Infosys Saga - A victory for Corporate Governance

The Ratan Tata-Cyrus Mistry boardroom battle threw the spotlight on the quality of corporate governance in board-managed companies and highlighted the need for a wider, more robust debate around the role of independent directors, higher levels of transparency and fairness, and many other thorny issues.

In many ways the entire saga that played out at Infosys with Vishal Sikka leaving might be a victory for corporate governance in the country, where principles have always lagged behind business.

'The Sarbanes-Oxley Act of 2002 (SOX) in the US was an act passed by U.S. Congress in 2002 to protect investors from the possibility of fraudulent accounting activities by corporations. The SOX Act mandated strict reforms to improve financial disclosures from corporations and prevent accounting fraud. The SOX Act was created in response to accounting malpractice in the early 2000s, when public scandals such as Enron, Tyco and Worldcom  shook investor confidence in financial statements and demanded an overhaul of regulatory standards.' ( investopedia.com )

If one looks at the main grouse that Mr Narayana Murthy had against a corporation he founded was the issue of corporate governance. Murthy had earlier questioned if large severance payments to departing employees (particularly ex-CFO Rajiv Bansal) constituted "hush money, and bemoaned what he described as a "concerning drop, in corporate governance at the company". In one interview he is known to have said "We strove hard right from the day Infosys was founded till the day we left the company voluntarily on October 14, 2014, to make Infosys the best-governed company in India and on Nasdaq".

There is a fundamental contradiction in the way India governs its corporations and it had to get exposed. Unfortunately, it has surfaced in two of India’s best-known groups, first with the Tatas and then with Infosys. While we don't have a separate Sarbanes-Oxley Act, SEBI ( Securities and Exchange Board of India ) and MCA ( Ministry of Corporate Affairs ) jointly regulate corporate governance of listed companies in India. One can't forget that in fact Narayana Murthy formed the Narayana Murthy Committee (2003) under the aegis of SEBI, which provided recommendations on issues such as audit committee’s responsibilities, audit reports, independent directors, related parties, risk management, independent directors, director compensation, codes of conduct and financial disclosures.

So how have these two catastrophic corporate events in India helped India Inc?

Redefined the roles of independent directors

• Over the last many years independent directors haven't been taking their roles as seriously as they should. Somehow an independent director has always felt that his liabilities are less than a full time director on the board. As a result he has tended to be more lenient when it came to matters of corporate governance. But now it seems that being an independent director might actually mean that you carry a higher burden and their fiduciary responsibility to the corporation and its shareholders is as much as that of any director. The question of course is of real independence, and whether there is a problem in getting independent directors of the right caliber, and in sufficient numbers. 

Made boards more cautious

India has always had a promoter mindset in companies. Promoters are infallible and very often they can do exactly what they want. But starting with the Vijay Mallya episode, boards may have to take more prudent decisions, irrespective of how promoters behave. Nearly a third of the Sensex companies can be said to be family promoted, controlled and managed. One of the questions that is being raised is whether the board of directors of Indian Family Managed Companies(FMCs) have been playing a constructive role in promoting corporate governance.

Boards need to uphold the three values of corporate governance, namely accountability , openness, and upholding moral values.

Succession Planning

Unfortunately both the Tata case and the Infosys case seem to have been disasters in succession planning even though they might have been thought through by the most intelligent minds in the country.

Two lessons that Tatas and Infosys might have taught us :

• It is a myth that external candidates are more exciting and promising. Both Tatas and Infosys seem to have fallen into this trap. Tatas has of course corrected by getting N Chandrasekhar, and Infosys is getting back Nilekani as Chairman proves that often the best talent may be inside the company
• CEO succession planning is not a single person event. Most boards focus only on the CEO position and how to find a suitable candidate for that position. But often it is not only the CEO because he is just one part of the leadership puzzle. COOs, CFOs and other C level executives need to be chosen as carefully as the CEO. Often it is the C level leadership that works as unit. No CEO can work on his own.

In retrospect, Nilekani therefore becomes a great choice for Infosys. The company might have suffered in the last few days after Sikka resigned and taken a beating at the bourses. But if all this suffering was to set right the story on corporate governance, then it might have been worth it. India needs to have a re-awakening on corporate governance. Murthy had earlier made his stand clear in an interview when he said "Good governance is about doing what is fair in a transparent manner with full accountability accepted by senior leaders and board members for their actions. Good governance results from following the adages - when in doubt, disclose; and let the good news take the stairs and let the bad news take the elevator."

In retrospect, Sikka's resignation and the ensuing events might have been a blow to market cap and public opinion. But it is a victory for corporate governance and ethics both for Infosys and for India Inc. Major catastrophes are sometimes required to institute revolutionary change!

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