Forbes India 15th Anniversary Special

Infosys: Redux, again

Nandan Nilekani, who returns to Infosys as non-executive chairman, has a task on hand: To lay the foundation for transformation so that a founder doesn't have to keep coming back

Harichandan Arakali
Published: Nov 2, 2017 05:25:21 PM IST
Updated: Nov 2, 2017 11:05:36 PM IST

Infosys: Redux, again Nandan Nilekani will have to decide if he wants to make the details of an independent probe public, as demanded by Murthy
Image: Selvaprakash Lakshmanan for Forbes India

One thing that co-founder Nandan Nilekani’s comeback to Infosys achieved, just by virtue of his return, within days of the sudden resignation of Vishal Sikka as CEO and managing director, is that it curtailed the uncertainty surrounding the company.

Investors immediately gave Nilekani’s return a thumbs up. Infosys shares rose by over 3 percent on the Bombay Stock Exchange on August 28, the first day of trading since the Bengaluru IT company named Nilekani non-executive chairman late evening on August 24.

The Friday that followed was closed for trading in India because of Ganesh Chaturthi, but through August 24 and 25, shares rose on the New York Stock Exchange as well, where Infosys is listed. By August 28, Infosys American depositary shares rose by as much as 4.25 percent over the closing price on August 23, the day before Nilekani’s return was announced.

While the initial cheer has mellowed, Nilekani’s return helped shore up the value of investor wealth —including his own 0.93 percent stake in Infosys; his immediate family holds another 1.36 percent, according to a recent stock exchange filing.

Shares had tanked by nearly 10 percent on August 18 after Sikka quit, blaming founder NR Narayana Murthy for personal attacks after a long drawn-out fight over how the company was run by Sikka and the then board led by Ashok Leyland veteran R Seshasayee as chairman.

Nilekani, 62, returns to stabilise the company after Infosys’s first, and only, experiment with professional management failed just three years after the founders voluntarily walked away from holding any position at the company, aiming to remain just shareholders. Together they own 12.75 percent of the 36-year-old company, which they intend to reduce further by participating in the share buyback that Infosys has recently announced.

Immediate Challenge
Nilekani’s immediate challenge will be two-fold, says Siddharth (Sid) Pai, a technology consultant who has worked in the IT industry in various capacities for a long time. The first is to ensure there are no operational hiccups, so that clients continue to get the quality work they paid for, and the second is making sure that competition does not take advantage of the situation, especially with clients who are vulnerable due to renewals, renegotiations or performance problems.

Ray Wang, founder at IT advisory Constellation Research, says, “The first challenge is to temper expectations. His role at the moment is that of peacemaker and also of a transformation artist. The promoters want transparency, but also influence, while the [other] shareholders want transformation and growth. These elements bring Nilekani forward and provide the stability required on the most important role—finding the new CEO.”

Pai adds: Nilekani’s medium-term challenge will be to find an effective CEO, “who I believe needs to come from the outside, is not an alumnus with old loyalties or rivalries, is India based, and is US, Europe and Asia markets savvy”. The long-term challenge will be to see the company safely in the hands of the new CEO and dealing with the external challenges that affect every IT company in the industry.

Infosys: Redux, again
“Personal attacks” by Narayana Murthy led to Vishal Sikka’s resignation as Infosys CEO and MD
Image: Selvaprakash Lakshmanan for Forbes India

Nilekani told investors and reporters that he will cast the net wide, and ensure a global search to fill the new CEO’s position. Once again, head hunter firm Egon Zehnder—the same firm that helped recruit Sikka—has been hired. Nilekani will look at both internal candidates and at fresh faces, he said, on August 25. The board’s nominations committee, led by Kiran Mazumdar-Shaw, founder-CEO of Biocon, will have an open mind and even consider those whom Nilekani termed as “Infosys alumnus”. These are senior executives who, after leaving Infosys, have gone on to build successful careers elsewhere.

Two such “alumni” are Ashok Vemuri who left in September 2013, about three months into the return of Murthy—who had come back to shake things up after Infosys had fallen behind peers, and so Nilekani’s recall has a precedent—and BG Srinivas who left in May 2014, only weeks before Sikka was named CEO. Vemuri and Srinivas ran Infosys’s operations in the company’s two biggest markets—the Americas and Europe respectively.

There were other executives who quit through Murthy’s one-year return stint as executive chairman, including global head of sales at the time, Basab Pradhan, and V Balakrishnan, CFO. Will any of these people be interested, or make the cut to lead today’s Infosys is a question only Nilekani, and Murthy, can answer.

Deterrent or Bulwark?
It hasn’t escaped keen observers that any new CEO will either have to be someone who can comfortably go along with Nilekani’s outsized stature, or an executive who can absolutely hold his, or her, own. Therefore there are both schools of thought—that no real CEO-material executive from outside will be interested, or that Nilekani, with his stated aim of wanting to hand over the company, will genuinely act as a bulwark and not as a deterrent for competent potential candidates.

Pai clearly takes the second view: “I have dealt with Nandan extensively when he was CEO and while I was advising some of Infosys’s largest clients.” Nilekani is an “ideal pick” for the chairman’s role as he understands technology, has the ability to team extremely well with others, and is an outstanding communicator, he adds. “His constant presence should actually be a relief for the new CEO or other new members of the board,” Pai says.

Manish Sabharwal, founder of temp-staffing company TeamLease Services, echoes this view: “I think Nandan has made it clear that his role is not executive, full-time, or permanent. I don’t think a worthy CEO candidate will be bothered by the past, Nandan, or the industry weather of the moment.”

