Corporate Governance Deviation – Infosys Case Study

CS Divija Dave

03 Jun 2021

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Corporate Governance Deviation – Infosys Case Study

About Infosys

Infosys Limited was started by a team of seven software engineers. It began its journey in 1981 as a software development organization. It opened the first international office in the USA in 1987. The major revenue of the company came from a dedicated offshore development centre. Later, it also started delivering its services in handling projects, dealing with the re-engineering, migration and maintenance of legacy systems to graduate to the client–server environment etc.

Infosys came out with an initial public offering in 1993 and became the first Indian IT company to get listed on the NASDAQ in 1999. It had a global presence with offices opened in UAE, the Netherlands, Argentina, Singapore and Switzerland. Mr. Narayan Murthy made a modest beginning by launching Infosys with six co-workers and a borrowed sum of US$250. In 2017 Infosys was an US$11.12 billion company to be listed on the NYSE, with a market capitalization of approximately US$42.2 billion and an employee strength of 209,000. It also became the first Indian software company to provide customized software in world markets.

Case Background

The major organizational transformation journey of Indian software bellwether firm, Infosys, from 2014 until 2017 under the leadership of first non-founder member. The entrepreneurial ambitions and zeal to grow through organic and inorganic moves saddled with lack of cognizance of corporate governance resulted in deviance leading to turmoil followed by the resignation of the CEO. The company values, the roles of founder members, institutional investors, shareholders and other aspects came under the scanner to understand the reasons behind the corporate governance deviance.

Though the Company got a clean chit against the corporate governance deviance charges, the conflict between the board of governors and founders, particularly the ex-CEO continued which culminated into the resignation of the CEO. What are the roles of founder members, board of governors, institutional investors and shareholders in case of corporate governance deviance?

Infosys had come a long way for its business model to deliver excellence along with its leadership to perform on corporate governance norms. Entering the second decade of the 2000s, the company’s profits declined. This was largely attributed to the increasing costs of labor in India and losing out to outsourcing. Profits also took a beating owing to sluggish western markets. Despite increasing labor costs and job-hopping in the software industry, Infosys’ leaders believed its strength lay with its people. Hence, employee development and job engagement were always a priority of the company. In spite of the innovation and burgeoning growth, critiques cautioned that the momentum of growth could not be sustained. With time, Infosys exhibited sluggish growth, and unstable leadership with as many as 13 exits from the senior management. A high pricing margin model and complex contracting procedures made the company struggle even to retain average industry growth rates. While client needs were changing in the global space, Infosys was struggling to innovate, diversify and transform. 

Impact

It was observed by many former associates of Infosys that company may have been known for good corporate governance standards in the past, but it displayed poor standards elsewhere. Under Mr. Murthy’s watch as an executive chairman, the company followed poor disclosure standards when it came to a significant profit warning that sent its stock down by over 8%. Similarly, a number of analysts and industry experts had raised eyebrows when Mr. Murthy decided to bring his son along when he was appointed executive chairman in 2013. The company’s former CFOs who were demanding that the company returns a larger proportion of cash back to shareholders seemed to have forgotten that Infosys had a history of holding on to cash, even under their watch. Some investors and also suggested that the new CEO must be given room to function freely and not bogged down by needless accusations. But being given freedom to function shouldn’t be used as a sanction for transactions that raise red flags. Besides, it wasn’t that Mr. Sikka had an outstanding run as a CEO. Infosys shares were only marginally better off since Mr. Sikka’s appointment was announced. Therefore, clearly, not all stakeholders were enamored by the new CEO.

Road Ahead

Boardroom turmoil often results in miscommunication and ineffective leadership. Deviance from corporate governance is disastrous for organizations in the long term. It is a direct challenge to trust and transparency and hurts the brand equity. It derails the long-term development of an organization. Dilemmas and choices are experienced by the leaders of the organizations. These often are major factors leading to deviance. A strong commitment and adherence to organizational logic in the interest of shareholders, stakeholders and organization should be enforced by the top management. Thus, understanding of corporate governance and circumstances that lead to the deviance is important.