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Why Infosys has failed on corporate governance

April 01, 2014 13:27 IST

Why Infosys has failed on corporate governance

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BS Bureau

Infosys has been widely criticised for bringing back N R Narayana Murthy at the top, thus going against its own retirement policy.

A brokerage firm, Ambit Capital, has joined proxy advisory firms in taking a critical view of corporate governance issues at Infosys.

The report also focuses on several other Indian information technology companies, some of whom have been involved in clear transgressions in the past and have been termed “ugly” and “bad”. 

But what will attract the most attention is what the report says about Infosys and two other well-known companies, Tech Mahindra and KPIT Technologies, which have been categorised as “not so good”.

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Image: Infosys campus in Bangalore.
Photographs: Reuters

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In the case of Infosys, negative observations – no matter how mild – acquire a sharper edge as the industry front runner was once considered a pole star in good corporate governance. 

The report makes one-and-a-half fresh points on Infosys.

The major new point is that, compared to three other market leaders, Infosys has too many promoter representatives on the board in relation to the size of its promoters’ holdings.

It also has the highest proportion of non-independent directors on its board. 

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Image: Infosys has too many promoter representatives on the board.
Photographs: Binoyjsdk/Wikimedia Commons
Tags: Infosys

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Both Tata Consultancy Services (TCS) and Wipro, in which promoter holding is more than 70 per cent, have a far lower proportion of promoter nominees.

It can be argued that corporate governance cannot be measured in arithmetical terms; what matters is the spirit in which things are done, and what actually happens. 

Infosys has been widely criticised for bringing back N R Narayana Murthy at the top, thus going against its own retirement policy — and for Mr Murthy bringing his son along with him to make matters worse. 

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Image: N R Narayana Murthy
Photographs: Reuters

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Going by the board composition statistics now highlighted, it is unsurprising that the board has not brought to bear much of an independent approach. 

Another point made by the report can be categorised as half a point in that it is not new. Infosys has been known to under-promise and over-deliver, but what is new is to link this to the volatility in its share price.

It can be said in defence of Infosys that the point is unfair; many leading firms, notably TCS, issue no guidance at all. Unsurprisingly, Infosys has cut its guidance.

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Image: Infosys has cut its guidance.
Photographs: Reuters
Tags: TCS , Infosys

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The guidances cannot be technically faulted and surmise is different from fact. If brokers read patterns, speculate and come to grief, then it is their headache.

Irrespective of how correct the criticisms are, the fact is that dissatisfaction with governance at Infosys is growing; and its well-wishers would like the firm to set its house in order.

The matter is somewhat serious, since the firm recently had to pay a fine in the United States for visa rule violations.

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Photographs: Reuters

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There is also the need to welcome the growing trend of independent financial experts scrutinising the way Indian firms are run and not hesitating to raise questions.

The way in which the management of Maruti Suzuki has been hauled over the coals for the ownership structure outlined for its Gujarat plants shows that there are no more holy cows left and the small shareholder has to be treated fairly.

This healthy trend can only make the markets fair and help the equity cult grow. 


Photographs: Reuters

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