Phaneesh Murthy saga: Why do smart people do stupid things?

In business, being right 95% of the time, is in fact an achievement. But, in the world of ethics, the remaining 5% will pull one down

hidden December 20, 2014 21:07:11 IST
Phaneesh Murthy saga: Why do smart people do stupid things?

By Mitu Jayashankar and NS Ramnath

"Mr Bond, they have a saying in Chicago: "Once is happenstance. Twice is coincidence. The third time it's enemy action." -- Goldfinger

Phaneesh Murthy was able to invite the enemy action in the second occurrence itself.

Two cases of sexual misdemeanour in 11 years beg this question. How could a man as intelligent as Phaneesh Murthy end up making the same mistake twice? This question has been ringing out in the corporate corridors ever since the news of his indiscretion broke.

These were the same questions that were asked when Phaneesh was asked to go from Infosys. Educated at India's premier institutes like IIT and IIM, Phaneesh had a wonderful career at Infosys and iGate. "He was a star, an outperformer, and sure shot CEO material" says Mohandas Pai, a former colleague at Infosys and now Chairman, Manipal Universal Learning.

His Infosys colleagues remember him as an extremely driven and ambitious man who had a natural knack for selling. In the early days of the IT industry, it was extremely difficult to sell offshoring as a service. Phaneesh would routinely pitch high prices for contracts and would often win these deals. He loved to win, and colleagues say that even in friendly matches of basketball or football in campus, he would put up a fierce fight for every point. But when the game was over, he would not carry any grudges.

When he joined Infosys it was a $2 million company. When he left revenues had risen to $750 million. He wasn't shy of taking credit for that growth. He would often repeat to journalists that he was responsible for a lot of Infosys' success. But an ex-colleague at Infosys says that Phaneesh followed no processes. "The numbers were in his head", he says. When he suddenly left Infosys, it took the company a long time to put in place stringent processes and reporting structures to reduce dependence on any one employee.

Phaneesh worked hard, colleagues described him as a workaholic, the first one in office and the last one to leave. Although he is wealthy (thanks to stock options in Infosys and iGate) he wasn't flashy. "He is frugal, doesn't smoke or drink (except an occasional glass of wine), is a vegetarian and wasn't fond of splurging money on clothes or shoes" is how one associate describes him. People who have visited his home in Fremont, California, say that the Murthys lived a very simple lifestyle. "You could not tell it's a CEOs house", says one visitor.

Phaneesh Murthy saga Why do smart people do stupid things

Phaneesh Murthy led a simple life but was known to cross boundaries. Reuters

But he had a tendency to push boundaries. An old colleague at Infosys remembered an incident about a sales offsite meet in New Orleans in the late '90s. At one point walking through the streets of New Orleans, the group ended up in a topless bar. Some of the sales managers had also brought along their spouses for the meet, and the women felt uncomfortable. "Phaneesh hadn't led us to that place, but he didn't stop us from going there either", says the colleague. When the corporate HQs in Bangalore heard of it, they issued a warning to Phaneesh. As the group's leader he had a moral responsibility to avert this situation they said.

Phaneesh is invariably described by those who have worked with him as very intelligent, even brilliant. "He is seen as aggressive, but it's not physical aggression - I haven't seen him abuse anyone or throw things around - it's intellectually aggressive", one of them said. Another person who has worked with him said "he might even start a discussion saying, truthfully, he doesn't know much about a subject but five minutes into listening he would have connected the dots, and in no time he would be talking as if he has been working on that problem all his life. He was supremely confident. And he would be right 95% of the time."

"Phaneesh was also very comfortable working in grey areas. He was comfortable using one criteria, one standard on one day, and a completely different standard another day," he said.

These two helped him well to thrive in the world of business. In business, being right 95% of the time, is in fact an achievement. But, in the world of ethics, the remaining 5% will pull one down. It's easier to be ethical 100% of the time than 98% of the time, as Clayton Christensen points out in his book How will you measure your life. Similarly, his comfort with grey areas might have helped him to thrive in a sector where technological disruptions were common and their impact on businesses were huge. But, ethical standards - especially those expected of a CEO of a large listed company - are seen as either black or white, and seldom grey.

