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The Infosys Saga

The Securities and Exchange Board of India (Sebi) must evaluate India’s governance doctrine in the light of the boardroom upheaval at Infosys

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As I have written elsewhere, the advent of  Nandan Nilekani has been the best outcome for Infosys and it is best that he be allowed to apply his phenomenal leadership skills in extricating the company from this wholly undesirable situation precipitated by his iconic, albeit arguably petulant, mentor.

But whilst he attends to this onerous responsibility, it is important that the regulator not lose sight of the three core issues that need a structural response in the interest of corporate India and its publicly owned companies.  

The first issue is the manner in which boards actually function when not in the control of a promoter, a MNC parent or a dominant professional as an executive chairman. Due to behavioural and cultural underpinnings in our character traits, this situation is rare in India and we will witness how this plays out in L&T post A. M.  Naik and ITC post Y.C. Deveshwar. There is no other company in the BSE 100 index which satisfies this condition except some private banks whose dynamics are not strictly comparable. The situation was thus unique in the case of Infosys.

In most such “promoter controlled boards”, there is no specific accountability of individual members, no hard measurements either of their performance whilst discharging their fiduciary responsibilities, or indeed of the complementarity of skill sets and character traits. Of course, many are highly eminent professionals but are unable to counter the promoter’s primary objective of encouraging a compliant — or aligned, if one wishes to be charitable — “trophy director” on the board. The exceptions are too few to merit attention with Anand Mahindra and Anu Agha being rare examples. Hence, conflicts seldom happen in corporate boardrooms and, in the rarest of rare cases, the odd inconvenient director is hopelessly outnumbered and quietly persuaded to resign. Infosys was an exception to this paradigm as there was no promoter, MNC parent or a dominant executive chairman in control to provide “guidance” on key issues. In my view, Seshasayee and Ravi Venkatesan in all earnestness were grappling with this fundamental precept and, based on information in the public domain, I am not convinced that either their intentions, or their approach, were so conspicuously flawed that the company had to be pushed to the brink on issues of  “governance”.

If they can be faulted at all, it would perhaps be for the magnanimity demonstrated in continuously engaging — some would say placating — a particular set of shareholders who, in the ultimate analysis, have had a disproportionate influence on the final outcome despite a small shareholding. A governance question worth contemplating! Whether the Audit and Remunerations committees were wanting in the initial stages and whether (Vishal) Sikka did not quite appropriate the role of the dominant voice on the board, is debatable. To that extent, the superintendence responsibility of  the board with respect to the CEO could be questioned.  Second, the entire issue of shareholder communication — in the context of those with a substantial holding wanting pre-consultative rights in certain decisions — is ambivalent. Murthy demanded, and got, preferential access and desired, quite publicly, operational and strategic outcomes to be in line with his thinking.

We saw this in the Tata-Mistry case too. Providing such rights impinge on the stringent insider trading regulations and place a certain group of shareholders in a more privileged position with respect to the majority. Extraneous considerations of loyalty, iconic status and board propriety got muddled up in a high decibel, often vitriolic and opinionated, battle for perceptions waged in the media through trusted erstwhile mentees, leaked emails, a certain degree of compliant journalism,  etc. Those who did not have either the skills, or the mindset, to retaliate were significantly disadvantaged. The wisdom of adopting such a route to seek a resolution, though, is questionable given that established norms exist under law to settle such issues with far more dignity in board managed corporations.  

I have consistently maintained that full disclosure of the Panaya report will be an injudicious course of action for those responsible for managing the company: now that the board is being overseen by Nandan, it would be interesting to see how unrelenting Murthy will be on his core demand which formed the edifice of this battle. If he relents, it would seem that this form of media intervention was a thinly veiled attempt to wrest back promoter control of the board. The fact that such actions result in serious erosion of value — impacting minority shareholders most — would not be lost on Sebi which is primarily tasked with protecting minority rights.

