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Infosys founders raise concerns over governance: Should investors be worried?

Chanakya IAS Academy

Infosys, the country’s second largest software exporter reported single digit growth in the in the past two consecutive fiscals. As a result of its performance in the first three quarters of FY17 where it clocked 8.3 per cent year-on-year growth and the seasonal sluggishness in the fourth quarter, the company may report lower growth for the full fiscal.

The stock of Infosys came under pressure after the founding members raised concerns over transparency and corporate governance at the second largest software exporter in the country. The founders believe that there has been a violation of Infosys core values.

The governance Issues highlighted by the founders:

  • The executive compensation, which includes the annual salary of the CEO and the severance package given to the previous CFO.
  • Whether the company would be able to meet the steep growth vision set by the CEO in the next few years, given the uncertain global environment.
  • Achieving $20 billion revenue milestone by 2020. The founding members are concerned whether this is achievable, as the plan is to achieve the target through the organic route. Infosys with over $ 4.5 billion in cash can use the inorganic route to achieve its growth target by acquiring high growth businesses.
  • The shift in the overall approach towards a less-people more-software-driven business.

When trust between founders & those leading an organisation breaks down:

Chanakya IAS AcademyJust when another boardroom battle of two generations at the Tata group was winding down, another is threatening to erupt. Sometimes founders find it difficult to stay out of the management and give a free hand to the professional team. The differences may be cultural, between two generations, in areas like delegation of power, promotional spending, dealing with clients and partners, and spending done on talent acquisition.

Concerns for the Indian IT industry in general:

  • The current technology landscape is also prompting Indian IT exporters to reconsider their traditional business models where revenue growth was driven based on the number of employees.
  • These companies are gearing up to address the changing client requirements by investing towards new technologies such as automation, mobility and cloud computing.
  • Rising rhetoric against H-1B visa usage adds to the uncertainty. A related bill presented in the House of Representatives, if passed, will push employers including Indian IT companies such as Infosys to raise salaries of H-1B employees and increase local recruitment. This will have a huge impact on margins of Indian IT firms.

Way forward:

The predecessors must be willing to let go. As shedding of responsibility should not happen just on paper, it has to be done in both letter and spirit or else complications are bound to happen. Any decision should be taken while considering the interest of all shareholders.

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