore) compensation for Sikka for 2017. Others have hinted there could be a third: $5.25 billion (Rs 36,483 crore) lying idle with the company, which many shareholders, including past CFOs TA Mohandas Pai and K Balakrishnan, have said should be used for higher dividend payout or to buy back shares to improve Infy stock price.
Most institutional investors, mutual funds and insurance companies which hold shares in Infosys see it more as a clash of cultures, as the old pushes back against the new.
“What happened in Infosys was unprecedented. Sikka, then 47, was given total charge. No promoter has walked out like that in India,” says Nilesh Shah, CEO, Kotak Mutual Fund.
In the 32 months since joining Infosys, Sikka has brought in a different work culture. “He is an Indian, speaks with an Indian accent, but is culturally an American. His expenses, the way he spends, the areas he wants to invest in, all are very different from the traditional Infoscion’s mindset,” says an analyst with a foreign institutional investor, who has hosted Sikka in roadshows abroad. “If Narayana Murthy cleans his own toilet, Sikka can’t be expected to do that. Murthy may fly economy class, but Sikka doesn’t mind hiring corporate jets (8 per cent of his travel has been such), or spending hundreds of dollars on wine bottles at roadshow dinners. Much of what is happening, I suspect, is due to the stark cultural differences. This is the root cause of the friction,” the analyst
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Before Sikka took charge, Anantha Narayan of Credit Suisse says, Infosys was also hurting from its excessive focus on high-end services such as consulting and products and suffered from its inflexibility on pricing. The previous three years had seen its revenue growth spiralling downward and its EBIT (earnings before interest and tax) margins dropping. “This was compounded by falling employee morale.”
In June 2013, Murthy, who had left in 2011, returned to executive role on shareholder request. His son Rohan Murty joined as his Executive Assistant. As the Executive Chairman for about a year, Murthy rationalised costs. Margins did improve during 2013-14, but revenues remained muted. The company also saw several senior management exits, including those of Kris Gopalakrishnan, and board members Ashok Vemuri, global head of manufacturing, and B G Srinivas, head of Europe.
By the beginning of 2014, the company had started hunting for a CEO, and finally zeroed in on Sikka. He was at the time a member of the Executive Board at SAP AG, leading all products and driving innovation globally.
Almost immediately, Sikka created a buzz in the IT industry by launching new services called ‘AiKiDo’ and ‘renew and new’ strategy. Given his background, he enjoyed high visibility in the tech industry and marketed products and services much better than rival companies. “His background could have also helped him engage better with clients at a time when many of the client discussions are centred on new technologies and execution methodologies,” says Anantha Narayan.
A top Infosys executive, who has been with the firm for 20 years, says, “Vishal came at a time when Infosys looked jaded. He brought vision, passion and aggression, and most importantly a strong reputation and big client prospects. He renewed the firm from within, addressing soft culture issues, such as flexibility to work from home and smart dressing without ties, and communicated this well down the line.”
The executive questions Murthy objecting to Sikka’s high salary and comparing it with the lowest paid employee. This lowest paid employee, says the executive, appreciates the changes brought by Sikka. His salary could also hardly be compared with what the founders earned in their time, the executive adds. “The founders had huge shareholding, which more than compensated for the low remuneration they received.”
An Infy executive in the Human Resources Department says while bringing in flexible timings may seem like a small step, it mattered due to the young demography of the firm’s 2.5 lakh employees, who have an average age of 29-30 years. “It was important to be flexible. We were too rigid for comfort. He fundamentally changed the way we think.”
By the end of Sikka’s first year, the company’s attrition rate had dropped significantly. The quarterly annualised attrition came down from 23.4 per cent in April-June 2014 to 13.4 per cent in January-March 2015. “This is almost 50 per cent lower,” the executive points out.
At the strategy level, Sikka changed Infosys focus to innovation, design thinking, automation and artificial engineering. He led acquisitions, the biggest one being that of Israeli firm Panaya for $200 million last year that enabled Infosys to boost productivity and bring automation to several of its service lines. Earlier in April 2015, it acquired Skava for $120 million to leverage the power of digital experiences in reaching retail customers. These acquisitions helped Infosys tap into new businesses given the rapid transformation in the global IT industry.
IT industry observers point out that Infosys had to reinvent to survive. “But it (Sikka’s decisions) is not unique. Structurally, the industry is changing. Most companies are doing what Infosys is. The difference is Sikka has been a lot more vocal than Chandra (N Chandrasekaran, ex-CEO TCS and now Chairman Tata Sons) or Abeedali (Abeedali Neemuchwala, CEO, Wipro). He has overhyped it. The company’s growth rate is similar to the industry, margins are steady, even marginally up,” says another analyst in an FII, who did not wish to be named.
At the same time, observers warn, Sikka can’t afford to ignore Murthy’s objections, for the sheer weight they carry. Murthy-led Infosys has always set the gold standard in corporate governance, with the bulk of India Inc taking years to catch up.
Murthy’s outburst also comes at a time when the company is investigating a whistleblower’s letter to SEBI alleging Infosys overpaid to acquire Panaya and that then CFO Bansal walked out of a meeting called to approve the acquisition.
Says the FII analyst, “You pay a severance package only when the exit is not voluntary. In December 2016, Infosys signed a separation agreement with its General Counsel and Chief Compliance Officer David Kennedy based in Palo Alto. Kennedy will be paid almost a million dollars in severance. It is not the quantum of the severance package that worries me. Compliance is a very key and responsible function, why are ties with him being severed?”
Prithvi Haldea, who founded Praxis Consulting, a research firm, and is a member of SEBI’s primary market advisory committee, says, “When a person of Narayana Murthy’s stature raises issues, it cannot be ignored. These need to be addressed. The leader has to set high standards of propriety.”
