Infosys Saga: Ignore Emotions, It’s a Legit Shareholders’ Battle

Let’s not mix issues of governance issues with cultural norms, making for a blunted public debate on governance.

This is the second high-profile battle of shareholder versus board that India Inc has witnessed in under six months. (Photo: Reuters)

This is the second high-profile battle of shareholder versus board that India Inc has witnessed in under six months. Maybe it is a sign of things to come.

Cyrus Mistry, whose family is an 18.6 percent shareholder in Tata Sons, accused its board of very poor governance on several counts, including the manner in which he was removed from the chairmanship of Tata Sons. Now Narayana Murthy, presumably speaking on behalf of a 12.75 percent shareholding group, has accused the Infosys board of the same, what he calls a decline in governance standards, with particular reference to issues of CEO compensation and severance pay to certain people.

Rational Governance Versus Emotion

In India, we have a way of mixing up rational governance issues with emotional social and cultural norms, making for a blunted public debate on governance.

In the case of Mistry versus Tata Sons, the debates in board rooms, meeting rooms, drawing rooms and in the media were:

• Whether Ratan Tata should have gracefully faded into the sunset instead of coming back to “interfere”.
• Whether the “way” in which the Tata Sons board did the deed was as gentlemanly and gracious as the Tata ethos has always been.
• Whether Ratan Tata had indeed steered the group as badly as Cyrus Mistry claimed he had.
• Whether the Nano was a Himalayan blunder or a great innovation
• And, most importantly, whether such a significant shareholder should have been treated “in such a manner” or not.

The debate rarely framed the situation as one of the majority shareholder using his legitimate shareholding muscle to sack the CEO (executive chairman) that he had lost confidence in.

Nor did it acknowledge that this is a fairly common occurrence here and elsewhere. The debate did not acknowledge the fact that the quantum of the shareholding of the removed CEO was not germane to the issue of perceived CEO performance. Why should a 25 percent-shareholder CEO be treated differently from a 0 percent-shareholder CEO, when it comes to judging his performance or character?

Cyrus Mistry, the former chairman of the Tata group. (Photo: Reuters)

Moving to the Infosys situation, the debate is already moving into realms of:

• Whether Narayana Murthy has a right or even an obligation to ‘interfere’ as a ‘founder’.
• Whether he should be “giving up gracefully” – thus confusing his role as former chairman with that of a present shareholder.
• Whether governance in his time was everything he claimed it to be.
• Whether “the way” in which he is expressing his dissent through newspaper interviews is cricket or not.

Questions Raised As Shareholders

The core issue here is that a large-ish shareholder group is challenging the decisions of the board, as well they or any other shareholder are within their rights to do.

A 12.75 percent shareholder group states that it is losing confidence in the board’s integrity and ability to make decisions that are good for business (or not bad for business). This group has a voice that is credible and loud enough to have the potential to damage the company on many fronts. They are asking...

• Whether it was hush money given by way of severance pay to a departing chief financial officer.
• Whether giving the CEO so much more money per se and compared to his next level is sound people management practice in a people business.
• Whether a particular independent director is in a position to be really independent.

These are legitimate and serious questions which the board of Infosys must decide whether it wants to answer, clarify unequivocally or partially or ignore. The board's decision on how to respond to questions about its actions should hopefully not be decided by which kind of shareholder group is asking the questions.

The peripheral non-issue is that this shareholder group is the founder group.  Founders and promoters occupy a hallowed space in Indian business culture, with their emotional stake in the company as parents being given as much weight as their financial stake.

Infosys Chief Executive Officer Vishal Sikka. (Photo: Reuters)

The board of Infosys is charged with the responsibility of protecting all stakeholders, not just shareholders; and must decide its course of response keeping that in mind.

Getting defensive or deferential or blinking and departing from what it believes is the right thing to do merely because the previous management team is asking questions, and more so because they are the founders, is the last thing it needs to do.

Board As Custodian Of All Stakeholders

The board needs to ask itself had these questions been asked by a non-founder group, would they respond differently? Does it offer all stakeholders the assurance that it has, and will, fairly balance the interests of the institution and all stakeholders in the decisions it makes? If the answer is yes, then it would do well to follow Murthy’s favourite dictum, “When in doubt, disclose.”

The Infosys brand is about straight speak and detailed disclosures and answering questions fully. The copious detail in its annual reports through the ages highlights this. Once done, they can sleep well because, as he has often said, “The softest pillow is a clear conscience.”

We look to the Infosys board to show some collective courage of its convictions and not follow the philosophy of appeasement of the company’s ‘birth parents’.

Its response to appoint a law firm to review governance practices when the questions being asked are about specific judgement calls made is a bit baffling.

Put The Views To Vote

Equally, in the spirit of grown-up governance, free from emotional and cultural shackles, there is no need for anybody to cry foul if this shareholder group decides to mobilise more shareholder support for its point of view and flex its muscle and put its shareholding to vote to change the board and/or the management, using all the legitimate avenues available to it by law.

To quote another favourite dictum of Murthy, "Cash is a fact, profit a matter of opinion." Perceived governance going downhill compared to the days of yore is a matter of opinion. The relative shareholder backing that each can muster, around their respective points of view, will be the fact that decides the winner. That’s capitalism… and global best practice.

(Rama Bijapurkar has been an independent director on the boards of several blue chip Indian companies. She was an independent director on the board of Infosys between March 2001 to April 2010.)

(This story was first published on BloombergQuint. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)