Just how did things come to such a pass for co-founder Narayana Murthy, within the three short years Vishal Sikka was at the helm?
On Sunday, August 20, Nagavara Ramrao Narayana Murthy turned 71. It should have been a joyous occasion, but the mood at the small informal gathering of friends and ex-colleagues who had come to wish him at his Bengaluru home was sombre.
Just two days earlier, Vishal Sikka, CEO and MD at Infosys Ltd handpicked by Murthy in 2014, had resigned, sending shock-waves through Infosys and the entire IT industry. The company's shares plunged nearly 10 per cent on the bourses on Friday, August 18, wiping out over Rs 22,000 crore of shareholder wealth, while the Sensex fell over 400 points. Sikka had complained of "distractions" from his work at the company, and the "false, baseless, malicious and increasingly personal attacks" against him. But while he did not name Murthy, the Infosys board attacked the company's co-founder, publicly upbraiding Murthy, accusing him of being a bully and forcing Sikka's resignation, and in the process damaging the company and misrepresenting its commitment to corporate governance.
So, on his birthday, instead of reflecting on a lifetime of achievement, Murthy grew misty-eyed and bemoaned "being misunderstood, back-stabbed and betrayed, for standing up for principles", according to a former colleague who did not want to be identified.
Even the following Monday, despite Infosys announcing a share buyback proposal on Saturday, investors continued to punish the stock, sending it plunging over 5 per cent on the bourses. Shareholder proxy firms, which normally red-flag errant decisions in listed firms, were equally quick to blame Murthy for the crisis at Infosys, even as some former independent Infosys directors joined the chorus for him to keep away from the company he was CEO of for 21 long years. "Learn to walk away, as you had promised when handing the reins to Vishal," wrote Omkar Goswami, an independent director with Infosys for 15 years from 2000, in an open letter to Murthy on August 22. "Let Infosys get on with its business, heal itself from the injuries that you have inflicted, and again grow shareholder value."
Brokerages warned of clients falling off and the company missing its growth target of 6.5-8.5 per cent for FY 2017-18. Many fear the company will lose the momentum Sikka built in the past three years, ceding ground to rivals. Some analysts even wondered if Infosys could ever return to its glory days, and what the fate of its 200,000 employees would be. The concerns are not surprising. Infosys is not just another company, but an icon in the business, which, along with firms such as Tata Consultancy Services, Wipro and HCL Technologies, has made Indian IT a globally respected phenomenon. Even as the embers from another big corporate battle between former Tata Group chairmen Ratan Tata and Cyrus Mistry are yet to die down, the acrimonious battle at Infosys threatens to dent its image as a globally trusted and credible brand.
Just how did things come to such a pass for Murthy, within the three short years Sikka has been at the helm? From being feted as the poster child of middle-class success, creating thousands of high-paying white-collar jobs, billions in shareholder wealth and setting standards in transparency and corporate governance, Murthy today is being accused of trying to destroy his own creation. Is he a petulant 'old man' refusing to cede control? Is Sikka the upright technocrat who tried to bring change and in the process rubbed too many in the 'old guard' the wrong way? Has the Infosys board failed to fulfil its fiduciary duties? Is there truth in the allegations an anonymous whistleblower and the promoters have made of financial malfeasance and corporate governance failures in Infosys?
India Today went behind the scenes to talk to a number of people involved in the controversy. Most of them chose to remain anonymous as some of them are either part of the unfolding drama but are not authorised to speak to the media or are former senior executives of the company, who identify with one or the other camp- Murthy or Sikka. While Murthy did not respond to mails, Infosys declined to make its executives available for meetings.
On Thursday, June 12, 2014, Infosys hurriedly called a news conference at the company's sprawling, verdant campus in Bengaluru. A beaming Narayana Murthy, who had returned to Infy just a year ago for a second stint (having retired earlier in 2011) to 'rescue' it from its deteriorating performance, announced Vishal Sikka as the new CEO and MD.
