Image: Vivek Prakash/ Reuters
Soon after Vishal Sikka stepped down as CEO and managing director of Infosys, twelve institutional investors, of which nine are top mutual funds, and three private insurance companies came together to draft a letter to the board of Infosys to get Nandan Nilekani back for the top job at Infosys. The letter was addressed to R Seshasayee, chairman, and Ravi Venkatesan, co-chairman, of Infosys, and dated August 21, 2017.
Late on August 24, Nilekani was named non-executive chairman after resignations from the board, including that of Seshasayee and Venkatesan.
It is popularly held that Nilekani’s comeback, as it were, has been in large part to assuage concerns among institutional investors.
Some of the major names of the pack include HDFC MF, ICICI Prudential MF, SBI MF and Franklin Templeton MF. The three insurance companies are HDFC Life, SBI Life and ICICI Prudential. As minority shareholders, these institutional investors were not happy with what was going on at Infosys, a company that forms an important holding in all their large-cap schemes.
Three mutual funds initially came together and decided to be proactive about the happenings at Infosys. However, one of the big mutual funds later decided to side with Sikka. That is when they decided to bring in more investors for a broader discussion. On a broad level, all the MF CEOs agreed that Sikka really did a good job.
Sikka was a classic “Outsider CEO", as popularised in the book The Outsider by William Thorndike, which talks about how the best CEOs run operations efficiently and are good at capital allocation. But these CEOs come from outside the organisation and not from the ranks within the company.
These CEOs give relatively higher stock market returns against their peers, normally look at their own stock from the point of long-term investing and call for a stock buyback whenever the stock price falls. The “Outsider CEO” also looks at acquisitions very seriously and delivers on this front.
Now, consider Sikka: Over the three years of his leadership at Infosys, the stock moved up by 4 percent annually against the IT index’s 1 percent annually during the same period. Earlier, when SD Shibulal was the CEO of the company between August 2011-July 2014, Infosys was up by 11 percent annually compared to the IT index’s 24 percent.
In general, investors agree that Sikka steered the company through a tough phase for the industry. The talks of a buyback also started during Sikka’s regime. In fact, a day after Sikka resigned, the company announced a buyback of shares. “Sikka did well on the buyback front but had he actually finished the entire process before he left, then he would have been one of the best CEOs the company had,” said a fund manager who has been invested with Infosys for many years.
But while MF CEOs are happy with Sikka when it comes to growth and the buyback, they have reservations about how the acquisition of Panaya Inc panned out. Infosys acquired Panaya for $200 million in 2015; this was held as highly overvalued. There were also questions about the high severance pay given to Rajiv Bansal, former chief financial officer.
However, while there were divided views on who was right and not, they were all of the opinion that the public battle between the board, Sikka and the founder(s) was not good for the company.
“We felt that we needed a more mature name… like Nandan Nilekani because he is a father figure and all the stakeholders respect him. He also has the power to boost the morale of the employees and build confidence in the clients. There is no other name we could think of,” a senior fund manager at SBI mutual fund told Forbes India.
Nilekani was the CEO of the company between March 2002-2007 and in these five years, the stock had gone up by 36 percent annually as compared to the IT index which grew 25 percent. He also understood the company and had a decentralised approach to management.
Fund managers feel that Nilekani is the best bet for the company because he later got out and worked with the government and also fought an election. Most importantly, he become a venture capitalist and invested in many startups. His experience is valuable because he will now come to the company like an outsider. “Now, he can concentrate on the buyback and acquisitions, and all the traits that William Thorndike talks about. But in this case, this outsider is also an insider,” says the CIO of a large fund-house based in Mumbai.
He also feels that the battle between the founders and the board at Infosys is the starting point for many similar battles that will come and haunt investors in the future as more and more startups plan to get listed. Typically, businesses in India are owned by a single family. In the case of Infosys, there are many families that own small stakes in the company. This is a unique problem. A problem that will eventually be seen in startups where there are many founders holding small stakes as well as large institutional investors.