Activist shareholders: Infosys squabble calls for a theory of the teenage firm


Singapore: Four decades ago, two University of Rochester professors came up with a definitive theory for that “awesome social invention” known as a publicly held company. The firm, they said, was but a series of contractual agreements between the owners and their agents—the managers.

And there the matter rested. Until a 20-F filing at the US Securities Exchange Commission by Bangalore-based Infosys Ltd reopened the contract and raised the question: Can agents ask pesky principals to get off the lawn?

Gadfly has argued that some founders of Infosys, long considered a bellwether of India’s software exports, were acting like teenagers in going after chief executive officer (CEO) Vishal Sikka and the board for everything from “shifting values” to the former SAP SE executive’s chartered flights and top managers’ pay.

N.R. Narayana Murthy, Nandan Nilekani and three other founders own around 13% of the stock. They no longer run Infosys. If they fear Sikka will waste the company’s $5 billion cash hoard on trophy acquisitions, they should make a case for why higher dividends (or more aggressive buybacks) would be better.

Either sway the board by enlisting other shareholders, or sell out: That’s what an activist like Paul Singer’s Elliott Management Corp. would do. If the founders are feeling particularly bold, they could even try a buyout, and fire Sikka and the board. A whisper campaign in the press is unhelpful.

That assessment holds, but now it looks like Infosys wants to compete with its founders in silliness. Take the 20-F filing:

“Actions of activist shareholders may adversely affect our ability to execute our strategic priorities, and could impact the trading value of our securities. Responding to actions by activist shareholders can divert the attention of our board of directors, management and our employees and disrupt our operations. Such activities could interfere with our ability to execute our strategic plan. This may also require us to incur significant legal fees and public relations costs. The perceived uncertainties as to our future direction could affect client and investor sentiment, resulting in volatility in the price of our securities.”

To see how twisted the logic is, try replacing “activist shareholders” with words like whistle-blowers, accounting firms, or the police. Companies don’t go around whining about the cost of statutory audits, or that of compliance with environment or immigration laws. That’s because the shareholders—the principals—expect nothing less.

When bank CEOs grumble about onerous capital requirements, the agents are again acting as servants of shareholders because the latter’s dividends are at stake.

However, the essence of Infosys’s warning distills into: “You, dear shareholder, could be hurt by my trying to defend myself against one of your own.” That’s preposterous.

There’s a marketplace for managers. If the incumbents must spend a certain sum of money and time to protect themselves from attacks on their strategy or ethics, shareholders can always find another bunch who could do it for less. That’s part of the contract that Michael Jensen and William Meckling wrote about in 1976. It doesn’t become a risk factor in 2017.

Infosys says its filing isn’t directed at any one group of investors. That’s just PR spiel. The truth is, Sikka’s halo is fading; the shares’ premium over the Nifty IT index—in which Infosys has a 25% weight—is heading back to where it was when he took up the job almost three years ago. He has dropped his bold $20 billion revenue target, and in media interviews his COO can’t seem to decide whether shrinking client budgets also mean pricing pressure on Infosys.

If Sikka is trying to deflect attention from the Indian software industry’s dwindling fortunes or his lacklustre performance, then highlighting activism as a risk is poor judgment. Professors Jensen and Meckling would disapprove

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