"Sikka means a lot of money to Infosys," he chortled, playing on the surname, which in Hindi translates to 'coin'. The bonhomie was evident as the then chairman of India's second-largest IT services exporter and the new hire exchanged praise. Sikka, who had spent most of his career in the US, first as an entrepreneur, building and selling two companies, and later as a successful senior executive at business software major SAP, seemed to share a great rapport with Murthy, despite the two-decade age gap.
While Murthy said how he enjoyed "talking to Vishal on mathematical and Computer Science-related abstract minutiae", Sikka, who has a PhD in Computer Science from Stanford, played deferential protege to an elder statesman, who had helped build one of India Inc's most respected and successful companies. No one then could have anticipated that the bonhomie would evaporate in less than 40 months. What went wrong?
After nearly a decade-and-a-half of rip-roaring growth, when Indian IT services exports grew from $5 billion in 2000 to $108 billion in 2014, things were beginning to stall. Till then, Infosys had not merely mirrored but led this growth with revenue growing from $512 million in 2000 to more than $10 billion at the end of the last quarter.
While it was never the largest company by revenue (TCS was), Infosys remained the icon and bellwether for the sector. Unlike the Tatas, who had a long business legacy, or Wipro, which grew under the guidance of a rich merchant's son, the Infosys story was about seven middle-class men making good globally while playing by the rules. (That Murthy floated the firm on a Rs 10,000 loan from wife Sudha is part of corporate folklore.)
In post-1991 liberalised India, that story of growth, on the basis of merit, not 'sifarish' (recommendation or connections), had a powerful appeal. It was also a carefully nurtured narrative, from the frugality of its successful founders who still held on to middle-class values to their willingness to share wealth in an egalitarian manner.
By setting standards in financial disclosure, transparency and pioneering industry standards such as the generally accepted accounting principles (GAAP), global delivery model (GDM) or sharing wealth through ESOPs (employee stock option plans), it didn't take long for Infosys to become a national institution.
However, with promoters deciding to take turns at the top job in the company, a changing industry landscape which had moved beyond 'lift and shift' as well as 'labour arbitrage' meant that Infosys, like others in the Indian IT sector, began to feel the effects of a slowdown.
To his credit, Murthy, who had come back to lead Infosys through this sluggish phase, realised the industry had changed and required a fresh pair of young, energetic hands to steer the company into the next phase of growth. Thus the Sikka hire (though it came after intense pressure from shareholders, as Murthy's second stint was marked by a spate of high-level executive exits).
A few analysts had, at that time, questioned Sikka's suitability, given that he had no knowledge of the IT services industry and was more of a software product guy, a different beast altogether.
Despite its pretensions of being a global company, 90 per cent of Infosys employees were based in India. Sikka, while born in India, had spent much of his adult and professional life in the US and was removed from the strong culture, systems and processes Infosys had carefully built over the years. Also, by deciding to locate himself in the US rather than in India, he shifted the company's centre of gravity, creating unease within.
Murthy and Infosys initially defended the choice of Sikka as CEO saying that was the way to go and Sikka with his technocratic credentials and 'hail-fellow-well-met' exuberance was the perfect face to lead the company.
But even as Sikka would become the face of the company for customers, analysts, government and media, Infosys, which always had excellent backroom execution skills, would continue to be run by Pravin Rao, a Murthy hire and a company veteran of three decades.
By the time Sikka came in, Infosys, which had listed on Indian bourses in 1993 and on Nasdaq in 1999, was a widely-held stock. Through its ESOPs, hundreds of its employees became dollar millionaires. So, by the time the first non-founder CEO came in, the promoters held just about an eighth of the company (12.8 per cent, as on June 2017).
However, the promoters, and specifically Murthy, had considerable clout, which owed more to the aura of having built the company than their actual shareholding (Murthy held just 0.38 per cent in Infosys). Famous for his temper and his tendency to micro-manage, Murthy vowed to keep away from the company's decisions and let the new CEO take the firm in whatever direction he saw fit.