The impact of sexual indiscretion of one individual - which sometimes gets dismissed as private and personal, and therefore ought not come under extensive media scrutiny - often extends to other very public areas. One, companies - in effect shareholders - end up paying for such mistakes. (Infosys had to cough up $3 million to settle the earlier case against Murthy). Two, colleagues get drawn into complicity, feeling obliged not to report on these to authorities even when they have to. (Infosys board came to know about Reka Maximovitch case too late, because initial indicators never reached Bangalore from the US office) And, finally, information asymmetry could tempt insider trading. (iGate stock was hit after Murthy's termination, raising questions about whether anyone gained from knowing the eventual fall out.)

Phaneesh's own response to the this controversy has been strange. A few hours after the first email from iGate arrived on May 21, terminating his services as CEO, Phaneesh arranged a hurriedly convened teleconference with journalists in India. He admitted to a personal relationship that he said was "more than a friendship". He then went on to reveal her name. When one journalist fumbled with her spellings, Phaneesh helped by calling out each alphabet slowly: Araceli Roiz. He appeared low but spoke with a calm voice. He ruled out any Board room struggle, but he said it was a case of extortion, pointing out that the same lawyer and law firm which handled the two previous cases against him was involved in this too.

Phaneesh said the news of sexual harassment and his termination came as a complete surprise to him. It was so sudden that when he spoke to the journalists he claimed he hadn't even approached a lawyer.

The same evening [May 21] Forbes India spoke to him over telephone. It was 6 am in Fremont, California when we reached him and he said he had spent a restless night, tossing and turning, trying to catch some sleep. He sounded tired and was in a hurry to answer our questions and end the call. He repeated what he had said in the conference. That he had ended the relationship with Roiz a few months back and had informed the Chairman "a few weeks ago". When asked why he had chosen that moment to tell the Chairman, Phaneesh said, "there were a variety of reasons" without getting into any more details.

Throughout the call, he maintained, that his only fault was that he hadn't adhered to what was written in the employee handbook. That he was supposed to have informed the Board about a personal relationship with an employee. When pressed whether someone with his history (of a previous sexual harassment charge) should have been more careful, Phaneesh replied, "yes, you are right, maybe I should have been more careful". (see interview with Phaneesh) When asked what he was going to do next, he said he had no idea. He couldn't think straight at that moment. We asked whether he had spoken to his family, and he said, he had, but that he didn't want to talk about it with us.

The next day's papers claimed that he had sold close to 150,000 shares worth $2.7 million in march and April 2013. (iGate's filings with SEC shows that he received 190439 shares from iGate on 4 March 2013, sold 104,459 shares on 6th March 2013 for $18.88 and a further 40,000 shares on 19th April 2013. The share prices have dropped since then. It was 14.19 end of May 23. A senior executive said dates of sales of stock owned by senior executives are predetermined.)

By Wednesday afternoon (May 22), news started to leak out that Araceli Roiz was pregnant with Phaneesh's child. It was alleged that he had asked her to have an abortion and that he was putting pressure on her to leave the company. Forbes India sent him a detailed questionnaire asking if any of these charges were true. At 1.20 am IST on May 23, Roiz's lawyers issued a statement that Roiz was pregnant. In an email to Forbes India, Randall Aiman Smith claimed that they were forced to make this public because "we did not know that Mr Murthy would give his press conference, or would make so many inflammatory and untrue statements in it". The lawyers alleged that "When he discovered this, Mr. Murthy pressured Ms Roiz to have an abortion. When she refused, he told her to leave the company, quietly, to protect his position as CEO." It said planning legal action against both Murthy and iGate.

Phaneesh has not spoken any further ,in a statement he said, "There are always two sides to the truth and now that the matter is definitely heading to court, I can't comment anymore."

How the story unfolded

In dozens of interviews with people close to the company, Phaneesh's present and old colleagues, Forbes India managed to put the story together. Araceli Roiz was hired in May 2010. Although she was reporting to iGate CFO Sujit Sircar, people close to the company remember distinctly that Phaneesh took her first interview when she came to the Fremont office. Several people in the company say that Roiz and Phaneesh began a relationship soon after she joined iGate (her lawyers confirm this).

