One-time software bellwether Infosys has hit a rough patch of late, having to grapple with the effects of senior-level exits and friction between the founders and management even as the operating environment gets more difficult.
The company’s co-chairman, Ravi Venkatesan, addressed a range of issues in conversation with Moneycontrol’s Malini Bhupta. Here are edited excerpts:
On where Infosys is at the end of three years with CEO Vishal Sikka:
Vishal just completed 3 years on 1 August. Both Vishal and the board have had to deal with a number of aspects of transition and transformation. The first transition was that the founders left the company almost overnight and with that we lost an extraordinary amount of institutional knowledge.
Second, Infosys for the first time had a professional CEO, moreover one who came from outside the company and the services industry
Third, we morphed from an executive board to a non-executive board. Prior to Vishal, the board had three founders and three executives all of whom knew the business intimately and were hands on. We went overnight to a non-executive Board.
So we are dealing with three transitions. Any one of these would have been a challenge for a Board and we had to deal with three. In retrospect, I believe that the Board has done a creditable job dealing with these.
In addition like every IT company, we have to transform ourselves. Fast. Vishal was hired to drive this. He came in with great energy, outlined a new software and services vision, set ambitious targets and launched a bunch of initiatives like zero distance and design thinking. He took his vision for the company to clients and all employees.
The first two years saw remarkable traction in energy and performance; Infosys closed the performance gap with its best peers. However, in the last year, the transformation has slowed down and in retrospect it is clear that we underestimated the cultural aspects of transformation. In hindsight more could have been done to integrate the new talent we brought in with those who had grown up in the business. In hindsight, perhaps more could have been done proactively to take all stakeholders along on the journey. Much of our challenges have stemmed from such issues and we are course-correcting quickly.
However what is extremely gratifying is that in spite of all the challenges and the noise, the performance of the company has been good and this is something that most investors appreciate. Last year, Infosys grew 8.3 % which was the second highest in the industry and we held on to margins better than virtually anybody. Our free cash flow was excellent. Customer satisfaction reached the highest levels ever. Our first quarter performance was reassuring. Most of all, we began to see real traction in new services, things like cloud services, digital, cyber security and so on. Half our growth over the past two years has come from new services and there is enormous headroom and opportunity to grow these much faster.
So overall the Board likes where we are from a business standpoint and believes that the company will do much better as execution becomes more finely tuned.
On whether the importance of culture was underestimated:
We all underestimated the challenge of cultural change. The board underestimated it, Vishal underestimated it and I dare say even the founders underestimated it. We did not realize how big a deal this was.
On Sikka not being based in India:
When they were searching, Mr. Murthy was keen the CEO be based in India because the bulk of employees were and for the foreseeable future will be based in India. And, therefore, he felt CEO will have to spend half his time traveling but should be based here. However, Vishal has a compelling personal reason to be based in the US & therefore it was agreed that he would balance the time spent here and outside. It was also decided that Vishal would spend more time client focused and COO Pravin Rao would focus more on the inside, on operations and execution.
On the real issue around performance
Our performance relative to the industry, to our competitors or peers is very solid and that’s something people really respect. The challenge is that we had calibrated expectations around $20 bn and 30% margins and $80,000 RPP (revenue per person). We have said that this is now going to take longer. The disappointment may be relative to this.
The challenge for Infy is this. How do we pull out the resources, dollars and talent from slower moving parts of the business and move them to faster growing part of the business? This is an operational and execution challenge. The challenge is keeping everyone focused on performance and transformation despite the noise and negativity around. But I am not one of those people who is going around telling people that the best days of the IT industry are behind us. We think this industry and company has big headroom for growth. We are seeing this in our current portfolio of services. When you look at performance, investors we speak to, we are told “we like the performance and make sure your team does not take the eyes of the transformation”. The pressure is on to accelerate and we are feeling good.
On COO Pravin Rao’s interview with Moneycontrol, on which he flagged pressure from clients to take costs out in the traditional business, existing businesses being under pricing pressure and new business not coming through, and Venkatesan seeming to say the contrary.
Not at all. One must get into the details of our portfolio to understand this well. Half of our business is getting rapidly commoditized but the other half is growing and accelerating. How do you move resources, talent, and your smartest people and redeploy them to new side of the business? One of the things since we set up the committee of directors (CoD), which has Sesh, Prahlad and me on it, is that we are getting a lot more granular about the story. We were far sharper about it in July. Strategically, we are not worried. When we meet investors, the only thing they care about is can we sustain and accelerate the performance.