Third is the issue of institutionalised board processes, specifically succession planning, and its long-term impact on company valuations. Despite the halo of good governance under Murthy and team from 1981-2014, facts would strongly suggest that these were inadequate. Else, Seshasayee and team would not have succeeded in breaking down governance in this short span as is being claimed! On the core question of succession planning, Infosys has had the misfortune of having relied on Murthy’s opinion thrice — and gone horribly wrong each time. First, the infamous policy of having a musical chair type rotation of founders for the top job: thus virtually forcing out Nandan and Mohan Das Pai at the peak of their careers whilst installing founders without the appropriate skills for leading the company. Another serious governance failure!  Second, no element of succession planning was evident amongst its huge managerial talent base leading to many high-profile exits. Third, the board, and the CEO, were handpicked by Murthy whilst handing over the reins of control and, given the context, he must dispassionately reflect on this.

We can now safely assume that, having wrested control, the founders, or their nominees, will have a dominant voice on the board for at least the next decade. A revisit of the earlier musical chair type of arrangement is most likely to emerge — now for board positions.

Given this perspective, where does the regulator fit in?  To my mind, all the three issues can be fundamentally traced back to how boards should function and its role in aligning the interests of the promoters, shareholders, and employees. As discussed earlier, complementarity of skillsets and independent disposition of directors, along with an objective measurement criteria of their combined performance as a board, is crucial.

I would thus urge Sebi to consider the model of a director’s slate as practised in many countries to address this core issue relating to the difficulty in legislating a character trait — subservient as it is to cultural dynamics —  called “independence”,  whilst imposing an Anglo Saxon doctrine on a non-Anglo Saxon world.

In this model, shareholders over a certain threshold either individually or jointly, have the liberty of suggesting a slate of directors for appointment. To borrow an analogy from cricket, this is akin to proposing an entire team (rather than specific individuals) with complementary skillsets, specific pre-defined roles and objectives and therefore a transparent, measurement criteria “as a whole team”. The slate with the maximum votes wins the right to govern the company for a defined time period usually about three years. Members of such slates in some countries publicly publish their raison d’etre, past accomplishments and qualifications to support their candidature on the slate. The principle is of a rigorous competency-based approach whilst proposing membership of the slate which emphasises leadership, problem solving, global perspective, strategic thinking and business acumen. Other considerations include the geographic mix of the board, as well as the professional experience of the directors. The promoter is thus placed on the same footing as that of any other shareholder in the appointment process.

Adoption of such a model will immediately address issues of cronyism relating to the appointment of directors and their seemingly everlasting longevity on boards in direct proportion to their proximity to the dominant shareholder, the complementarity of skillsets necessary to govern as a team and finally, the success criteria in providing superintendence of the company in the interest of the entire complement of shareholders. Issues of shareholder communication, decision making and the necessity to perform in line with the pre-declared objectives would largely ensure governance on a set of transparent metrics and not in sole conformity to the directions from the promoter and his shifting priorities. There are different models to this construct in different countries. It is for Sebi to decide the most appropriate model for India given its corporate ownership structure and the behavioural market dynamics it wishes to encourage.

In public interest, it is for Sebi to raise this fundamental proposal for consideration. In my view, this will foster a structural change in corporate functioning. If simultaneously backed by suitable changes in the law for the market for corporate control, including a liberalised hostile takeover doctrine, then India can decisively dismantle the cozy nexus between promoters, directors and managements. This will enable us to truly have a legislative framework in the interest of all shareholders and maximising value creation in our publicly traded corporations led by effective boards engaged in transparently and professionally overseeing management efficiency; thereby promoting an efficient, value accretive investment climate in India.

I do realise this will meet with stiff resistance from many entrenched managements. But the rate at which Prime Minister Modi is dismantling existing structures across the spectrum, in the interest of the common man, I am hopeful Sebi will seek his political goodwill to usher in substantive reforms in this area in the backdrop of the high profile Infosys saga.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


Prabal Basu Roy

The author is a Sloan fellow of the London Business School and chartered accountant. He has been a director in various companies. He now manages a PE fund and advises startups

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