What we must learn from the Infosys saga

The dispute at Infosys between its iconic founder, Narayan Murthy, and the board has settled down with the appointment of co-founder, the eminent Nandan Nilekani as chairman of the board. Shareholders are relieved. Murthy was castigated by the business media for making his concerns public. Much shareholder value was destroyed for a few weeks. Murthy’s concerns were with ‘values’, which seemed to matter a lot to him. He had also raised issues of corporate governance which seemed to him, as a well-wisher of Infosys, to have broken down.

During the past few weeks, most commentators in the business media, in India and abroad, have chastised Murthy for going public. Some have even ridiculed him, as a leading proponent of good corporate governance, for his actions which have been described as egotistical, and harming the company he founded. Alarms have been raised about the hundreds of crores of rupees of notional destruction of shareholder wealth caused by the immediate drop in the company’s share price. Stock markets react to short term events. They do not like uncertainty. An expectation of stability with the appointment of Nandan immediately turned up the share price.

Leaders in the public mind, which is what corporate brand leaders aim to be, must open themselves for scrutiny by the public. Public trust boosts shareholder value by improving the confidence of stakeholders in the company—its customers, employees, and investors. Trust is not obtained by clever advertising. It is earned by the honest responses of the company’s leaders, especially when things go wrong, as they often will. Therefore, Murthy’s critics who have cited the importance of good corporate governance should have welcomed a discussion about Murthy’s concerns rather than trying to brush them beneath the carpet out of public view. 

Murthy’s primary concern seemed to be with the compensation given to the CEO and other executives. He thought it was excessive and inequitable. The board’s response was that it was broadly in line with current global corporate practices. Those norms and practices are being challenged in many countries, including the US, UK, and Europe. Therefore, Murthy, who has been a champion of equity and restraint in compensation of top executives, can be forgiven for becoming agitated if he feels the company he founded and built on those principles may become just like others. The large increase in the compensations of top executives in Indian companies over the past twenty years, which are now several hundred times higher than median incomes in the companies, has been a concern for many who care about the quality of India’s social fabric. It is an issue that the board of Infosys, a company considered as a leader and norm-setter in India, must apply itself to more deeply than it appears to have.

How should anyone vested in a company raise an issue about ethical values when the management and board of a company is focused on creating shareholder value as they are expected to? Who is responsible for blowing the whistle? And how can he or she ensure the whistle is heard? The institution of independent directors on the board, who are ‘independent’ of both promoters and the management, is created for this purpose. Independent directors are expected to help the company increase shareholder value. But they are also expected to be internal watch-dogs, looking out for the interests of society, pointing out to the rest of the board when the board’s decisions or management’s actions may be contravening the company’s espoused values.

The integrity of a company rests heavily on the integrity of its independent directors. If they fail to blow the whistle, or even to notice when the whistle should be blown because they have been completely co-opted into the shareholder value generating process (and indeed are selected because they have the skills for this), then society should hope that someone else will blow the whistle. Which Murthy seems to have.

If an independent director becomes concerned about a breach of values and raises it, quietly, internally, and the concern is not addressed, should not the internal director be expected to make a louder noise? Public opinion is of great concern for political leaders and for companies and their brands too. Sadly, the only way to be heard sometimes seems to be to ‘leak’ the story to the outside world. That is what James Comey, the FBI Director, felt compelled to when the US President, his boss, wasn’t listening.

The greatest loyalty to an institution requires the courage to tell truth to power. Whistle blowers are hardly ever popular with the institution they warn. They may sound too critical of, and even dis-loyal to the institution. The institution, and even the public, may demand that the whistle-blower apologize for raising the alarm in public and for damaging the institution’s reputation.

The board of Infosys had gone public with accusations against Murthy, as he had about the board. Who should apologize to whom is not important. Infosys must change its strategy and its business model to continue creating shareholder value in a business environment which is different to the one in which it has been very successful in the past. Nilekani’s principal task is to put in place a board and management team for this. However, that is not all that has to be done.

Issues of corporate governance have surfaced, particularly about norms of executive compensation, and the responsibility of independent directors for upholding societal values. Just as the Supreme Court takes a particular incident as a provocation to examine broader principles, the Infosys story must trigger a deeper examination of these matters amongst those who care about standards of corporate governance in India and elsewhere too.

The writer is a former member of the Planning Commission and the former India Chairman of the Boston Consulting Group. His latest book is titled ‘Listening for Well-Being’