On the pieces that concern him:
Most importantly, when you are shifting direction is to ensure that everyone is aligned. The second is the pivot of the business from old to new and redeployment of resources. The cost takeout is not just for margins. Cost-takeout is to redeploy resources. Execution is important. We think accelerating talent development is crucial.
The noise around governance and around legacy issues is a distraction that we have to find a way to put to bed. The Board keeps telling Vishal and management to ignore the noise and just stay laser focused on performance. Sometimes, like right now, that is really hard.
On new targets and milestones that the company intends to set for itself:
The question of targets is an excellent one. Sesh and I have been quite inspired by how Satya Nadella at Microsoft has done an exceptionally good job of calibrating the world on what to expect and delivering against it. Satya said it is not about Windows revenues but it is about momentum in the cloud- Azure and Office 365 etc. And though the revenue from Windows are steadily melting and that from the new stuff is growing rapidly, the market has rewarded Microsoft handsomely.
Calibrating people’s expectations right is half the game.
On those expectations being given by the CEO:
The world was different in 2014 and nobody anticipated the head-winds in the industry. What we thought was stretch but achievable (target), had to be moderated. In my last interview I said - are these targets achievable, yes. Can we achieve it in 2020? No. What we want to do right now is to put out long-term transformation targets which are truly well thought through and reflected. In the meanwhile, for every quarter, we need to make sure we deliver industry leading growth and margins. If we do that, we can hold the fort till we figure out what the transformation journey looks like.
Transformations go best when you have thought through what the journey will look like. And here are milestones to check whether you are on track or not. So we are working hard on it. In the meanwhile, we better deliver industry leading margins and growth. That is what will give us the air-cover and oxygen.
On appraising the CEO’s performance:
We are very conscious that the industry has limited runway and each quarter really matters. We don’t have luxury of time. Yes, we have appraised performance. Some things have gone really well. For instance, customer satisfaction is something we measure every year and at Infosys. Customer satisfaction is the highest since we started measuring it. Financial performance is competitive. If you look at employee engagement, it is pretty good. If you see innovation across nearly 20,000 projects, it is improving rapidly. However if you look at the transformation and our progress against the 20/20 targets, there is a gap. We have to step back and look at how we can reboot transformation. Talking of accountability, if you look at CEO compensation, it is reflected in our appraisal. What we paid out was significantly less than what some people thought, so our variable compensation system works. To conclude, the board thinks some things are going really well and some are not going well. But we are clear about where the course correction is needed and determined and confident we will accelerate.
However if you look at the transformation and our progress against the 20/20 targets, there is a gap. We have to step back and look at how we can reboot transformation. Talking of accountability, if you look at CEO compensation, it is reflected in our appraisal. What we paid out was significantly less than what some people thought, so our variable compensation system works. To conclude, the board thinks some things are going really well and some are not going well. But we are clear about where the course correction is needed and determined and confident we will accelerate.
On Sikka spending more time in India:
I am not sure why you keep coming back to this. As our CEO, Vishal has to be with clients who are mostly in the US and Europe. He has to meet with investors who are in five or six cities around the world. He has to connect with employees who are again all over the world but largely in India. So the CEO of a global company has to be everywhere. I grant that in times of change, management has to connect emotionally much more with employees and communicate constantly but this is the job of Pravin, Ravi Kumar and the whole leadership team not just the CEO. Sesh and I believe they are beginning to focus much more on this.
On investors needing to know if the transformation is coming along fine:
Change is uncomfortable and the temptation when the going gets tough is to abandon it and go back to steady state. Change is like a grain of sand in an oyster. The oyster tries to eject it and when it fails, it becomes a pearl. Change is uncomfortable but if you do abandon it, you abandon the upside. Because of the ‘Kodak moment’ we cannot abandon change. We are still hopeful and confident. The traditional notion of a non-executive board is that it is hands-off and focuses largely on financial reporting and governance. However, in times of transition, change and crisis, the board has to be much more engaged with the management which is why we put in place a COD structure. It has been in place for four months and we think it is working well. We have a collaborative and supportive relationship between the Board and management; we will work harder on communicating more intensely with all stakeholders.
On a timeline for putting milestones and targets before the market:
The Board has asked Vishal to be prepared for an intense discussion of this at our October board meeting.
On senior-level exits:
Let us calibrate ourselves with data. The data says that when you look at general attrition, three years ago to the month, it was at about 22-23 percent, now it is 16-17 percent. When you look at top management attrition, it used to be about 15 percent, it is now 11 point something percent. So in aggregate terms, I don’t think there is anything that unusual. Sometimes you have a period of calm and sometimes you see a spike and we have seen a bit of that recently. But we don’t think that there is a crisis.