In the iGate scheme of things, Phaneesh would personally whet all senior hires. iGate employees say that there was no strong second tier leadership at iGate and most decisions, especially concerning personnel, such as salaries and promotions were decided by Phaneesh. iGate employees allege that the relationship between Roiz and Phaneesh was hardly a secret. Several people in the company knew about it and they say that Roiz travelled with Phaneesh extensively and often. He was seen as her mentor and people mentioned observing several interactions where Phaneesh would be seen coaching her on the job as well.

iGate employees claim the relationship started souring some months back. According to her lawyers, Araceli found out that she was pregnant in March 2013. At which stage, they allege that Phaneesh tried to get her to leave the company. Her lawyers claim that he wanted her to abort the baby.

According to the lawyers account, in April 2013, Roiz's legal counsel got in touch with Phaneesh's lawyers. The lawyers allege that it was only after Phaneesh found that the lawyers were planning to file a suit that he decided to inform the Chairman of the company about his relationship with Roiz. The lawyers say that he spoke to the Chairman On May 2. (iGate has two co-chairman - Sunil Wadhwani and Ashok Trivedi, who are also the co-founders) and told them that he was in relationship with Roiz but that he had ended it.

In a call with us, Phaneesh said that when he disclosed this to the Chairman, soon after that the company appointed an external investigator to probe the allegations of sexual harassment. "The investigator spoke to me and then spoke to a few other people," he says. Phaneesh says that soon after talking to the Chairman he left for a trip to Europe. According to him, the external investigators didn't find any evidence of sexual harassment. It is not known what transpired after this, but on May 20, at around 4 pm PST, the Board called for an emergency meeting. Phaneesh was not a part of this meeting. According to one account, the Board met over a teleconference. At the end of the meeting they had decided to fire him from his position immediately. They then called up the Head of Finance and the Head of HR in Bangalore to inform them about this decision.

Phaneesh said that he was fired by the Chairmen in person, while he was at his office soon after the board took the decision. It came to effect immediately.

The lawyers allege that Roiz tried to end the relationship in vain. "When she tried to extricate herself from the relationship, he reduced her responsibilities, threatened her continued employment, and pressured her to continue the relationship," her law firm said in a press statement. But Facebook posts from Roiz's relatives present a different picture. Between April 1 - May 14, a family member of Roiz on three occasions made comments about Roiz's pregnancy stating they were happy with the news and were looking forward to becoming "grandparents". The last comment on May 14, posted on the wall of an iGate employee (a close friend of Roiz), where it was widely seen by a lot of other iGate employees, even mentioned that Roiz was expecting a baby girl and named Phaneesh as the father of the baby.


iGate's troubles seem to be far from over. Roiz's lawyers are talking of suing the company on grounds of sexual harassment. If they are found to be guilty they could end up paying millions of dollars in a lawsuit. "Under California law, because Mr Murthy was an officer and director of iGate, his actions were the actions of iGate, and iGate, too, is liable for the acts of Mr Murthy. There remains the question of whether, given Murthy's history of predatory actions toward female employees, iGate did all that it should have done to oversee and control Murthy and to provide some method for women at iGate to report his actions", Roiz's lawyers said in a press statement.

The iGate Board is defending itself by saying that it reacted with alacrity after being informed of the relationship between Phaneesh and Roiz.

According to a report in The Economic Times, the company said, "iGate acted quickly and sought to ascertain the facts, protect shareholder value and ensure we identified and completed all appropriate actions. Following an independent investigation carried out by a third party, the board decided to terminate the employment of Mr Murthy,".

There is also the question of what will happen to the iGate-Patni merger after Phaneesh goes. Phaneesh was crucial to the success of iGate. The company is still tying up the loose ends after the acquisition of Patni, a company that was twice as big as and several years older than iGate. It's evident in its performance. Since its acquisition iGate has been growing its sequential revenues slower than even underperforming companies such as Infosys and Wipro, despite having a lower base. (It made a profit of $97.2 million on revenues of $1.07 billion in 2012. iGate follows calendar year to report its accounts). A leadership change right now is likely to make progress even harder. iGate has also been positioning outcomes based pricing as its unique selling proposition. iGate's rivals doubt if the market will accept the new model beyond what it already does, because of the inherent complexity of outcomes based pricing. Its success to a large extent depended on Phaneesh's own faith that it's the model of the future and on its salesmanship. With Phaneesh gone, it might well have to lay that to rest.

