Cash: The Four-Letter Word At The Root Of Infosys’ Corporate Governance Spat 

If there is one thing that explains the current brouhaha over corporate governance (or its suspected deficit) at Infosys, it is cash. Too much of it. When you are staggering under nearly Rs 36,000 crore of idle cash, it’s no different from swaggering around in a public place wearing gold chains, platinum bracelets and diamond ear-rings. You are asking for covetous glances, if not a mugging.

From current and former employees to shareholders to greenmailers and taxmen, everybody will want a share, if they can get it.

Last week, another cash-heavy IT giant, Cognizant Technologies, agreed to a staged mugging. It bowed to pressures from an aggressive investor, Elliot Management Corp, promising to return $3.4 billion (nearly Rs 23,000 crore) to shareholders through buybacks and other means.

Infosys may have to do the same at some point: either spend the cash hoard on value-accretive acquisitions, or return the money to shareholders.

If you consider the thrust of iconic founder-chairman NR Narayana Murthy’s charges of governance lapses at the Infosys board (see The Economic Times interview here), they fall into three broad buckets: lack of transparency and shareholder value creation on a sustained basis; possible loss of trust with present and past employees; and compensation payments that are over-the-top, keeping in mind Indian social conditions. Mohandas Pai, a former chief financial officer (CFO) at Infosys, told The Times of India, that “shareholders who have put trust in the company have not seen an increase in the value in the last five years.”

Though the Infosys board has denied any lapses in corporate governance, the criticisms ultimately relate to cash – and the lack of its effective utilisation. Not creating shareholder value when you hold nearly $5.3 billion in cash makes shareholders restless, as the Cognizant case shows. While under chief executive officer Vishal Sikka, the company has increased payouts and followed a more liberal bonus policy, the cash is still growing and acquisitions are few and far between. When Infosys hoards so much cash, it is going to be the target of criticism.

Murthy also talked about the disappointment of employees over the severance pay granted to previous CFO Rajiv Bansal, who got nearly Rs 17 crore. Murthy expressed unhappiness in his ET interview: “Providing huge severance pay (with 100 per cent variable) to some departing employees while giving only 80 per cent variable for employees in the company is one such example (or a drop in governance standards). Such payments raise doubts whether the company is using such payments as hush money to hide something.”

This veiled charge may be off-the-mark, but Murthy was talking more about its impact on other employees, past and present. “This (huge severance payout) is particularly hurtful to stellar former employees like Mohandas Pai (former CFO), DN Prahlad (former Infosys employee who is now an independent director), Bala (V Balakrishnan, former CFO), Sharad (Hegde, former senior vice-president) and several others, who are still employed at the company. All these people have made huge sacrifices to build this company.”

This again is about cash, about people who made sacrifices earlier getting less than what people now may be getting. Unfortunately, this is not something about which any company can do much. The cost of great talent always rise disproportionately. The fact that salaries or severance payments were much lower earlier, or that someone inducted new gets a better deal, are problems as old as industry itself. It may be possible to avoid such anomalies in industries that have very slow rates of change (cement), but not in dynamic fields like IT and technology. Barring the point Murthy alluded to, about Bansal being paid big money to hide something (which is far from certain), he can’t crib about different treatment being meted out to new and older employees. This is the norm almost everywhere. People moving jobs regularly end up earning more than those who stay loyal to one company. But the observe side of the coin is that some of those who are considered loyal may well be less dynamic and plodders.

The third criticism, that CEO Sikka’s pay is simply too high, is again debatable. Here is what Murthy said: “In companies with good governance in developed countries, the ratio of the CEO salary to the next lower level is generally 1:2. At Infosys today, it is about 2,000 between the CEO salary and the entry-level salary for a software engineer. In poor countries like India where capitalism is still nascent, it is the responsibility of leaders of capitalism to ensure that these ratios are even lower.”

Murthy’s broad social point is worth raising, but it is also meaningless in the relevant market context. If good CEO material is available only at a certain price, Infosys has the option of saying we only pay so much and let him go, or swallow its reservations and pay up. Consider what Infosys independent director Kiran Mazumdar-Shaw, who is herself a founder-chairperson of Biocon, had to say in response in a Times of India interview: “Just because Sikka's payment is higher than before does not mean there is a breakdown in the value system. It is all linked to performance. If you consider the performance he is supposed to give us, it is a daunting one. The kind of goals you are giving Sikka, if he pulls it off, he deserves it. If he cannot deliver on the goals, he would not get it.”

Quite.

While Murthy may have his social concerns about excessive pay for CEOs, this is much the norm in the US, where Sikka operates. As an international company with its focus on north America, Sikka’s pay can hardly be compared to Indian operating conditions or linked to our poverty levels. The relevant market to benchmark Sikka’s pay is the north American one.

Some of the criticism also seems like grandad’s cribs. It’s what our grandfathers would say to us, when we live more profligate lifestyles than their generation. A person born into poverty may work very hard to accumulate riches, but his grandchildren may not be born into poverty, and may thus live differently. While one can always teach them the value of thrift, it may not always work, and it may also not be productive.

Some generation gaps cannot be bridged. Cash for one generation may not mean the same for another.

In Infosys’ case, hoarding cash in its initial decades, when offshoring was just being established as the next big thing, was vital. There was no guarantee it would work over the longer-term. Today, when capital is available in plenty, and investors are looking for higher returns from higher risk-taking, the Narayana Murthy approach to husbanding cash may be out of date.

So what the collective criticisms of Sikka’s board amount to is this: be like us on personal thrift, but don’t be like us when it comes to hoarding cash in the company. In short, spend, invest or return the money. Don’t just keep it in bank accounts, for we can do that just as well. The rest of the criticism, about too much CEO pay or excessive severance pay to a departing CFO, is not quite material in this discussion.

Infosys is at the cusp of changing cultures for tomorrow, and for that some of the baggage from the past may well be thrown overboard. As Kiran Mazumdar-Shaw told The Times of India: “What worked for the last 20 years will not work for the next 20 and you need somebody who understands what will happen in the future. He (Sikka) is a great guy in terms of understanding technology and one of the greatest tech innovators of our time. The board is with him and we all have supported his strategies. His new and renew strategy is a good one and we should let him get on with his job instead of distracting him.”

Quite.