Secondly, please understand that the industry is changing. Everybody is trying to change and transform and they are looking for new talent and they are all looking at each other. So where does the CEO of Wipro come from? TCS. Where did the CEO of Larsen and Toubro (L&T) Infotech come from? Infosys. There is a fair amount of movement of talent across the companies and Infosys, not now, but for the longest time has been a good place to look for great talent. Company has done a good job at hiring of people and growing talent. Therefore, many of our alums are now CEOs at different places, whether it is BG Srinivas, Ashok Vemuri or Sanjay Jalona or Manish Tandon or Amitabh and so on.
Is this a cause of some sadness that they have left? Yes. I don’t think any company should celebrate when they lose good senior people but it is a fact of life and I think you should rejoice that your alums are doing so well.
Point number two, when you are in transformational mode, it is an uncomfortable situation and therefore some people leave that is also a fact of life. So there is a lot of insinuation that this is attributable to something. I don’t see it that way. Does that mean, we need to redouble our efforts to make sure that our key talent are feeling emotionally engaged, looking charged up, absolutely. Succession planning is crucial and we must do more to accelerate the growth of new leaders from within.
On the struggle to retain senior people who came from SAP:
It is not easy to bring in people into a company at a senior level. I remember my own experience joining Microsoft at a senior level. Microsoft had a dismal record of integrating senior hires; most people left within one year or two because the culture was tough. So the company assigned Craig Mundie our CTO as my mentor and then Will Poole who headed Windows and they shepherded me into the culture. It is not easy to break into other strong culture from the outside. We need to do much more to integrate and assimilate the new people we are bringing in with the old people who built the place and build one team, “One Infosys”
On a mail from founder Narayana Murthy on 8 July to the board where he has asked serious questions including a reference to a mail of David Kennedy sent to the board where he said he could no longer hide former CFO Rajiv Bansal’s severance pay agreement from the board:
These are all speculations.
We received two whistleblower complaints in February and the audit committee met and debated what to do. Some of the complaints about the allegations were familiar from the past and had been looked at by Cyril Amarchand Mangaldas, others were fresh allegations. So the audit committee decided to engage a new independent law firm with whom company has had no prior relationship or engagement. We thought Gibson, Dunn & Crutcher had a very fine reputation. We engaged them to look at it. We also engaged a company called Control Risks which is an expert in forensics of this nature. Gibson Dunn was completely independent, it was given unfettered access to everybody and all documents. Over several months, they examined over a million documents and they interviewed over 50 people. The whole investigation cost over Rs. 10 crore and they finally submitted their report. The summary report to the audit committee is the one we put on the website.
I do not know how many companies do more to respond to unsubstantiated allegations where there was not one bit of evidence present. It was only allegations and accusations. What Gibson Dunn said was they found no shred of evidence whatsoever to substantiate any of these things. And so we put it out there and much of the world has moved on. Some people, a finite number, still do not believe that the issues have been put to rest. I would say to them that the principle of natural justice says that any person is innocent until proven guilty and if they have any evidence whatsoever, they should come forward to give it to the regulator, to Gibson or anyone else, so that it can be looked at but there has been no evidence produced.
I am not aware of another company, which puts investigation reports of whistleblower complaints and allegations on its website and discloses them. I am not even aware whether Infosys has ever done this in the past. So in our opinion we have done what any good board should do in terms of pursuing this to its logical conclusion and disclosing it appropriately.
On the continued clash between founders and management:
We will come to the founder- promoter matter but on this issue we believe we have done what is necessary and appropriate from a point of view of governance. I will ask you a simple question which I would like you to research and come back to me - tell me another company that has put investigations and whistleblower complaints on its website and disclosed every last details and every phone call conversation etc.
On the need to communicate more with the 87-percent public shareholders:
Very very few investors have approached us saying they want more information on the investigation out in public. We have put out as much information as we believe is appropriate and if anybody has further evidence, they should come forward.
On whether the onus of producing evidence is on the founders/investors:
No. It's on people who are making unsubstantiated allegations.
On Murthy’s demands:
I am not talking about Mr. Murthy. You said investors and that is why I am reacting to that. After a point this becomes a witch-hunt. It damages the company and the reputations of people. Multiple investigations have not founded any shred of evidence whatsoever. There is a fine line beyond which this repeated accusation without any evidence becomes a witch-hunt.