Several iGate employees confirmed to Forbes India that Phaneesh was in complete charge of the company. The promoters never came to the office except for Board meetings. All operational decisions were taken by Phaneesh. In one of the earlier interviews with Forbes India, Phaneesh had said that his arrangement with the promoters was that he would be given a free hand to run the company as long as he was meeting their expectations on profitability, growth and market cap. From all accounts, Phaneesh was the company's topmost sales person and had deep personal relations with the key clients. It was Phaneesh who had brought the Patni deal to the promoters.

"Mr Murthy's departure was not related in any way to the company's operational or financial performance, both of which remain strong," said Ashok Trivedi, co chairman and one of the founders, said in a press statement.

In an investor call on 21 May, iGate said that they would not be paying Phaneesh a severance package.

The first episode

The way this issue played out was in many ways a stark contrast to how it unfolded the first time, 11 years back at Infosys. At iGate, he was a man with a history of sexual misadventure. But at Infosys, he was the other Murthy. (In fact, NR Narayana Murthy used to refer to him as his brother). How Infosys responded to that crisis is both a sign of those times (when IT companies were less global), and instructive (in showing how a sudden crisis can throw a company that swears by ethics off guard.)

"It hit us like a thunderbolt when the sexual harassment case happened. None of us had the experience of dealing with the issue till then," says a former Board member. Even though Reka Maximovitch had filed two restraining orders against Phaneesh between January and June 2001, the management in Bangalore had no idea about what was going on. The HR head of Fremont, California was reporting to Phaneesh at that time. The first time the Board heard about the case was when NRN Murthy received a legal notice from Maximovitch's lawyers.

"The question at that time was whether the then CEO Nandan Nilekani was aware of the situation and had hoped that it would eventually blow away. Whatever the situation was, the company swung into action thereafter. Nandan did a conference call with all of us and briefed us on the case" says the Board member. The lawyers were flown in from the US. "That's when we realised that the company could be sued for lack of processes" says this former Board member.

"At that time, Infosys did not have a strong sexual harassment policy, a whistle-blower policy or even a disclosure policy. That's what Reka's lawyers were looking to exploit" this person adds.

In hindsight, the management team wanted to close the case and avoid any further embarrassment. Senator Larry Pressler, who was on the board, was the sole voice who kept insisting that Phaneesh should not be let off. He felt Phaneesh should be suspended, pending investigation. If the investigation proved guilt, he should be made to pay for it.

However, in the boardroom huddles, it appeared that the executive team was keen to let him go, accept his resignation and settle his dues. "One of the senior members of the management team argued that if the company acted tough, there was a real danger that Phaneesh could possibly turn vicious and attack the then CEO Nandan Nilekani. So that was why the company eventually chose to settle the case out-of-court. And Phaneesh did not pay a single dime out of his own pocket" says the former Board member.

After the unsavoury episode, Infosys swung into action. Being a systems-driven company, under HR head Hema Ravichander's leadership, it went about methodically creating all the necessary apparatus to deal with sexual harassment, such as training the entire company, including the Board, on issues related to sexual harassment. They codified what was appropriate behaviour and what was not and built a detailed manual. And finally, they set up an independent committee under the leadership of a professor from the National Law School. Henceforth, all complaints related to sexual harassment would end up at her door.

At that time, the average age of employees at Infosys was 22 and building a gender friendly work environment in a male dominated culture wasn't easy. For instance, how do you create a disclosure policy for a manager who is dating another colleague? Is someone expected to disclose the fact before the relationship, or during the relationship or after the relationship? The basic idea was to ensure that the person had to inform the company so that the subordinate could be moved to a new role so that the person did not take undue advantage of an otherwise consensual relationship.

Shortly after the Phaneesh case, there was another case involving a violation of the sexual harassment policy, where a CEO of Infosys' BPO business was accused of sending out apparently funny, but sexual explicit mails to colleagues, including some women colleagues. One of them filed a complaint accusing him of violating the policy. The matter was discussed in some detail at the Board. Eventually, the CEO in question was let off with a hefty fine. Chairman NR Murthy is said to have censured the person saying that a senior leader had to be careful not to do such stupid things.

Why do smart people keep on doing stupid things?

Mitu Jayashankar and NS Ramnath write for Forbes India

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