Case Study: The Role of an Independent Director in Infosys Ltd - Crisis of 2017

Introduction

Independent directors play a crucial role in corporate governance, ensuring that the interests of all stakeholders are protected and that the company adheres to high standards of transparency and accountability. Herein, this case study examines the role of Independent Directors during the Infosys crisis in 2017, highlighting their responsibilities and actions.

Background

Infosys, one of India’s leading IT services companies, faced a significant governance crisis in 2017. The crisis was marked by a public spat between the company’s founders and its board of directors, particularly concerning issues of corporate governance, executive compensation, and strategic direction. Below were key economic actors.

• Vishal Sikka – CEO & Managing Director
• N. R. Narayana Murthy – Founder
• Ravi Venkatesan – Independent Director
• Kiran Mazumdar-Shaw – Lead Independent Director
• R. Seshasayee – Chairman of the Board

Infosys Crisis of 2017

The Infosys crisis began when the company’s founders, led by N.R. Narayana Murthy, raised concerns about corporate governance practices, particularly regarding the severance package given to former CFO Rajiv Bansal and the high compensation of CEO Vishal Sikka. The founders accused the board of not being transparent and failing to uphold the company’s values. This led to resignation of Vishal Sikka.        

Role of Independent Directors

Independent directors are expected to provide unbiased oversight and ensure that the board’s decisions are in the best interest of the company and its stakeholders. Their key responsibilities include:

1. Oversight and accountability: Independent directors are responsible for overseeing the management’s performance and ensuring accountability.
2. Risk management: They play a critical role in identifying and mitigating risks.
3. Strategic guidance: Independent directors provide strategic guidance and ensure that the company’s long-term goals are aligned with stakeholder interests.
4. Ethical Standards: They uphold high ethical standards and ensure that the company adheres to legal and regulatory requirements.

Actions Taken by Independent Directors during Infosys crisis.

• Ensuring Corporate Governance The Independent Directors, led by Ravi Venkatesan and Kiran Mazumdar-Shaw, played a critical role in ensuring that Infosys adhered to strong corporate governance standards. They took a neutral stance between the founders and the executive management, focusing on what was best for shareholders and the company.

Transparency: The Independent Directors called for greater transparency in the operations of the board. They facilitated open communication between the board, founders, and investors to avoid further public disputes.

Audit and Accountability: They ensured that the decisions around severance packages, CEO compensation, and acquisitions were audited, scrutinized, and made public, in line with shareholder interests.

• Crisis Management and Stability Due to Sikka's resignation, there was a leadership vacuum. Ravi Venkatesan, as an Independent Director, helped maintain stability during the crisis by facilitating the interim leadership transition. His neutral position allowed the board to make balanced decisions without being seen as partial to the executive team or founders.

Reassuring Stakeholders: The Independent Directors were instrumental in reassuring investors, employees, and clients, all of whom were concerned about the leadership crisis. They issued statements to assure stakeholders that the company remained stable and that the board was actively working to resolve the issues.

CEO Succession: The Independent Directors played a key role in the CEO succession process, ensuring that the search for Sikka's replacement was transparent and in line with governance best practices. This helped restore investor confidence.

• Protecting Minority Shareholder Interests One of the core responsibilities of Independent Directors is to protect the interests of minority shareholders. In the case of Infosys, the founders still held a considerable share of the company, but many institutional and retail investors were concerned that the ongoing disputes would harm their investments.

Balancing Interests: The Independent Directors helped strike a balance between the founders, who were critical of the board’s actions, and the executive management, who were leading the company. They ensured that the long-term interests of all shareholders were prioritized over personal conflicts.

After reviews and negotiation, the Independent Directors helped the board agree on Narayana Murthy’s continued involvement in an advisory capacity, while also setting clear boundaries to prevent further conflict and called for below changes.

• Evaluating Board and Executive Performance The Independent Directors reviewed the performance of both the board and the executive leadership, identifying areas where governance could be improved. They called for stronger communication channels between the board and the company’s founders and recommended changes in the way compensation and severance packages were handled.
• Restoring Investor Confidence After months of public disputes, investor confidence in Infosys had been shaken. The Independent Directors were key in restoring this confidence by ensuring that proper corporate governance practices were followed and by taking steps to prevent similar conflicts from arising in the future.

Initiatives Taken: Independent Directors pushed for improved corporate governance policies, transparency in executive decision-making, and a clearer communication strategy to address shareholder concerns.

Outcome and market impact

After the leadership crisis, the board, including the independent directors, took steps to address the governance issues raised by the founders. These actions helped stabilise the company and restore stakeholder confidence. Thanks to their efforts, Infosys’ stock eventually stabilised, and the company regained the trust of its investors.        

Conclusion

The Infosys crisis of 2017 underscored the critical role of independent directors in corporate governance. Their ability to provide unbiased oversight, ensure transparency and mediate conflicts is essential for maintaining stakeholder trust and upholding the company’s values. The actions taken by the Independent Directors during the crisis were pivotal in resolving the issues and setting the stage for improved governance practices at Infosys