Investors turn nervous when the companies they have parked money in face crisis; they turn even more panicky when such crisis situations are self-made ones, particularly with large reputed companies.
We saw this last year when the Tatas were engaged in an ugly tug of war with Cyrus Mistry. We are seeing it again with founders and board locking horns in Infosys on issues of corporate governance practices, leading to the untimely exit of its CEO Vishal Sikka. Share prices of both companies plunged in the days after the tussle in the respective cases. So far this year, Infosys shares have fallen by around 13 percent. Since Sikka’s exit, the market cap of Infosys has eroded by over Rs 31,270 crore.
The battle between NR Narayanamurthy, the famed co-founder of Infosys and iconic figure in Indian industry, and the company's board doesn’t end here. It is actually escalating to another orbit with Murthy approaching investors and analysts to clear his stand and Infosys co-chairman, Ravi Venkatesan rushing to Delhi to meet union finance minister Arun Jaitley, apparently to discuss the situation.
In Infosys, the problem started in February 2016 when the Infosys board gave Sikka a 55 percent pay hike making his salary $11 million. After that, Murthy has raised multiple charges against Sikka - ranging from corporate governance issues, compensation to top staff and on a certain acquisition. Murthy had also said that many of the board directors had told him that Sikka was not CEO but CTO material.
As noted in an earlier column, as co-founder, no one could have questioned Murthy if he raised concern over larger corporate governance issues in Infosys and guided the company he co-founded in right direction, but he could have certainly approached the issue in a different way avoiding a high-profile public spat in media. It only damaged Infosys' image and caused further confusion.
Also, given the way Sikka exited, his successor too will be under tremendous pressure to find a balance between the founders and the management. Murthy's allegations were primarily on the corporate governance issues in Infosys not on his performance per se. Sikka's term has seen Infosys advancing both in terms of innovation and revenue generation. During his term, Infosys' profit and margins witnessed healthy growth. Infosys's revenue grew 28 percent from Rs 13,342 crore in Jul-Sep 2014 quarter to Rs 17,078 crore in Apr-Jun 2017 quarter.
The Tatas got largely unhurt after the Ratan Tata-Cyrus Mistry episode because it is too big a group to get affected by internal skirmishes but the same may not be true for Infosys. Though an iconic name in the IT sector, instability within the company can cause long-term damage to Infosys, as investors and clients keenly watching the developments with concern. Both investors and clients have already begun moving to rival companies, according to reports (read here and here). In other words, Infosys isn’t a conglomerate like Tatas which can withstand a prolonged phase of imbalance and confusion that is out in the open.
The point here is that it’s time for both Murthy and the board to put a full stop to the public spat and sit across a table to discuss the point of differences and find a solution. As JN Gupta, former executive director at Securities and Exchange board of India (Sebi) pointed out in a Firstpost column (read here), any regulatory solution for such issues is unlikely “as it is battle between aspirations, expectations, sense of right and big-brother attitude.” Gupta suggests that creating an advisory board consisting of founders and independent experts could be a way forward, ensuring that no interference on day-to-day matters. Secondly, founders may be preferably nominated on boards. These are long-term solutions Infosys can work on.
The ongoing tussle is only doing greater damage to both Infosys and its investors. Both the founders and the board should realise that the current collision course isn’t doing any good to benefit the company. Escalating the problem further could only land Infosys in bigger troubles. There is no point in throwing the baby out with bathwater.
Updated Date: Aug 23, 2017 12:05 PM