Story Of The Week

Infosys Plight: An Uncomplete Story

“Like all fads, corporate governance has its zealots”

-Conrad Black

On 9th August 2017, sitting in the Palo Alto outpost of the Infosys Foundation, the Chief Executive Officer (CEO), Vishal Sikka, after much thought, decided that he had had enough. He told the non-executive chairman R. Seshasayee that he wanted to quit. Following this thought, Sikka resigned as MD and CEO of Infosys on 18th August.

His resolution lead to a difficult situation for Infosys. In the past few days, the stock price of the company has gone down by 10 percent. Further, as a surprise to the spectators, the Board of directors laid a flat blame on Mr. Narayana Murthy for triggering Sikka’s exit.

After Sikka’s resignation, Narayana Murthy, the co-founder of Infosys said: “I voluntarily left the board in 2014 and am not seeking any money, position for children or power. My concern primarily was the deteriorating standard of corporate governance which I have repeatedly brought to the notice of the Infosys board. It is below my dignity to respond to such baseless insinuations.’’

A lot of weird discussion has gone in the past few days regarding the future of Infosys.

What went wrong for two lakh-employed company? Let’s dig down deep and discover.

 

Sikka’s journey in Infosys

It was in June 2014, replacing S D Shibulal, Vishal Sikka took charge as Chief Executive Officer and Managing Director of Infosys. The broad vision was to reshape the business model of the global giant. To build a strong organization with a focus towards innovation and entrepreneurship, the top management decided to give the power to the next generation of management.

The happy Infosys newsroom (an online platform where news relating to Infosys is shared ) still iterates Sikka’s appointment for the venerable position. The same wall declares Mr Narayana Murthy’s trust and respect for Sikka when the board handed over some of the prime responsibilities to him.

With an illustrious track record, Vishal promised to bring valuable experience to the table. Mr. Murthy proclaimed him as an ideal choice to lead the global organization. That was, of course, almost three years ago.

The change began right after a week into his new job when Sikka promoted over 5,000 employees in an attempt to retain them.

In Oct 2014, Vishal Sikka said that the company would focus heavily on growth, and for that they need the benefit of their cash reserves. He also said that his plan will not be concerned about what happened with earlier generations of low-grade softwares, or of cutting costs. Instead of going on a downward spiral, Infosys will work on renewing themselves to a next-generation services company. In the same year, Sikka gifted iPhone 6s to 3,000 top performers.

Infosys’s financials began to improve from FY16. Its revenue grew by 28 percent from Rs 13,342 crore in Jul-Sep 2014 quarter to Rs 17,078 crore in Apr-Jun 2017 quarter.

 

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In 2015, Infosys announced the acquisition of Panaya and Skava to help clients bring new digital experiences to their customers. Sikka announced company’s long-term goal of $20 billion in revenue as Vision-2020. However, time changes. Infy has dropped $20 billion revenue target this year.

In 2016, Infy board raised Sikka’s compensation by 55% to $11 million. In a resolution reappointing Sikka as CEO, only 23.57% of promoter votes were cast in favor. But then with the support from shareholders and the board, he was reappointed.

The Panaya Disaster

It was in the year 2015, shortly after Sikka took the lead role. The Israel based software services company named Panaya was acquired by Infosys. The controversy started in February 2017, when a whistle-blower sent a mail to SEBI that claimed the Panaya deal to be hugely overvalued.

According to the anonymous letter, Panaya was brought at $200 million by Infosys. However, the firm’s value stood at $162 million a month before the date of purchase. The allegations further stated that Panaya deal was unfairly benefiting Hasso Plattner.

There were two striking observations in the deal:

First: Sikka was the Chief Technical Officer at Hasso Plattner before joining Infosys. This raised serious doubts about his involvement in the deal as Hasso Plattner had 8.33% stake in Panaya.

Second: Rajiv Bansal, the former CFO of Infosys, had walked out of the meeting when the board had asked for an approval to buy Panaya. He thought the company was paying too much to acquire Panaya, and the deal would bring comparatively less benefit to Infosys. Later in the year, Bansal left Infosys with a  huge severance pay of more than 17 crores. It became tough for Infosys to explain such a drastic combination of incidences.

These observations raised serious questions around the corporate governance in Infosys.

