Infosys Limited, which is a global leader
in IT technology and consulting, is in the news after the founder-shareholders,
who together hold around 13 per cent of the outstanding equity shares, voiced
their concern over certain corporate governance issues. A whistleblower has
raised same issues in a letter to the SEBI. They relate to alleged overpayment
in the acquisition of Panaya, in which Hasso Plattner, who is the cofounder of
SAP (the company in which the CEO of Infosys Mr. Vishal Sikka worked earlier),
had 8.33 per cent shareholding; and unusually high severance pay of Rs 17.38
crores (actually paid Rs 5.2 crores) to the erstwhile CFO (Rajiv Bansal), who,
according to the whistleblower, initially was not in agreement with the
acquisition of Panaya. According to N R Narayan Murthy, the highly respected
founder of the company, the high severance pay could be ‘hush money’ to silence
Mr. Bansal. Other issues raised by the founders are the significant pay-hike of
Mr. Sikka, departure of a former compliance officer David Kennedy with significant
severance pay and appointment of Punita Kumar Sinha, who is the wife of a minister
in the central government.
Across the globe outside blockholders
(large shareholders who do not occupy a position in the board or executive
management) monitor the performance of the board and directly intervene, for
example, by writing letters to the chairperson communicating suggestions and
concerns or raising issues in general meetings. Therefore, intervention by the
founder-shareholders of Infosys is not a surprise. The use of the public forum
(e.g. Media) to raise issues is.
The allegation that the board had approved
payment of ‘hush money’ to the former CFO in the form of unusually high
severance pay is a very serious allegation. The board on its part got the issue
investigated by a highly reputed law firm (Cyril Amarchand Mangaldas), which
did not find any wrongdoing or cover up of wrongdoing. Ostensibly, the founders
were not satisfied with the investigation. If, founders believe the high
severance pay was ‘hush money’, they should have taken recourse to options
available in the Companies Act. For example, they could call EGM for removing
the chairman of the board and chairman of the nomination and remuneration
committee from the board. Indicting the board for wrong doing and pressurizing
the chairman to resign by making noise in the media is an undesirable
shareholder activism, which harms the company more than benefitting it.
Excessive compensation to the CEO and members
of senior management is always an issue in corporate governance. The board has
the responsibility to critically examine the employment contracts with them before
approval. The Infosys board has indirectly accepted that high severance pay to
former CFO was an error. This is definitely a failure of the nomination and
remuneration committee.
Founders had expressed concern about the
increase in the ratio of CEO salary to the median salary. Although it is
generally believed that the high ratio reflects poor corporate governance, there
is no norm. High ratio of CEO’s pay to median pay is not always against the
principle of ‘fairness to all employees’. An independent board should apply its
judgement based on the demand and supply of capabilities that are required for different
positions/jobs for strategy implementation. Usually the board benchmarks salary
with salary levels in comparable companies. For example, as Mr. Sikka has an opportunity
to work for a global company in a similar position in USA and he is allowed to
operate from USA, his compensation should be comparable to a CEO in a global IT
company operating from USA. On the other hand, salary of employees located in
India should be comparable to salaries in global IT companies operating from
India. It could be the reason that the ratio of Mr. Sikka’s compensation to the
median compensation in Infosys has exceeded the earlier normal.
It goes without saying that if the SEBI finds
truth in the whistleblower’s allegations of unethical practice, the board
should be held responsible. On the other hand it would be a mistake to hold
Infosys hostage to its founders’ original approach to business. A ‘way of doing
business’ is not the same thing as ‘core values’ like a commitment to integrity
and ethical standards, mutual respect and fairness to all stakeholders. The
latter should certainly not change. But to raise a certain way of doing
business to the same status as these fundamental values can only do a
disservice to the company and leave it without the ability to adapt to changing
business contexts.