Infosys had traditionally also been fiscally prudent. The reward for its executives lay in the stock options, which fetched humongous returns in the go-go years of growth. Their salaries, however, were modest by global standards.
In contrast, Sikka's salary of $11 million or over Rs 70 crore per annum (following a revision last year), while corresponding with global standards, caused much heartburn, with Murthy saying it was 2,000 times the entry-level salary at Infosys. It was also reportedly much higher than his counterparts in the industry: Former TCS chief N Chandrasekaran was paid Rs 25.6 crore in 2015-16, while Wipro CEO Abidali Neemuchwala's annual pay was Rs 12 crore.
Infosys also preferred to grow organically, with Murthy valuing profitability over revenue growth. This meant that it enjoyed the highest margins. At its peak, Infosys enjoyed over 30 per cent net margins, more than double its global peers such as Accenture and IBM, and higher than Indian competitors with similar cost structures, indicating that it took on only high margin work and squeezed better efficiencies.
Recognising this, markets gave Infy shares a premium over its peers. The company, therefore, was always careful about making acquisitions that could dilute its margins. In 2008, when they made a bid for the UK-based package implementation company Axon, and HCL Tech swooped in with a counter-bid, Infy refused to raise its price, citing likely price and margin issues, and lost the deal. Acquisitions it typically made were small and mostly for either technology or for customers of the acquired company.
In 2014, when Sikka came in, Infosys was sitting on a huge cash chest of $4.9 billion. The new CEO wanted to deploy it in making acquisitions that could add value.
Six months into Sikka's tenure, in February 2015, Infosys announced that it would acquire Panaya, an Israeli provider of automation technology as a part of its 'new and renew' strategy. While Infosys never disclosed how much it paid for Panaya, market analysts estimate the payment at between $200 million and $230 million. But what made the move interesting was that Panaya had been partly venture funded by Hasso Plattner, the billionaire founder of SAP and Sikka's former mentor, with whom he retained excellent relations despite his departure from the company. Sections of the market were surprised at the valuation at which Panaya was acquired; murmurs that persisted over other high-value acquisitions, such as of Skava, a Silicon Valley based e-commerce start-up that Infy acquired.
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A whistleblower complaint alleged that the then CFO Rajiv Bansal had raised concerns on the Panaya deal but was allegedly sacked. To buy his silence, he was allegedly paid a severance package 30 times what his actual contract stipulated.
Sikka, meanwhile, hired a number of ex-SAP colleagues for senior roles at Infy, forcing the departure of some of the old-timers, derisively referred to as 'deadwood'. The new hires came at salaries substantially higher than departing ones. Ritika Suri, one such former SAP colleague, was made the M&A head (she quit in July this year).
There was also a clash of cultures between some of these new hires and the traditional company. Historically, the company encouraged senior executives to travel economy class and the top leadership by business class. Sikka himself was alleged to have flown around in chartered flights, a charge chairman of the board, R. Seshasayee, said was "unfair as only 3 per cent of his flying was done using (chartered planes)". However, a few of the new hires started flying first class and stayed in hotels much above company norms.
Several of the senior executives forced to depart had worked at the company for decades. So they started reaching out to promoters and specifically Murthy when they felt "injustice had been done and wrong decisions taken".
While Infosys, which had been lagging in growth prior to Sikka's arrival, saw some improvement, it did not grow above the industry average. In fact, some players like Cognizant and TCS grew faster, though people sympathetic to Sikka say that their growth came at the expense of margins. Sikka's claim of generating $20 billion in revenue by 2020 and ensuring per employee revenue of $80,000 also seemed fantastical.
But the Infy board flashed key figures to show how the company had fared much better under Sikka. Revenue went up from $2.13 billion in the first quarter of FY2014-15 to $2.65 billion in the June quarter this fiscal. Operating margins, a measure of the company's efficiency, stood at 24 per cent, bettering some competitors for the first time in many years. Revenue per employee grew for six consecutive quarters, even as the company brought down attrition to 16.9 per cent from 23.4 per cent a year ago.
