India’s key software services provider appears in crisis
Recent events indicate that a major crisis is under way at Infosys Ltd, an Indian multinational corporation that provides information-technology services on a large scale.
After beginning as a modest middle-class enterprise, the company now has 200,000 staff members, comparable in size only to the giant Tata Consultancy Services Ltd (TCS). But as it attempts to adapt to emerging global trends in the IT sector, Infosys’ growth process appears to be threatened by some decisive challenges.
Over the past few decades, Infosys has topped polls in best practices on corporate governance. It has been ranked the best on “parameters of disclosure and transparency, responsibilities of the management and the board of directors and shareholder rights and equitable treatment”, Sandeep Khanna wrote in Mint on August 23.
Multiple Indian companies have indeed carved out a space for themselves in the IT services and IT-enabled services segments in recent times. They may, however, be seen to have missed the bus in incorporating emerging trends of innovation such as artificial intelligence (AI), the cloud, digital, an software as a service (SaaS), which are the new drivers in the services space.
The Indian IT services model was founded on labor arbitrage. Engineers with reasonable English-speaking skills worked for far lower compensation than equally qualified First World personnel.
AI takes away many jobs, especially low-level call-center jobs. The cloud and SaaS have also taken over much of the outsourced services space. Even writing code has changed in that it is now more about cutting and pasting of chunks of relevant code. Having come late to the evolving process, Indian IT services firms have seen margins thinning and have struggled to register growth in revenues. There have been many layoffs.
In this situation, Infosys in June 2014 recruited Vishal Sikka, a highly trained American-Indian professional with a PhD from Stanford University, to the position of chief executive officer and managing director based in Palo Alto, California. Apparently, Sikka was expected to push the company into the world of new trends in the IT sector.
After completing three years in the company, Sikka abruptly resigned on August 18, complaining about what he said were “continuous drumbeats of distractions” and “baseless, malicious and personal attacks” by Narayana Murthy, 71, the iconic founder of Infosys.
The trouble that erupted at Infosys may have been partly the result of its attempts to catch up with new trends. Presumably, Sikka was hired to push Infosys into the AI and digital era. The dissatisfaction over Sikka’s leadership grew perhaps because old-timers who were used to double-digit growth rates and, as labor arbitrageurs, were not fully in tune with what he was hired to do. The board of directors were perhaps guilty of not providing proper leadership to Sikka.
In February 2015, a controversy arose over the acquisition of Panaya, an Israeli automation-technology company, which led to rumors of impropriety. A whistleblower asserted that the deal was overvalued. In October that year, Rajiv Bansal, chief financial officer of Infosys, exited and later demanded that he be given full severance pay, adding fuel to the fire.
Murthy said the severance deal with Bansal (offered US$1.1o5 billion as severance pay at first, but after arbitration he received $625 million) appeared to be “hush money”. Bansal also made public a series of questions in a letter on the Panaya valuation and possible improprieties.
Sikka resigned on August 18. The board of directors exchanged back-and-forth accusations with founder-shareholder Narayana Murthy. Some US lawyers talked of class-action suits. The reputation of Infosys, known for its integrity, ethics and transparency, was damaged.
Surprisingly, the company announced a buyback, extinguishing 5% of the equity. A buyback with the CEO absent was a bad signal, which suggested that the company was in panic mode.
The board of directors of Infosys were divided on their assessment of the work of Vishal Sikka. One section, which included chairman R Seshasayee, was appreciative but others were critical.
Murthy had come to know that a section of directors felt that Sikka was a technical officer and not an executive officer.
The growing mistrust between Sikka and Murthy led to investors losing billions of dollars in just a few trading sessions, Mint reported on August 23.
After Sikka’s departure, the company reportedly incurred a huge loss in market value. Seshasayee sent a scathing six-page note to stock exchanges, which was made public, blaming Murthy for the CEO’s resignation.
The note did not have the unanimous support of the board. Murthy, however, held the board responsible for not providing leadership to Sikka.
Shareholders asked why Seshasayee had lashed out at Murthy. Investors too expressed dismay.
A former executive vice-president and shareholder of the company said Seshasayee’s move was “the biggest story of mismanagement by any board of a large listed company in India”: He had failed to discharge his fiduciary responsibilities; could not retain his CEO; and could not work with an influential group of minority shareholders.
Above all, in his scathing six-page note, he had blamed Murthy for his own failings, Anirban Sen and Varun Sood reported in Mint on August 23.
Founders of the company said Seshasayee’s note was “offensive”, not befitting the board of a company such as Infosys.
An informed observer questioned Sikka’s motives for quitting his job. Murthy was not someone to whom Sikka was reporting; nor was he a member of the board of directors of Infosys. His protests should not have bothered Sikka enough to prompt him leave the company. Perhaps he had other reasons, said Sudhir Bisht.
As the leading founder and shareholder of Infosys, Murthy had a right to raise questions on its corporate governance and criticize the functioning of the board. He had offered his comments as an activist shareholder and was not bound by the constraints of any office.
He had no vested interests and was within his rights to criticize the company on matters of ethics, morality and corporate governance.
Bisht said Sikka perhaps decided to quit Infosys when he realized that he would not be able to achieve the targets that he had set for the financial year ending March 2021: $20 billion in revenue; an operating margin of 30%; and per-employee revenue of $80,000.
Three kinds of risk confront Infosys: In global terms, the IT business environment appears non-conducive; in sector-specific terms, the sector is undergoing a downturn; in company-specific terms, Infosys is facing the huge challenge of having to catch up in a difficult situation.
Global demand is not strong; the rupee is strong and shaving off margins from foreign-exchange earnings; the Indian IT services model is screwed up. The company is headless and the board is engaged in an ugly and open spat with the founder of the company, which is afflicted by allegations that affect its reputation.
There is a real danger, given Infosys’ standing as a market leader, that its company-specific risks will spill over and affect other IT businesses, which may well find copycat allegations surfacing from disaffected former employees, according to Devangshu Datta.
On August 24, Nandan Nilekani, 62, co-founder and former CEO and managing director of Infosys, was appointed as the non-executive chairman of the board of directors, replacing Seshasayee, who was considered by the iconic Narayana Murthy as responsible for the sharp deterioration of governance standards in the company.
Nilekani faces challenges both immediate and longer term: Find a successor to Vishal Sikka; sort out the relations between the board of directors and the founders and shareholders of the company; resolve issues relating to compensation packages and salaries for the top executives; formulate an appropriate succession policy for the head of the company; and evolve a new strategic vision for company.