While pointing to Bansal’s severance package to illustrate “dropping corporate governance standards”, Murthy talked of Infosys in terms of pre- and post-2014 time zones. His specific demands included: following the good practices of pre-2014 Infosys and consulting past employees from time to time, bringing a co-chair to the board, getting back past Infoscions schooled in “Infosys values” as additions to the board, letting the chair of the board and the chair of the nomination and remuneration committees accept their mistakes, and showing contrition.
In short, Murthy just stopped short of demanding a new board.
In that, there were quite a few parallels with what played out in Tata Sons just recently. Ratan Tata, who controls Tata Trusts, staged a comeback as Interim Chairman after Cyrus Mistry (whose family holds 18 per cent in Tata Sons) was sacked last October over “trust deficit” and “non-conformance with Tata Group values”.
Like Ratan Tata, Murthy and the other Infy founders (Nandan Nilekani, Kris Gopalakrishnan, Dinesh Krishnaswamy, S D Shibulal, N S Raghavan) had walked out voluntarily from the firm, over a period of time. Having set up the company in 1981 with just $250, nurturing it over the past two decades, and being the toast of India Inc in every global forum, they had chosen to not retain a board position and be just shareholders. They still hold a significant 12.74 per cent share in Infosys, but no influence.
Currently, Sikka and Chief Operating Officer Pravin Rao are the executive members on the board, which also has seven independent directors: Jeffrey Lehman, Punita Kumar-Sinha, Kiran Mazumdar Shaw, Roopa Kudwa, Ravi Venkatesan, D N Prahlad and John Etchemendy. The board is led by industry veteran R Seshasayee, who was earlier the chairman of Ashok Leyland Ltd.
Murthy’s demands suggest this was not a sudden outburst, and was building up for a while. Says Mohandas Pai, who is among the people Murthy wants the Infosys board to consult from time to time, “He has been communicating with the board since May 2016. But there has been no satisfying response.”
Haldea adds, “I am not privy to information, but there could have been several wrong decisions — legally correct, but morally or business-wise incorrect. These must have been raised by Murthy, and his advice may have been adhered to in some cases. But his interview gives an idea that he was frustrated that the board and management had not listened to him. So he may have thought I might as well raise the issue now, rather than it becoming a fait accompli later.”
Balakrishnan, who along with Pai and D N Prahlad (now a board member), had written to the Infosys board in July 2014, a month after Sikka took charge, making a compelling case for a large buyback, says their fears have been proven right.
Balakrishnan says he always believed the promoters should not have walked away and ensured some continuity. “Infosys has 30 years of history. History gives you the biggest lessons. If you remember history, the quality of today’s decisions will be good. If there is no memory, there will be inconsistency. I told him (Murthy) to continue, maybe not in the board, but as Chairman Emeritus so that there would be some continuity and some cultural lessons.”
Of the decision to give Sikka total control, Balakrishnan says, “This was wrong, there was total discontinuity. A few of the promoters should have stayed back in some role to hand hold the board.”
At the same time, he sees the dispute over the high severance package to the CFO (which was curtailed abruptly after payment of about Rs 5 crore) and the huge variable component in the CEO’s salary without adequate disclosures as governance rather than cultural issues.
It is on another point that Balakrishnan sees a culture divide: Sikka’s target of $20 billion revenues, employee productivity of $80,000 and EBIT margins of 30 per cent by 2020, which he calls impossible to achieve. “Infosys always conveys to the market what is possible. We under-promise, over-deliver. In the new era, you over-promise, under-deliver. This is not Infy culture. This is one aspect of the difference between old and new. The $20 billion revenue target is highly unachievable looking at how the market is evolving. It requires the company to grow at double the present rate. There is a lot of disconnect between what has been told to the market and what is coming. Per capita revenue has been coming down over the past few quarters,” he points out.
Whatever the grievance, a former board member of the Infosys says, the bad blood shouldn’t have spilled out in the open. There are forums available for shareholders to air their grievances, he says. “I apply what is called the ‘Popatlal’ test. If some ‘Popatlal’ raises concerns, then she can talk about it in the annual general meeting. In its considered wisdom, the board can state that it has studied the issue, and is of the view that its actions were correct.”
Kavil Ramachandran, Executive Director, Thomas Schmidheiny Centre for Family Enterprise, Indian School of Business, who also sees the burning issue as one of perceived values, agrees. “I don’t think the board should encourage this (voicing of differences in public), especially from those who are not representing shareholders on the board. The board doesn’t have the responsibility to explain to anyone or anybody,” he says.
What is critical though is for all board members to have a certain degree of mutual understanding, says Ramachandran. “Some of the processes are laid out, but it’s always useful for board members to have an agreement on issues and say that they stand by it. Those who are outside the board, they have a mechanism to write to the chairman of the company. And the chairman considers it in the normal process. Related to this is the platform one is using to air his concerns, or intent. Is it to score brownie points?”
Murthy has so far stood firm on the concerns he has raised. The board has responded by appointing a law firm, Amarchand Mangaldas, to review the company’s governance standards. It will receive inputs from the founders and other shareholders and make the necessary recommendation to the board.
Sikka is also standing his ground. Pointing out that less than 5 per cent of questions relate to governance in a call by an investor, Sikka said at a press conference he addressed after Murthy’s outburst that such incidents take the management’s attention away from business. In an email to employees, he termed media reports on the differences between the board and some of its promoters as ‘Eardrum Buzz’ and asked them to not be distracted.
Seshsayee, the non-executive chairman of the Infy board, has struck a more conciliatory note. On the severance package for Bansal, he has said the board could have exercised its mind better, and also promised that the company would move to higher standards of transparency and better business judgments.
For now, there is a pause. But it may be just a lull before the storm.