Ravi Venkatesan, a former Microsoft India chairman who had been inducted into the board and is said to have been made the co-chair after the promoters lost confidence in Seshasayee, has publicly admitted that the targets Sikka announced with much fanfare have now been "pushed back at least by a couple of years".
Murthy is believed to have repeatedly talked to the board and the executive team including Sikka about the so-called missteps in corporate governance. While he had earlier chosen to give up even the position of honorary chairman emeritus and not stay on the board, the ensuing fissures in relations between the founders and the board led to DN Prahlad, who is rumoured to be a relative of Murthy, being inducted into the board. A decision some board members are believed to have criticised. Prahlad, though a former employee of Infosys, now ran Surya Software, which was arguably a competitor.
Both Sikka and Rao, now current interim MD and CEO, were given substantial salary hikes when other employees were asked to either forgo raises or received paltry ones. This also raised questions among promoters.
Building up over a period of time, these issues spilled out into the open six months ago, when an anonymous whistleblower wrote a mail to market regulator Sebi (a copy of which India Today reviewed) making several accusations against Sikka, including some of those listed above. Murthy and the promoters used the mail to publicly accuse Infosys of corporate governance failures and demand a probe.
Initially, the board resisted and first appointed Cyril Amarchand Mangaldas to look into the allegations. The law firm gave Sikka and the board a clean chit. When this did not satisfy the promoters, global law firm Gibson Dunn & Crutcher LLP were asked to investigate. They too gave Sikka a clean chit. Murthy has responded to these clean chits saying "shareholders who have read the whistleblower report have told me it is hard to believe a report produced by a set of lawyers hired by a set of accused giving a clean chit to the accused and the accused refusing to disclose why they got a clean chit! This is not the way an impartial and objective investigation should be held." In a letter to the Infosys board in July, he had raised a set of eight questions, mostly pertaining to the Panaya deal and the executive payoffs, and asked the board to come clean. One of his key demands was that the entire investigation conducted by the law firms be made public. Murthy immediately made the letter public following Sikka's resignation. He was also miffed by Venkatesan's letter to him saying the board has 'closed' the Panaya matter.
It didn't help that the Panaya acquisition didn't pay off, though the company does not agree with this assessment by some external analysts. "That is the nature of acquisitions. Some pay off, others don't. Look what happened to $350 million Lodestone acquired when a promoter was the CEO. It was a spectacular failure," says an Infosys executive sympathetic to Sikka.
Seshasayee rubbished the allegations of payoffs and defended valuations saying the company had been subjected to the usual due diligence of external and company filters. Speaking at a press conference in February, Seshasayee said, "Multiple independent investigations have said there is no such thing (as kickbacks)."
Seshasayee also defended the payment to Bansal, saying "it was an error of judgement and made only because of his long service to the company". The promoters did not buy this argument. Murthy kept talking to the media, expressing unhappiness over the way things were being run at Infosys and even said he had been advised that Sikka was just CTO-not CEO-material.
The continuous criticism and the self-destructive battles seem to have left Sikka exhausted, leading to his resignation. "It is clear to me that despite our successes over the last three years, and the powerful seeds of innovation that we have sown, I cannot carry out my job as CEO and continue to create value, while also constantly defending against unrelenting, baseless/ malicious and increasingly personal attacks? I am proud of how our Board has worked, tirelessly, selflessly, these past quarters, despite intense, unfair and often malicious and personal criticism, in not only upholding our standards of governance and integrity but also indeed raising these," he said in a mail to Infosys staff.
Former CFO V Balakrishnan, perceived to be a Sikka critic, has asked for the board to be completely reconstituted. Another former HR and finance head, Mohandas Pai, accused Sikka of using Murthy as an excuse for the company's poor performance.
While Sikka said he would take on the role of Executive Vice Chairman till a new CEO and MD could be found, the battle between founders and the board at Infosys is hardly over.
