Infosys: Outsiders not welcome

(UPDATE: On January 10, Infosys said that its audit committee of the Board of Directors had determined that all the allegations against its CEO and CFO by anonymous whistleblowers “are substantially without merit.” “CEO Salil Parekh and CFO Nilanjan Roy are strong custodians of the company’s proud heritage. Salil has played a key role in reinvigorating the organisation and driving momentum and the board is confident that he will continue to execute on the company’s new strategic direction successfully,” said Nandan Nilekani, chairman of Infosys.)

Early in November, McDonald’s Corp. terminated the services of its president and chief executive Steve Easterbrook, 52, because he had a consensual relationship with a colleague. The fast-food giant, in a filing to the U.S. Securities and Exchange Commission (SEC), said, “He [Easterbrook] violated company policy and demonstrated poor judgement involving a recent consensual relationship with an employee.” McDonald’s non-fraternisation policy doesn’t allow employees to date subordinates, both direct, or indirect. And the chief executive is no exception. “He was a high-performing CEO and there was nothing against his performance. But he made a few transgressions and the board dispassionately fired him,” says Shriram Subramanian, founder and managing director, InGovern Research Services, a corporate governance advisory firm.

Around the same time, the board of India’s blue-chip IT-services firm Infosys was battling to solve issues regarding its senior leadership—not of sexual misconduct, but of other alleged unethical practices. Anonymous whistle-blowers’ complaints have accused the company’s CEO Salil Parekh and chief financial officer Nilanjan Roy of procedural lapses and aggressive accounting practices, among other things. According to InGovern, the whistle-blower complaints can be broadly categorised into three buckets: seemingly trivial complaints on the CEO’s travels and deductions on taxes; ones that relate to bidding for contracts with low or no margin; and of over-recognising revenues, hiding costs, and consequently boosting margins and profits. It was also alleged that information was withheld from the auditors and the board.

“This [third] bucket of allegations is very grave and deserves the highest and urgent attention from the company. Also, the whistleblowers claim to have email and voice recording evidences. If auditors and the board were not presented the true picture, then the investors were also not presented the true picture,” says Subramanian.

The market obviously wasn’t thrilled. On October 22, a day after reports of these allegations surfaced, the Bengaluru-based firm’s stock opened 14% lower, touching an intra-day low of ₹638.30, and closed 16.21% lower at ₹643.30 at the end of the day’s trade. This wiped off ₹53,000 crore of investors’ wealth in a single day. Since then, the company’s share price has clawed its way up to ₹712.75, as on November 20, still below its 52-week high of ₹847.40. Despite the internal bickering, Infosys ranks a high No. 22 on the latest Fortune India 500 list—down a rank from the previous list. The list is based on the revenue of a company.

“The trust that investors have on the numbers presented to them during the quarterly results will be broken. Infosys can ill-afford such a loss of trust. Additionally, management bandwidth could be spent on defending class action suits,” adds Subramanian. The IT-services firm is fighting multiple class action lawsuits filed by U.S.-based law firms.

For the Infosys board, its primary goal is to dispassionately see if indeed the company’s senior-most leaders have fudged the numbers. In its 38 years of existence, the storied company has never faced such tremors but in the last few when Infosys was helmed by non-founders. In 2014, former SAP executive Vishal Sikka took over as the first external CEO of Infosys from S.D. Shibulal, a co-founder. Announcing his appointment, legendary co-founder N.R. Narayana Murthy had said, “His [Sikka’s] illustrious track record and value system make him an ideal choice to lead Infosys.” It didn’t take long for Murthy to change his opinion; as critic-in-chief, he panned Sikka’s methods and raised issues of corporate governance. Finally, Sikka stepped down in August 2017, and company veteran U.B. Pravin Rao, the then (and current) COO, took over as interim CEO. In January 2018, Parekh—an IT services veteran from Capgemini—took over. Now it is déjà vu. So, the question is, why is the hot seat at Infosys too hot for external CEOs?

Let’s rewind to the troubled times in 2017. Then, too, whistleblower allegations had shaken the company. One of the allegations was that Sikka overpaid for a couple of acquisitions; most notably that of Panaya, an Israel-based artificial intelligence (AI) company for which Infosys paid $200 million. While nothing was proven against the company, this led to Sikka’s departure and the exit of other senior-level executives. Infosys saw about eight senior management departures after his exit.

Also, during Sikka’s tenure there was the issue surrounding the huge severance package given to former chief financial officer Rajiv Bansal, which was red-flagged by Murthy. Finally, an arbitration tribunal ruled in favour of Bansal, and Infosys had to fork out ₹12.17 crore with interest.

Another criticism against Sikka was that he operated out of the U.S. while the company was headquartered in Bengaluru. Parekh, too, has been criticised for not shifting his base from Mumbai to Bengaluru and the money the company is spending on his travel.

