Founders vs the board: Understanding the Infosys brouhaha

The founders, led by Murthy, have levelled a number of allegations against the Board and CEO Sikka

Anyone who has been closely following the messy spat between the founders of Infosys, its Board and the chief executive officer (CEO) ought to read Dear Chairman, a book that chronicles and makes sense of the biggest boardroom battles and the rise of shareholder activism in the US.

There were a few lessons tucked away in the book that need to be surfaced. One, large activist shareholders have every right to challenge inefficient corporations that waste valuable assets, but at the same time, their own actions can also foster destructive and destabilising short-term strategic decisions. Two, public companies are filled with contradiction and conflict of interest. And the best place to study them is to look at the fault lines where shareholders and corporate managers and directors meet. Three, shareholder activists tend to be colourful figures. Yet, behind the “shareholder rights” rhetoric and the larger-than-life personas are self-interested economic actors seeking profit. And finally, shareholder activism can be put to good use. The key issue in an activist campaign often boils down to who will do a better job of running the company — a professional management team and Board with little accountability, or a financial investor looking out for his or her own interests.

So, if you’re wondering how this relates to the Infosys saga, consider this. In all such cases, a number of issues tend to get lumped together, sometimes deliberately, to create an illusion that things are out of control. The founders, led by N R Narayana Murthy, have levelled a number of allegations against the Board and CEO Vishal Sikka. The primary among them is the severance pay doled out to the outgoing chief financial officer (CFO) and the legal counsel. That Rajiv Bansal was overpaid is clear. Even the minutes of that meeting have gone missing or weren’t kept. The Board has clearly acknowledged that it erred in its duties and has confirmed that it has rescinded the agreement with the CFO. It has also agreed to work out a process for severance payouts in future. But the matter hasn’t stopped there. Mohandas Pai has continued the tirade to point out other “excesses”—like using a chartered aircraft, paying people hefty salaries, staying in fancy hotels, and a new extravagant office in Palo Alto.

Now, the founders perhaps forget that Infosys is no longer a Bengaluru-based company. It is a global company, it works with clients around the world, has overseas employees on its payroll, including a foreign listing—and therefore, needs to become more global in the way it does business. Mr Sikka’s spending binge shortly after taking over was apparently unheard of inside Infosys. Now, is that warranted? Infosys needs to inspire confidence that it can serve larger global clients that would otherwise tend to go to IBM and Accenture. To do that, it needs to hire people who have the experience of having served such clients. And that doesn’t come cheap.

(This was exactly the same issue that cropped when Vivek Paul was at the helm at Wipro. And his approach was at complete variance with Azim Premji’s miserly ways.)

Now, ultra conservatism didn’t help Infosys in the pre-Sikka era either. Infosys sat on a huge cash hoard, thanks to Mr Murthy’s insistence that it needed to conserve for a rainy day. In the process, it made very few acquisitions, refused to take on business unless it generated a hefty margin, kept a lid on sales and marketing expenses and earned shockingly low return on the cash sloshing in its coffers. It made no attempt to plan a share buyback that would have propped up the share price further. And now, ironically, Mr Pai demands that the cash should be returned to shareholders. And Mr Murthy even makes a case for some of the founders to be re-inducted into the Board.

It isn’t as if public memory is short. Mr Murthy’s insistence on a revolving door system for each of the founders to take turns to be CEO almost brought the company to its knees. Mr Murthy’s handling of the Phaneesh Murthy’s sexual harassment case also left much to be desired. He chose not to make a public disclosure till one year after the incident. And after steadfastly denying that he would ever settle the two cases, he did exactly the opposite. And when he stepped down a second time, he avowed that he would never discuss Infosys in the media at his farewell dinner. Last week, he broke that promise. And all hell broke loose.

On his part, Mr Sikka too needs to know that his actions are being watched. And it is for the Board to ensure proper oversight on the actions of a supposedly rockstar CEO and ensure that the balance of power is maintained. If they fail to discharge their duty in the future and the performance belies expectations, shareholders have every right to raise hell. Till then, Mr Murthy would do well to stay out.
 

The writer is co-founder at Founding Fuel, a learning platform which aims to serve a community of entrepreneurial leaders