The report, titled 'The underbelly of Indian IT - the ugly, the bad and not so
good' hasn't spared other IT companies either
Bibhu Ranjan Mishra & Dev Chatterjee | Bangalore
March 28, 2014 Last Updated at 10:00 IST
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Read more on: Infosys | It Services | S Gopalakrishnan | S D Shibulal | Ambit Capital Research | N R
Narayana Murthy
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A new report has raised serious questions on the corporate governance standards
at Infosys, saying board independence at India's second-largest information technology
(IT) services firm might be the weakest among Tier-I entities.
The report, published by brokerage firm Ambit Capital Research, also says the
promoters hold disproportionately high board representation with respect to their total
shareholding in the Bangalore-based company.
resulting in high volatility in share price - none of this gels with Infosys' image of a
leader in corporate governance," it adds.
Infosys co-founder Murthy returned to the company as executive chairman in June last
year, junking his retirement after what he claimed was a crisis call made to him by the
board. This, he said, was done to seek his help in bailing out the company, which was
steadily losing its lustre. However, he joined the company with a pre-condition to bring
his Harvard-educated son, Rohan Murty, as his executive assistant. This was
accommodated by the board.
The Ambit report says the entry of Murthy, as well as his son, amounts to breach of
corporate policies. "Infosys has historically followed a well-articulated policy of
executive retirement at the age of 60, with Murthy himself being a strong proponent of
the policy. Similarly, all the founders have time and again mentioned about not letting a
family manage the business. More surprising was Rohan Murty's entry into Infosys as
the senior Murthy's executive assistant."
Infosys is known for introducing some of the global best corporate governance
practices, including giving quarterly (it has discontinued the practice now) and annual
revenue growth guidance, among other things. The Ambit report, however, says Infosys
has lately been following a peculiar guidance pattern, which is leading to extreme
volatility. "There has been a pattern in Infosys' guidance and outlook over the past three
years. It sets a lower expectation in the fourth quarter of a year and overdelivers in the
following quarters, causing extreme share price volatility," it notes.
"Indeed, Infosys has repeated this pattern yet again by indicating on March 12 that it
will settle at the lower end of the guidance for 2013-14 and giving a weaker outlook for
the first half of 2014-15," it adds.
In 2012, brokerage CLSA had written an open letter to Infosys voicing investors'
concerns.
Case Details:
Case Code
: CGOV001
Case Length
: 12 Pages
Period
: 1996 - 2001
Pub Date
: 2001
Teaching Note
: Available
Organization
Industry
: Information Technology
Countries
: India
Price:
For delivery in electronic format: Rs. 300;
For delivery through courier (within India): Rs. 300 +
Rs. 25 for Shipping & Handling Charges
Themes
Coporate Governance
Abstract:
The case, 'Corporate Governance at
Infosys'talks about the corporate governance
practices at Infosys, one of India's
largest software companies. Till late 1990s,
corporate governance did not have much
significance in India. In 1999, two committees
(Confederation of Indian Industries, CII and the
Kumar Mangalam Birla Committee) were set up
to recommend good governance norms. These
committees came out with several
recommendations, which were made
mandatory for the companies to adhere to by
2001. Infosys was one of the first companies in
India which had complied with the
recommendations made by the committees.
The case discusses in detail, the corporate
governance practices at Infosys, which
complied with most of the recommendations
made by the committees.
The case is intended for MBA/PGDBM level students as a part of the Business Ethics and Corporate
Governance Curriculum. From the case, students are expected to understand the corporate governance
practices at Infosys. From the case, students can understand how Infosys became the best managed
company in India because of its good governance practices. The case would also enable the students
understand the importance of corporate governance in business. The objective of the case is to make the
students understand that good governance would make a company more professional.
Issues:
Enable the students understand the importance of corporate governance in business
Contents:
Page No.
The High Priest of Corporate Governance
Exhibits
Keywords:
Alacrity Housing, history, grew, listed corporation, Indian construction industry, operations, consultancy,
housing construction industry, ethical, ethical practices, profits, Indian construction industry, corrupted
,bribery, licenses/permissions, cost and time overruns, black money transactions, early stages,
corporation faced, policies, ethics, economics, mutually exclusive
The fundamental objective of corporate governance is the enhancement of long-term shareholder value
while, at the same time, protecting the interests of other stakeholders.
- Kumar Mangalam Committee report on corporate governance, 1999.
We've always striven hard for respectability, transparency and to create an ethical organisation. There
are certain expectations that we haven't fulfilled. But we're also a very young organisation and in areas
like track record of management, we may be low because we're yet to show longevity.
- Narayana NR Murthy, Chairman and CEO, Infosys Technologies Limited (Infosys), 2001.
The High Priest of Corporate Governance
By the late 1990s, Infosys Technologies
Limited (Infosys)1 had clearly emerged one of
the best managed companies in India. Its
corporate governance practices seemed to be
better than those of many other companies in
India.
Because of its good governancepractices,
Infosys was the recipient of many awards. In
2001, Infosys was rated India's most respected
company by Business World2. Infosys was also
ranked second in corporate governance among
495 emerging companies in a survey conducted
by Credit LyonnaisSecurities Asia
(CLSA) Emerging Markets. It was voted India's
best managed company five years in a row
(1996-2000) by the Asiamoney poll.
In 2000, Infosys had been awarded the National Award for Excellence in Corporate Governance by the
Government of India. In 1999, Infosys had been selected as one of Asia's leading companies in the Far
Eastern Economic Review's REVIEW 2000 Survey and voted India's most admired company by The
Economic Times.
Infosys had also provided all the information
required by the Cadbury committee3 Infosys
Excerpts
Code of Corporate Governance
In the late 1990s, the Confederation of Indian Industries (CII) published a code of corporate
governance (Refer Exhibit II for the highlights of the report). In 1999, the Securities and Exchange Board
of India (SEBI) appointed a committee under the Chairmanship of Kumar Mangalam Birla 5 to recommend
a code of corporate governance...
Corporate Governance-The Infosys Way
Infosys had accepted the recommendation of
both the CII and the Kumar Mangalam Birla
Committee. This section provides an overview
of corporate governance practices followed by
Infosys.
Infosys had an executive chairman and chief
executive officer (CEO) and a managing
director, president and chief operating officer
(COO). The CEO was responsible for corporate
strategy, brand equity, planning, external
contacts, acquisitions, and board matters. The
COO was responsible for all day-to-day
operational issues and achievement of the
annual targets in client satisfaction, sales,
profits, quality, productivity, employee
empowerment and employee retention.
The CEO, COO, executive directors and the senior management made periodic presentations to the
board on their targets, responsibilities and performance...
Governance
Some analysts felt that Infosys'corporate
governance practices offered many lessons to
corporate India. Infosys had shown that
increasing shareholder wealth and
safeguarding the interests of other stakeholders
was not incompatible. Infosys had given its nonexecutive directors the mandate to pass
judgement on the efficacy of its business plans.
Every non-executive director not only played an
active role in decision making, but also led or
served on at least one of the three (Nomination,
Compensation and Audit) committees...
Exhibits
Exhibit I: Broad Structures and Processes For Good Governance
Exhibit II: Highlights of the Confederation of Indian Industry Report on Corporate Governance
Exhibit III: Highlights of the Kumar Mangalam Birla Committee Report on Corporate Governance