Right now, Nilekani’s presence is important to serve as a transition to the next CEO and his presence makes it “more likely” that a good candidate will be found, Wang of Constellation Research says. However, “should that role change from advisor and influencer more to operator, then the next CEO would have an issue”.

“With a heavyweight like Nilekani around, I don’t expect any meaningful candidate to apply for the CEO’s post,” says one Mumbai fund manager, who has the Infosys stock in his portfolio. Nilekani brings stature, he is also tech-savvy and he is a co-founder. “More importantly, he has a direct line to investors. Now no CEO who wants to make a mark would like to be in this situation, you know it’s a daughter-in-law mother-in-law type of relationship,” adds the fund manager on condition of anonymity.

Back in 2013-14, the current interim CEO, UB Pravin Rao, too, was considered a candidate before Murthy zeroed in on Sikka. Unlike some of his peers who quit, Rao chose to stay—and was rewarded with the post of COO to Sikka’s CEO—and played a stellar role in helping implement Sikka’s plan for Infosys. The company has clarified that while being the interim chief executive, Rao retains the COO’s post, and that his compensation is tied to that role.

Might Nilekani and the board not formalise Rao himself as the next, permanent, CEO then? That is the most likely scenario, says the fund manager. That has its advantages, he points out: Nilekani becomes the primary point of contact and Rao gets the mandate to do what he is doing anyway—run the company from one day to the next.

Building on Strategy
With regard to the company’s strategy, Nilekani’s initial comments to investors suggest that he is in broad agreement with Sikka on the challenges faced by Infosys. While he said he will refrain from making any specific comments on strategy till October—most likely when the company announces its September-quarter results—Nilekani, in his initial comments, praised Sikka’s efforts at getting Infoscions to be more innovation-oriented.

“The industry is changing fast and I am sure whatever is good in the opening balance from Sikka’s time will be built on,” Sabharwal says. And it is important to recognise and reiterate that “Nilekani is not Sikka’s successor”, he says.

The only reason that Nilekani didn’t immediately go with Rao could be the real possibility of an investor backlash, the fund manager says. Especially at a time when the overhang of “governance deficit”, as termed by Murthy, remains. Which is also the only thorny issue that needs to be resolved before Nilekani and the new CEO can go forward.

In his first interactions with investors and journalists after being named non-executive chairman, Nilekani sidestepped questions on whether he will now fulfil the demand made by Murthy, to make public the full findings by independent investigative agencies commissioned by Infosys under Sikka, and then Chairman Seshasayee, to look into allegations made by an anonymous whistleblower in February 2017.

Among the questions that need to be put to rest are, one, why did the then board decide to pay Rajiv Bansal, who quit in October 2015 as CFO, a severance package of ₹17.38 crore? Bansal is said to be suing for about ₹12 crore that he hasn’t yet been paid. And, two, did the payout have anything to do with gaining his acquiescence to the $200-million acquisition of an Israeli IT automation specialist Panaya Inc in 2015, which Bansal is said to have opposed initially?

In a press conference in Mumbai in February, Seshasayee said there was an error of judgement and a subjective element, but denied that the payout was “hush money”, as alleged by Murthy. However, Murthy remained unconvinced. In a call with investors on August 29, Murthy went so far as to cite the whistleblower’s allegation that Seshasayee lied about the matter in the company’s annual shareholder meeting in 2016.

That prompted a public letter from Seshasayee, and two other directors who quit on August 24 to help Nilekani choose his own board, in which they refuted Murthy’s allegations. All of this brings the responsibility squarely onto Nilekani’s shoulders to make public the findings of the investigation.
“This is a tough one,” says Pai. “Not making it public will show that Murthy’s founder camp didn’t really have anything to go by, and making it public [and] if in fact there was any wrongdoing opens up the question of why the founder camp had access to more information than regular shareholders.”

The fund manager agrees with the assessment: If the full findings are made public, and if everything is as Seshasayee and Sikka had said, “then what is Murthy’s fallback?” However, if it turns out that something had been concealed, “then forget those who have resigned—what is the legal liability of a company like Infosys?”

There is also another big-picture lesson that TeamLease’s Sabharwal alludes to from this whole saga: Founders must be careful in the way in which they make the transition from management to overseers on the board to shareholders. Indeed, in 2011, many had thought Infosys had an excellent chance at transitioning to professional management via TV Mohandas Pai, who had spent nearly two decades at the company at the time, and had been an award-winning CFO. He had given up the finance post to V Balakrishnan, and was running a bunch of functions, including global head of HR at the company, when the time came for Kris Gopalakrishnan to finish his stint as CEO.

Infosys went with the option of SD Shibulal, the only founder active on the board who hadn’t been made CEO till then. By 2013, Infosys lagged its peers, including Tata Consultancy Services and Cognizant Technology Solutions—which actually came from behind, and is today a larger company than Infosys by revenue—and Murthy had to return as saviour.

Mohandas Pai has always said he never wanted to be CEO, and even that Murthy had offered the top job to him once. He certainly had the experience, and the chutzpah, to shape Infosys into the aggressive company it needed to be at the time.

Today the company has fallen back again on another founder as saviour. “I’m here because there’s no one else. I’m joking, but it’s also a fact,” Nilekani told reporters, opening the press conference on August 25, to discuss his new role. When Nilekani finds that someone, to be the next CEO, and eventually leaves, there will be no scope for another redux.

(This story appears in the 29 September, 2017 issue of Forbes India. To visit our Archives, click here.)

Post Your Comment
Required, will not be published
All comments are moderated