Shareholder activism: Murthy, Infy management at loggerheads will hurt investors' wealth creation

New Delhi: India is still taking baby steps in shareholder activism, with few instances of shareholders agitating for their rights. So when IT bellwether Infosys warned its shareholders against activists in an SEC filing yesterday, just days after its famous founders reportedly threatened to sell out due to differences with the current management, it comes as no surprise. The indication towards the promoters in this filing was apparent and the company said such activism could adversely affect its ability to execute “strategic priorities and could impact the trading value of our securities”. The founders together hold 12.75 percent equity in the company. Led by N R Narayanamurthy, they have publicly expressed, over the last several months, their opposition to some of the decisions by the current board led by CEO Vishal Sikka. In February, Murthy criticised Chairman R Seshasayee over the board’s decision to offer a whopping Rs 17.38 crore in severance pay to former chief financial officer Rajiv Bansal, without even informing the stock exchanges. In April, Murthy again went public with his displeasure against the board’s decision to award “high” salary to chief operating officer U B Pravin Rao, who is incidentally a Murthy protege. And at the beginning of this week, there were unconfirmed reports that the founders are now looking to exit Infosys. All this while, Murthy has been publicly nudging Infosys to adopt what he had earlier propounded – compassionate capitalism. Now, it seems the company is warning investors that compassion will kill capitalism – since it has indicated that such activism by shareholders could impact the share price. [caption id=“attachment_3631335” align=“alignleft” width=“380”]  Infosys founder N R Narayana Murthy and CEO Vishal Sikka[/caption] In corporate India, one has seen scant patience with activism and rarely come across a publicly managed company welcoming uncomfortable questions from shareholders. The last high-profile case of a very public spat between a shareholder and an Indian company was the Coal India-TCI (The Children’s Investment Fund) case. Here, TCI was the single largest shareholder in CIL and the UK-based investment firm accused the world’s largest coal producer of several malpractices. This case dragged on for months, several court cases were filed by TCI and the government also got involved in these skirmishes. Though TCI eventually cashed out, hope of this case throwing some spotlight on agitating shareholders forcing company managements to mend their ways were belied. Now, with Infosys management obliquely referring to Murthy and company as “activist shareholders” – it is clear that battlelines have been drawn. Some proxy advisory firms have earlier said that the Infosys’ founders come across as a bunch of retired professionals, meddling unnecessarily in the management of a professionally run company, and should take a back seat now. Some others have hailed the objections raised by these founders so the response to their issues has at best been mixed at most times. So, are the founders wrong in raising corporate governance issues? Surely not. Many public shareholders seem to share Murthy’s concerns on excessive remuneration etc. Remember, in April this year, public shareholders also seemed to favour Murthy’s cautious approach to COO compensation. According to Infosys’ filing with the stock exchanges in that month, over 32 percent or close to a third of all the shareholders who voted on a resolution to increase the COO’s pay were against the proposal. But since two-third of the voters approved, the resolution was passed. The naysayers included the group ‘Public non-institution’ where an overwhelming majority voted against the proposal. The BSE filing showed 67 percent or two-third of those who voted under this category – comprising the general public one would presume - did not see merit in the proposal to increase the COO remuneration. Around the same time, Murthy had said in a letter to the media that he had received numerous mails raising objections to such a pay hike. “No previous resolution in the history of the company has received such a low approval.” Murthy himself abstained from this vote, as did other founder promoters. In that letter, Murthy had further said “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 corporation in a poor country like India….. This is necessary if we have to make compassionate capitalism acceptable to a majority of Indians who are poor. Without compassionate capitalism, this country cannot create jobs and solve the problem of poverty. Experts tell me that capitalism may come to an end in the not-so-distant future if the current corporate leaders do not heed this advice in India.” Well, with the Infosys management terming shareholder activism as a threat and the founders appearing unwilling to back off from their ideological position, capitalism and shareholder wealth creation is certainly under some risk. This saga will end only if the promoters either cash out or if the management heeds Murthy’s advice on remuneration etc.