Some years ago, as the West debated unconscionably high executive salaries and compensation, the fabled investor Warren Buffett observed that the way to get fatcat corporates to change was to embarrass them. Infosys founder and Chairman Emeritus N R Narayana Murthy may not have had exactly Buffett’s solution in mind — but his skirmishes with the company’s management and board over what he saw as sliding corporate governance standards has probably had, in the exit of CEO Vishal Sikka, exactly the effect that Buffett predicted.
Since Sikka made his announcement on August 18, a wider debate has raged over whether a founder who has stepped down and is not a dominant shareholder, ought to indulge in the kind of public campaign that NRN mounted — rather than making an unambiguous choice between total detachment and committing himself to addressing Infy’s challenges as part of the board. The debate has also touched on issues of conformity to a company’s core cultural values and ethos.
Murthy has flagged the issue of distributive justice in corporate India — the widening gap between the top earners and the bulk of those lower down, especially at a time when the economy is slowing. On COO Pravin Rao’s high salary, he said this April, “I have always felt that every senior management person of an Indian corporation has to show self-restraint in his or her compensation and perquisites. He or she has to fight for maintaining a reasonable ratio between the lowest salary and the highest salary. In a poor country like India, the board has to create a climate of opinion for such a fairness through their actions. This is necessary if we have to make compassionate capitalism acceptable to a majority of Indians who are poor.”
Beginning 1994, Murthy’s ideal of the “democratisation of wealth” saw practical manifestation in the granting of stock to company staff down to the level of drivers, and went on to contribute to a culture of donations from personal wealth by all the founders of the company.
But the idea of self-restraint has not often sat comfortably with the new generation of professionals. The environment is far more competitive now, it is argued, and to attract global talent, you need to pay top dollar. That would seem a fair point for a company that operates and competes globally — software services, for instance — but not so much in the financial services sector. And yet, compensation for the top deck has continued to soar higher above the company median in some of India’s celebrated private banks — at least one of which, interestingly, had an Infy-like culture of granting stock until some years ago.
Proxy advisory firms such as IiAS redflagged governance practices at Larsen & Toubro, whose executive directors, they said, issued stock options at face value from a couple of subsidiaries before these firms were to go public. There is also the case of a company whose promoters — husband and wife — individually take home among the largest pay packets in the country, besides dividend payouts and capital appreciation. And the National Stock Exchange (NSE) of India Ltd was in a controversy regarding payouts to top executives.
The counter-argument, of course, is that these practices are not illegal, and have the sanction of the board of directors and shareholders. But what the case of Infosys underlines is not merely ethical behaviour — which, many argue, is bound to show in operational practices — but also the role of compensation committees. In his annual letter to shareholders in 2006, Buffett made the point that compensation reform will only occur if the largest institutional shareholders demand a fresh look at the system. In India, the largest shareholder is LIC, which is owned by the government.
Regulators in India have been careful not to intervene — even though the central bank has, in the past, shot down proposals from private and foreign banks to offer sign-on bonuses and parachutes designed to protect bosses who are fired. To return to Buffett — he once observed that politicians respond only when the public is outraged. This has happened in the West to an extent — with economists like Thomas Piketty mapping the growing levels of inequality.
In his recent book, Adults in the Room, Yanis Varoufakis, who was the Finance Minister of Greece when the country was negotiating with creditors after defaulting on loans, refers to a conversation he had with Larry Summers, economist and former US Treasury Secretary. Summers told Varoufakis that there was a kind of politician — the “outsider” — who may have prioritised the freedom to speak his version of the truth, but who, as a result, was ignored by the “insider” who made the important decisions. “The insiders follow a sacrosanct rule: never turn against other insiders and never talk to outsiders about what insiders say or do.”
Summers asked Varoufakis which of the two kinds he was. That’s the question shareholders — especially institutional shareholders — must put to those on the boards and the compensation and audit committees of many Indian firms.