Wednesday, December 4, 2013

Infosys Example: Independent Director's Role in Strategy Formulation and Implementation

I was going through the article entitles 'Infy's Many Faces' published in 'Fortune India' (November 2013 issue, pp. 70-77). I have not verified the facts stated in the article. I presume that the information provided is correct.

While reading the article, it came to my mind that if the Board's role in strategy formulation is so minimal in Infosys, which  is rated at top in corporate governance, what could be the role of the Board in other companies.

The Companies Act 2013 (Code for independent directors) requires independent directors to bring independent judgement in the board room discussion on strategy. Thus, their responsibility  does not end with performance evaluation of the company. It is much more than that. They are expected to play a key role in strategy formulation and implementation.

The story published in Fortune India emphasises  that Infosys strategy reflects the aspirations of Mr. Narayan Murthy even after his departure. The company could not modify the business model to respond to the changing business needs. The article writes "Current CEO, S.D. Shibulal's visions of PPS (products, platforms and solutions) has lost focus with Murthy's return." The article presents few more examples.

In formulating strategies, companies must consider the aspirations of the CEO and other executives who are responsible for implementing those strategies. Therefore, one important aspect of strategy formulation is to balance aspirations of different individuals involved in the implementation of strategies. It is as important as matching alternative strategies with core competencies and the risk appetite of the company. Articulation of risk appetite, mapping of core competencies and balancing different aspirations are three critical aspects in strategy formulation.

If, we examine the Infosys example, it is clear that the company did not give due consideration to the aspirations of those who are responsible to implement strategies. Infosy's strategy was Mr. Murthy's strategy. Similarly, it could not detect the symptoms of the failure of the current strategy well in time. Is it  Board'd failure to balance the aspirations and views of everyone who are responsible for implementing strategies? 'Failure' may be a strong word. But, the Board's decision to invite Mr. Murthy to take charge of Infosys, which has lost its leadership position, vindicates the fact that the company's strategy was Mr. Murthy's strategy and the Board did not play any substantive role in formulating strategies.

The situation in Infosys is not unique. Conventional wisdom is that independent directors do not have adequate knowledge of the business and industry and therefore, they cannot contribute effectively in strategy formulation and implementation. It is enough to communicate them new dimensions of company's strategy at the annual strategy meet.

There is no doubt that the executive management is in a better position than independent directors in  formulating strategies. Independent directors might find it difficult to provide any deep idea. They are not expected to provide the same. Their responsibility is to review alternatives, balance aspirations and review the current strategy to detect early symptoms of failure, if any. Executive management cannot takeover those functions of independent directors. Executive management is the owner of the existing strategy. Therefore, it cannot bring objectivity in reviewing the current strategy. similarly, balancing aspirations is a difficult task for the CEO as executive directors are subservient to the CEO and cannot articulate their aspirations clearly and forcefully. Independent directors should play the role of arbitrator.

Independent directors should have a clear understanding of the business and its environment to perform their duties in respect of strategy formulation and review. Unfortunately, most independent directors find themselves inadequate in handling the responsibility because they do not invest the time and efforts that is required to understand the business and its environment.

Let us hope that the things will change.

No comments:

Post a Comment