On board member Roopa Kudva’s comments to Moneycontrol in February that Bansal's severance was an “error of judgement”:
What happened in Bansal situation is we had a very smart employee who did not fit into Vishal’s leadership team; as a result he preferred to leave the company. The board authorized management to negotiate a mutually satisfactory severance arrangement and later approved the arrangements. There were also procedural lapses, like delayed minuting. In retrospect it was overly generous and not good judgment on the part of the Board. But key point is, it was bona fide. There is no truth whatsoever that it was hush money. This was a genuine mistake. We own this collectively. We have admitted and apologised for this. We have since reviewed what we could have done differently and fixed many things. For instance the NRC reviewed all Key Managerial Personnel (KMP) contracts, made sure that they all have appropriate severance agreements relative to their geographies, we reviewed all our procedural controls. I wish we could turn the clock back on this decision but we cannot and we have done what a good board should do to ensure such an error of judgment cannot recur.
On why Venkatesan wishes he could turn the clock back:
Because it was a poor decision, an excessive payment. It therefore aroused suspicions and despite our best efforts, we haven’t been able to put these to bed. And this has been a massive distraction and unfairly, wrongly allowed people to say governance standards are falling. To err is human. What matters is how we have responded to a mistake.
On what the issue on the Bansal case really was:
We have admitted that it was an error of judgment here and some procedural lapses. We have learned from this and put in place measures so this cannot recur. By the way, you know that we stopped the payments to Rajiv Bansal because of certain lapses on the part of Rajiv that came to light subsequently.
If this was indeed "hush money", the last thing you would do is stop the payment because then it creates an incentive for the person to share whatever it is they wish. I think the narrative that some people are trying to draw is between Panaya and financial impropriety in that transaction to Rajiv Bansal and, his severance payment. There has been no evidence whatsoever that has been found of this narrative and I think again as I say it, I think it is moving into realm of a witch hunt. The board believes that the manner in which we have investigated this matter repeatedly and disclosed is appropriate. It is time to move on.
On whether the bickering with the founders will continue:
First of all, for any Indian of my generation this is no ordinary company and Mr. Murthy is an icon. Seven of the eleven people on the Board today including Vishal, Sesh, myself, Kiran and others were invited on the Board by Murthy personally. We wouldn’t be here but for him. He has been and remains a personal friend of several of us. He has been a mentor to me and I have a lot of affection and regard for him. So this disagreement which has unfortunately become public is a very difficult challenge for us.
There is a view that we should treat the founders as just another shareholder. I think that misses the point. Founders are very different from a normal business person or professional. The company they create is an extension of themselves; it is their idea manifested in reality. Founders have emotional connection to their creation which cannot be fully understood by others. Murthy has often referred to Infosys as his second child. He still has enormous emotional connection to his creation. He still has a lot of ideas for what Infosys should be. Our challenge is to be able to harness that energy, those ideas and do it in a way that there is no risk of selective disclosure and that we are not creating an impression that one shareholder has particular influence or that we are not an independent board. Our challenge is to take his suggestions, examine them on merit and implement what we believe fits and respectfully disagree on others. Murthy has often said to us, “give me a hearing, argue it out, and eventually you make your own decision. However, when you make the decision, ask yourself will this decision enhance respect for Infosys, will this decision enhance respect for the board?” That is what we try to do. That does not mean we are going to agree on everything; we don’t. The key is to remain respectful and not allow these differences to impact the company.
On why only he was the only one in the company or board speaking out:
What is making this difficult is that the disagreement has become public. It would have been better if we could have handled differences in private. Despite very personal attacks on the Board, we have continued to remain restrained and respectful but there is a risk is that at some point positions harden and that the Board may have to forcefully defend itself. We have worked hard to become a cohesive board. In my experience, this is the hardest working board I have served on. I am confident that we are making good decisions and as performance gets better and better, some of these legacy issues may finally fade. However in the short term it is a real challenge.
On investors’ suggestions that former CEO Nandan Nilekani and Prahlad be brought back on to the board:
Prahlad is already on the Board. We have an active nominations Committee and so if there are suggestions for people who would strengthen our Board, they should be sent to the nominations committee. We have a steady natural opportunity to renew the Board with new people and I am sure the NRC would consider them.
On benefits to Infosys if Nilekani were to return:
This suggestion is hypothetical at this point. The board, at the end of the day, is a representative of the shareholders and would evaluate every suggestion that would strengthen our Board.
On whether he could do anything as co-chair on this issue:
Would the investors want that, would Nandan want that? That is a question I cannot answer. So it’s a bit academic at this point.
On whether he would pay heed to investors:
We have a stewardship responsibility. We have natural opportunities to refresh the board and we will look at all possibilities to strengthen the board as those opportunities arise. Doing what is in the best long term interest of Infosys remains our primary duty and focus
Discover the latest business news, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!