With a divided board, an interim CEO and an executive VC bitter about his sacking, Infosys will find it hard to continue on its journey of industry-leading growth. Inexplicably, Nandan Nilekani, a co-founder and one of the most successful CEOs of the company, has been quiet, amid clamour for his return.
R Ray Wang, principal analyst & founder, Constellation Research Inc, a Silicon Valley-based tech industry research firm, says, "Vishal's departure is a loss for both Infosys and the industry because he succeeded in giving Infosys a shot at the art of the possible." IT services vendors will have to make some very hard choices in order to successfully negotiate the next wave of disruptive change, Wang argues. "So the next Infosys CEO must have the backing of the full board to get there."
Sanchit Vir Gogia, CEO of research and analyst firm Greyhound, says competitors are already delighted at Infosys's plight. "Large clients don't like turbulence," he says. "Satyam was an Indian company, too, and everybody wants governance issues fully addressed. Talent will flee. Clearly, the promoters have raised some serious ethical and corporate governance issues that need to be addressed. It is in the interests of the board, the executive team and the promoters to sit across the table and sort this out. Not to say about the two lakh employees, investors and clients."
There is a lot of interest in how foreign portfolio investors (FPIs) such as Oppenheimer, Vanguard, Abu Dhabi Investment Authority and the Government of Singapore, who collectively own 37.5 per cent in Infosys, will react to the Sikka resignation and the ongoing tussle at Infosys. Oppenheimer, for one, had come out publicly in his support this February, when Murthy had raised the same issues and demanded Seshasayee's scalp. After a brief lull, the tensions have resurfaced. However, the FPIs have not responded in public so far. "The investment team's thesis on Infosys has not been materially affected by the CEO's resignation," was all that an Oppenheimer spokesperson would say.
With Sikka's departure, Infosys's immediate challenges include finding a suitable replacement against the backdrop of his acrimonious exit, finding closure to the 'founder issues' and maintaining business traction, especially in large accounts, says Vaibhav Dhasmana, equity analyst at global investment banking firm, Jefferies. In the long term, Infosys will need to create mechanisms to shield management from 'external noise', he said. Preventing attrition in senior management and sales becomes crucial too.
Questions have been raised about the boundaries of promoters and the alignment of their interests with those of the minority shareholders. Since attracting an external candidate could be difficult, an internal hiring is more likely, says Pankaj Kapoor, an analyst with the brokerage firm JM Financial, arguing that this would ensure continuity in strategy, minimise cultural conflicts and maintain the continuity of client interface. Some observers speculate that the Infosys board and Murthy could come under pressure from institutional shareholders and regulators to reconcile, which could lead to the induction of a couple of Murthy representatives into the board and/ or a titular role for him in the company.
The events at Infosys could also lead to greater shareholder activism. With many more such instances expected to happen in India as companies transition from being founder- to professional CEO-led, institutional investors need to step up their act, says Shriram Subramaniam, MD of InGovern. The proxy advisory firm had red-flagged Murthy's induction of son Rohan as executive assistant during his second stint at Infosys.
One immediate danger for Infosys is that of increased attrition among its unsettled employees. Already, CVs of senior Infosys executives are floating in the market, says Kris Lakshmikant of Headhunters India. "The more this issue is allowed to fester, the more damage it will cause on all fronts. They need to resolve this quickly."
While Murthy is said to be adamant about ensuring that 'truth prevails', the former senior executive of the company quoted above claims that "Nandan (Nilekani) and other well-wishers are working behind the scenes to arrive at a compromise that might involve reconstituting the board and having a strong internal candidate who understands the Infosys culture succeed Sikka".
InGovern's Subramaniam says there are only a few scenarios that can play out. "Either promoters sell their stake and exit, or get themselves or their nominees on board and work with other shareholders, or there is an external bid to acquire the company, with or without their help. Either way, shareholders would want greater clarity and transparency at the earliest."
How the Infosys saga plays out is important not just for the company but for Indian IT, as most companies in the sector face the same set of market challenges. Can Infosys get back to its winning ways?