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Is this a generation gap?

After a hired professional and major shareholder had charged Indias holy cow, Tata Sons, of not following corporate governance, another crisis has emerged. This time a founder and principal shareholder is making the charge on hired professionals. The company: Infosys.

Is this a generation gap?

Infosys is in the limelight after the founders, in particular, doyen N R Narayana Murthy, questioned the corporate governance and ethical practices of its top management. At question was the payment of Rs. 17.38 crore to former-CFO Rajiv Bansal on his exit from Infosys and shelling out six times the  target company’s revenue for the acquisition of Panaya.  SEBI is examining a whistleblower’s letter and responses from the management to see if there is any breach of Securities laws. The owners, including N R Narayana Murthy, believe that the ethics and governance of the company have deteriorated. He in fact questioned if there was any ‘hush money’ involved in the severance pay of Rajiv Bansal, which was significantly higher than the amount mentioned in his contract.

 

A merger and a goodbye

Does Rajiv Bansal who worked with Infosys for 17 years and severed after taking up the CFO role deserve a severance of about one crore for each year of service he has put in the company! That looks quite a bit out of proportion than you would normally expect. Another catch is that none of the former CFOs or senior executives had ever received such a princely sum when they exited the company. The current severance pay policy allows a 100 per cent variable component. Ironically, employees who are still contributing to the group only receive 80 per cent variable pay!  There is also a question on Vishal Sikka’s variable compensation package. The top eight executives were paid Rs 24 crore as compensation with a variable component of 20 crore plus stock options last year.  That’s not the kind of culture that Infosys grew up. 

 

Issue  governance and ethics

Clearly, the issue is about governance and ethics.  Apparently, Bansal’s contract stood modified without clearance from the audit and compensation committees and shareholders. Two, the payout happened without a formal board approval. Three, Bansal has allegedly received 30 months’ salary despite his contract approving a payout of only three months.  Four, according to SEBI rules, transactions involving KMP  have to be disclosed as soon as they happen and details of this operation should be disclosed at the board’s quarterly corporate governance report. While Rajiv left Infosys in October 2015, the severance was disclosed only in May 2016. And five, the transaction, being such a huge amount can be assumed to be a non-arms length transaction, which the audit committee should have disclosed. 

Infosys paid about Rs. 5 crore to Bansal and had to suspend the balance payout after a hue and cry at the company’s AGM. 

The other discontent is regarding Panaya deal, which was the first acquisition by Infosys under Vishal Sikka. Rajiv Bansal was not happy with the merger, as according to a senior formal employee involved with the purchase, the Israeli company was on the verge of shutting down and some people were laid off before the buyout. Why would an acquirer pay six times the company’s revenue for such a business? Despite the initial dissent, Infosys went ahead with the merger and denied any irregularities in the buyout. 

The founders of Infosys are ‘good capitalists’ because they were successful, earned wealth by transforming the society through innovation and ingenuity rather than inheritance or crony capitalism. Narayana Murthy defines good governance as transparency, no matter what the situation, disclosure of everything by the KMP and directors, whether good or bad, and taking action on it. 

Murthy says: “culture is the bedrock on which successful strategy rests.” He believes culture brings joy, sadness, pride and values and how people spend their time and money. A good company’s culture seeks respect from stakeholders in everything they do, concern for the society and excellence by each of the company’s employees.

The shareholders are of the opinion that the board should be proactive in communicating significant matters with major shareholders including founder shareholders as well as institutional shareholders.  They would first improve the trust of shareholders in the board. 

 

Ethos of founders and paid professionals

It is clear that there is a particular demarcation between the ethos of the founders and that of paid professionals. Founders seek to move forward with 100 per cent ethics, even if growth is slow. On the other hand, a paid professional is likely to overlook a few ethics to ensure he gets his compensation at any cost, as after all, he is there for a short time only! 

The crisis at the Tatas and now at Infosys raises the fundamental question whether in future founders would want to completely exit the company and leave it in the hands of hired professionals. Only time will tell if big family businesses will be easily willing to let go of their babies to someone who is there to work and earn his bread and nothing else. 

In other words, will they ever do a Larsen & Toubro?  

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