Why the Infosys board must share the blame for the company's fading image

From a sheer public perception point of view, NR Narayana Murthy’s second coming at Infosys has been underwhelming, if not a half-failure. Ever since he became executive chairman a year ago, the company has seen a procession of top executives leave the company, the latest being President BG Srinivas on Wednesday, the last of the major internal CEO candidates in the company. The Economic Times reports today (30 May) that more exits are likely, while Business Standard suggests that the chances of the next CEO being another internal candidate is not ruled out.

We have to read the two reports together - the latter story is probably intended to ensure that more people do not leave before a final decision is taken on the next CEO even as SD Shibulal’s term ends in January 2015.

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All the departures since June 2013 - when Murthy re-entered the picture - fall into two categories: those who were truly not competent to move to top management in Infosys, and those who saw no scope for career growth by staying on. Murthy should be worrying about the latter departures, and, in a way, his return to Infosys may well have been a psychological trigger for it. There’s nothing like the return of a retiree to send the signal that younger people are not good enough. An older man at the top always blocks the career paths of the young below him. Murthy’s return was also an indirect vote of no-confidence by the board in the top management of Infosys led by Shibulal.

So where does Infosys go from here, now that the markets are also getting jittery about its prospects, with the share tanking 8 percent yesterday (29 May). Clearly, one needs to clearly identify what went wrong and who got the company to this state before it can move forward.

There are three guilty parties who should be held accountable for Infosys’s current predicament. They are, in a descending order of guilt, the following:

#1: The Infosys board and its independent directors. The problem with the Infosys board is that for far too long its job was merely to bask in the glory of the company’s past track record. A pioneer in offshoring, Infosys was, till about 2008-09, doing so well with its founder-led leadership (Murthy and Nandan Nilekani) and strategy, that the board had practically little to do. But after 2009, when the market scenario changed, the board failed to provide a reality check to the top management.

After the 2008-09 global financial crisis, two things changed: once the initial shock of the Lehman crisis died down, the basic market for IT services boomed as company managements in the US saw outsourcing and offshoring as a way to cut costs. The demand for traditional IT services soared, and TCS, HCL Tech and Cognizant made hay. Infosys, which was trying to shift focus to more value-adding transformational services, including consulting, missed the surge.

The company chose this moment to adopt its Infosys 3.0 strategy, where it wanted to shift its emphasis to products, platforms and transformational business services where margins would be higher and not dependent on linear growth. While directionally this was fine - no company can hope to make big money in the long-term from providing plain-vanilla IT services based on labour-cost-arbitrage - the traditional business was where the medium-term growth was.

Infosys’s management under Shibulal dropped the ball when it resolutely stuck to Infosys 3.0 as its main thrust just as clients were unwilling to take on risky long-term projects when business conditions were uncertain. The Infosys board failed to ask hard questions about this failure to benefit from the bird in hand and dart after two in the bush. It should have forced a short-term shift in strategy, but didn’t. It is this failure that Narayana Murthy has been trying to fix.

#2: Murthy himself cannot avoid his share of the blame. One of the big mistakes made by Narayana Murthy was to give primacy to the founders in top management, especially the CEO position. While this did not pose a problem when Murthy and Nilekani were running the ship, or even during Kris Gopalakrishnan’s tenure, when the market was robust, by handing over the baton to colourless Shibulal - the last of the founders - at a critical juncture in the company’s fortunes they made a mistake.

We can say this with hindsight, because if Infosys had stuck to its earlier emphasis of chasing IT services business, even Shibulal might have done reasonably well. But he was the wrong man at the helm during market transition time. Murthy, with his moral authority, could have chosen merit over sentiment in preferring founders for the CEO’s job. The choice of a talented professional as CEO in 2011 would have sent a powerful message down the line that Infosys was the right place for performers. Murthy and Nilekani must share a part of the blame for this failure.

This problem became evident when the announcement of Shibulal as CEO immediately led to the exit of TV Mohandas Pai - a potential CEO - but at that time no one thought Infosys was going into a performance tailspin. Now we know that it was a sign of things to come. Now, as Murthy’s own performance comes under some degree of attack, there is a clamour of Nilekani’s return: the board should not think this as a solution, and Nilekani himself, according to The Economic Times, is not considering a return.

#3: Institutional investors must also rethink their short-sightedness. One of the perils of quarter-to-quarter performance reviews is that institutional brokerages and analysts start demanding quick solutions to their problems with underperforming stock - in this case Infosys. About two years ago, when the market was spooked by several quarters of Infosys’s mediocre results, big investors began demanding quick changes at the top.

One CLSA analyst, Nimish Joshi, wrote an open letter to the Infosys management in 2012, after Infosys announced another quarter of weak results, suggesting that the growing problems in the company may need the return of its retired founders.

Almost exactly a year later, the Infosys board threw in the towel and called Narayana Murthy back. The board effectively bowed to market demand, hoping that Murthy’s presence will, by itself, enable the company to ride the wave of disappointment - and for a while it did ensure that.

However, it is one thing to cock an attentive ear to what the market is saying, quite another to decide strategy and appointments based on populist demands.

The best option would have been to bring in an outsider with a fresh approach to Infosys. At best, Murthy could have been brought in as advisor to the board to help with the transition while an outsider took charge.

As Pankaj Ghemawat, professor at IESE Business School in Spain, said in an interview to The Economic Times last year, when a company needs big change, it may need a break with past leadership. He said: “It may be time to seriously rethink what geographies to compete it in, what verticals to build capabilities in or what margin to aim for. And that may also call for a different management architecture capable of planning and executing those changes in strategy.”

As we noted before, when IBM was in trouble in the early 1990s, the board brought an outsider - Lou Gerstner, former CEO of RJR Nabisco - to turn the company around. As an outsider, Gerstner saw that the industry had changed and IBM would need to reinvent itself. He sold off the PC business to Chinese company Lenovo, and IBM shifted focus to consulting and prospered.

Infosys has lost four years in trying too many old remedies. It is time for it to go for a clean break with the past.