So what exactly is it about outsiders that seems to be the problem? “Un - fortunately, in the context of Infosys, sometimes the core rigidity may be emanating from a particular view of culture as eschewed by the employees. That usually happens in family-owned businesses,” explains T.R. Madan Mohan, managing partner, Browne & Mohan, a management consulting firm. But unlike Sikka, Parekh has the backing of cofounder and non-executive chairman Nandan Nilekani, who is second only to Murthy in stand - ing among employees and has “much stronger connects amongst the founders”, Mohan adds. That, however, doesn’t mean that the Infosys board won’t examine if there indeed was motivation for the current CEO and CFO to fudge the numbers, as serious questions are being raised.

InGovern’s Subramanian puts forth an argument as to what could be the motivating factors for the senior management, including the CEO, to show enhanced revenue growth and higher margins. He says for that one needs to go through the details of the company’s 2019 stock ownership programme that was approved by shareholders in June. In that, Parekh was granted ₹10 crore worth of restricted stock units [RSUs] every year as part of his compensation. This stock grant is linked to the performance of the company and the Inosys board believed this was reasonable, given the size and complexity of the company’s operations. “In the 2019 plan, if the company un - derperformed, there was a possibility that no RSUs [were] vested and Parekh stands to lose ₹10 crore per year,” says Subramanian.

However, on November 6, Nilekani addressed an analysts’ meet where he said that the company’s response to the whistle-blower allegations complied with all applicable laws and regulations. This, he added, was contrary to reports that asserted otherwise. “This company has always been guided by a strong moral core and sense of larger purpose. We have reinforced these values by hiring people who are aligned to the company’s values and have instituted structures and processes to ensure that these values remain at the heart of our identity. Integrity and transparency are at the foundation of our business and inform our culture, policies, and relationships with all our stakeholders,”

Nilekani had said. While an investigation into the whistle-blower allegations against the company CEO and CFO is ongoing, Subramanian says, “The only thing that is perturbing to me, especially from Nandan’s analyst call, is that there is some sense of hubris within Infosys—a sense that nothing can go wrong. At the end of the day, anything can go wrong.” This is a point which a research report by brokerage firm Nomura alluded to. “Nilekani backed the management team and sees little merit in the whistle-blower allegations around margins in large deals and delay in reversal of a payment, though he indicated that he would wait for the audit report to offer more comments on the issue. He indicated that the company has a strong finance team and is unlikely to miss the delay in payment reversals, and that the audit committee meets frequently to audit large deals,” the report noted.

Nilekani’s strong backing of the management has buoyed investor spirits, with the company’s share price having regained lost ground—up 11%—as reported earlier. “He [Nilekani] does not see any disruption to the business and said that clients had been fairly supportive during this period. Infosys management mentioned that whistleblower allegations are a regular part of the business and that the company continues to encourage it,” the Nomura report added.

The way the chairman came out in support of the management and trashed the whistleblower allegations seems to indicate the board is standing behind Parekh, Mohan says.

Mohan feels amongst the multiple ways to look at culture for a service-oriented firm, the number of CEOs created from its stable is a good enough indicator. “While Wipro and HCL Tech do score high on this among Indian firms, Infosys lags in the number of CEOs it has created,” he says. And the recent whistleblower complaints against the Infosys senior management in a way bring a culture clash to the fore. While Infosys does see a significant amount of lateral hiring across ranks, at the very top it was almost non-existent until Sikka took over the reins.

While Sikka’s three years (August 2014-August 2017) at the helm of Infosys was marred by controversy, from a business perspective, he did shake up the company. Sikka had a radical idea—to create a differentiated model for the traditional software-services company—which would be built on newer technologies such as AI, automation, and the cloud. “Internally in the company and with customers there was a charge-up of energy and many employees liked Sikka,” says Subramanian.

Human resources (HR) consultants believe that Infosys has a powerful and shared history, in addition to a loyalty factor that is tough to define, but fiercely defended. “Companies do need fresh blood at the top and new thinking and Infosys is no different. But are we really doing enough in setting them up to succeed? That is the defining factor,” says Priya Chetty-Rajagopal, founder and managing partner of Multiversal Advisory, a CXO search and advisory firm. “The personalities [Infosys co-founders] are mammoth, even though in a good way Newer leaders will spend time in their shadow and unfortunately always be compared. Nandan’s getting back to Infosys had an immediate impact on the share price and investor confidence that speaks for itself,” says a senior HR consultant, who didn’t wish to be identified. “And it’s not always outside leaders that have a problem. Co-founder Murthy’s much-touted return wasn’t exactly ringed with glory.”

But will the current crisis at Infosys have a long-term impact in terms of hiring at CXO levels from outside? “Infosys has a strong defining culture and the adaptation to a newer world is certainly happening. The pace may not be at the level that the company would wish. Setting up and supporting new leaders to win is the need of the hour,” adds Chetty-Rajagopal. Over the past five years, Infosys has had to look for a CEO from outside the company rather than within, an indication that a strong leadership bench is lacking in the company. When Nilekani was asked a pointed question on the subject during the November 6 analysts’ call, his reply was: “So I think we have leaders and we are definitely going to make sure that the leadership opportunities will be available to everybody within, before we go out.”

This story was originally published in the January edition of the magazine.