Vishal’s life was turning around in a bad way. All of a sudden, he found himself burdened by the responsibility of a giant growing firm that was being doubted by everyone. There was chaos all around, and then there were the differences. To top it all, was another unfavorable decision.

Board Vs Promoters

Infosys had employed the law firm Gibson Dunn & Crutcher to investigate the charges. The firm submitted a report to the board, concluding against the whistle-blower claims of Infosys executive being profited from the company’s decision to buy Panaya in February 2015 and giving the acquisition a clearance. The company cleared Sikka. Further, the evaluation of Panaya was deemed correct.

With time, the promoters and the Board of Directors started showing differences. When Murthy asked Infosys to make the report of Gibson Dunn & Crutcher public, the company declined to do 

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On 15th April, Infosys named Venkatesan as co-chairman and then appointed a three-member panel to support and advise Sikka in executing strategy. Sikka was deeply unhappy with Venkatesan’s appointment. He even told some executives close to him that he wanted to quit. He and Venkatesan had a tough working relationship on the board. Though Sikka’s disappointment was not long and ended in less than 2 months, the glimmer that he had entered Infosys with, seemed lost.

Sikka saw the letter by Narayan Murthy as a direct attack on him. Moreover, the interviews given by Venkatesan on various media platforms disturbed him further. Murthy wrote more letters questing Sikka’s ability as a CEO. Today, this is being referred by the board as the biggest reason behind Vishal’s resignation.

Challenges for Infosys after Sikka’s Exit

 

Retain key executives and clients: Infosys might have to prepare itself to lose key executives and clients those supported the software-plus-services model that former Chief Executive Officer Vishal Sikka had pioneered as it has become an easy target for rivals to poach in an uncertain business environment.

Represent digital technology: The biggest challenge for Infosys would be to represent its digital technology strengths, which Sikka personally drove for pure digital projects in the US, its main market. Over the last few months, Infosys has lost several senior people in the US, who were driving client relationships.

Look out for competitors: Sikka was involved in driving key Client relationships and now his exit will open ground for many competitors to exploit the situation. Infosys was planning to innovate in automation under Sikka’s supervision, but now this advantage will go to the competitors who are equally willing to expand in that technology.

Regain lost image: Even if Infosys is able to replicate some of Sikka’s personal contacts, the fact remains that the lack of stability at the company will give clients a pause. Clients under macro/business uncertainty would prefer more business partners that provide continuity of thought process.Clients lost confidence in Infosys because of such instability in the organisation, Infosys also lost its identity as an innovator.

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The Final Touch

Vishal Sikka’s resignation was accepted and he was appointed Executive Vice-Chairman till the new CEO and MD takes over by 31 March 2018. He will now receive a salary of $1 annually.

Post Sikka’s exit Infosys co-founder N. R. Narayan Murthy said that he was extremely anguished by the board’s statement blaming him for the CEO’s exit. Finding it below his dignity to respond to baseless allegations leveled by the board, Murthy concluded: “I will reply to these allegations in the right manner and in the right forum and at the appropriate time.

Along with Vishal Sikka, two other board members Jeffery S Lehman and John Etchemendy also quit with immediate effect and their resignations have been accepted. Nandan Nilekani has been appointed as the new chairman of the company after R Seshasayee resigned as chairman of the board.

The board also offered a buyback of shares worth Rs 13000 crores a day after Sikka’s resignation, which was being advocated by the founders since a long time. Founders felt that cash pile should be used to reward the shareholders instead of making another hefty acquisition.

A complete restructuring is expected to take place upon the re-entry of Nilekani to the company. Nandan Nilekani has remained silent on the most critical Panaya acquisition case and has asked for time to study the complete report. UB Pravin Rao would continue as interim CEO and MD till a full-time CEO is appointed. 

References

http://www.livemint.com/Companies/kh0jH09FsCQRoaYZmEnqyM/The-backstory-to-Infosys-CEO-Vishal-Sikkas-resignation.html

http://economictimes.indiatimes.com/tech/ites/five-reasons-why-ceo-vishal-sikka-had-to-leave-infosys/articleshow/60114080.cms

http://www.financialexpress.com/industry/nandan-nilekani-back-at-infosys-stays-vague-on-contentious-issues-ducks-hard-questions/825763/

http://economictimes.indiatimes.com/tech/ites/panaya-how-one-infosys-acquisition-kicked-off-the-big-storm/articleshow/60120594.cms

 

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