Questioning the Infosys shareholders


Companies across the world issue shares with differential rights. The garden variety shares are known as “ordinary shares”, investing all shareholders with equal rights to ownership and profits. Then come shares with varied rights, including non-voting shares. In India, Tata Motors and Gujarat NRE Coke, among others, have issued non-voting shares; these shares allow companies to raise capital without diluting promoter shareholding. If events follow a certain trajectory, India could soon witness differential rights even within ordinary shares.

The epicentre of this development is software company Infosys Ltd, where a section of shareholders is publicly airing grievances against the current management led by Vishal Sikka and board of directors chaired by R. Seshasayee. The protesting shareholders have an urgent petition: a public review of severance packages offered to two departing senior executives, and returning part of the company’s cash reserves to shareholders. They’ve also flagged concerns over the chief executive officer’s compensation and the appointment of one independent director. One shareholder has even demanded the replacement of the current chairman.

There are multiple facets to this dispute. First, this shareholder activism is emerging from the company’s original promoters as well as a couple of past Infosys executive directors. The former remain part-owners with substantial shareholding, though as a category they are dwarfed by larger shareholder groups, such as foreign portfolio investors (FPIs). The extent of shares held by former executives is not known. While it might be apposite to question whether their legal position should be viewed as ordinary shareholders or promoter-shareholders (because the media seems to have bundled all of them as promoter-shareholders), one thing is clear: They seem to enjoy support from only a section of the promoter-shareholders.

Second, asking the Infosys board and the management for better communication, however justified, begs a counter-demand: The protesting shareholders need to segregate their respective positions and all the promoter-shareholders should unequivocally communicate whether they are in this collectively or whether only a section of former promoters is siding with the ex-officials. For instance, we have not heard a peep from either Nandan Nilekani or S.D. Shibulal or Kris Gopalakrishnan. This is important to ascertain whether every original promoter is on board with the objections or not.

Third, with so much emphasis on communication, it seems Sikka was not properly briefed about “company culture” when he was hired and welcomed by former chairman N.R. Narayana Murthy. He should have been briefed about what he can change and what he can’t (chartering private jets, for instance).

Fourth, it would seem from all the statements that some shareholders seek to occupy a separate moral perch compared with all other shareholders or shareholder groups. Media chatter seems to be also throwing up mixed signals: Implicit in the carping shareholders’ narrative seems to be an articulation of a superior position in the shareholder hierarchy, based on their legacy executive positions in the company. Murthy’s messages also indicate a desire for cryopreservation of the corporate culture prevalent in the Infosys of the 1990s, regardless of where the company may want to move under a new management.

Does it indicate that some former promoters and former executives want differential rights within the same category of shares? If yes, this is a fresh twist for corporate democracy and perhaps the only instance (with the exception of some past promoter-owned or state-owned enterprises) where a set of shareholders has sought to exercise greater moral suasive powers despite a lower numerical presence.

This is not to outrightly dismiss their claims or demands for improved corporate governance in the company. As ordinary shareholders, they have every right to seek an improved, and constantly improving, corporate governance framework which ably discharges its fiduciary responsibilities and is based on proper disclosure norms. And if the board did indeed indulge in suboptimal disclosure while finalizing severance packages, then it is certainly distressing and requires immediate remedial measures.

But, beyond that, what’s emerging is that some former executives (including some select promoters) are loath to give up their involvement in the company, somewhat evocative of the recent Tata group upheaval. What also stands out is that other shareholder groups, such as FPIs, do not seem to care about the immediate concerns. One FPI has clearly communicated that the existing management should not be distracted but be given a free hand in running the company, improving margins and enhancing shareholder value.

At this point, a sidebar becomes necessary. Two of the vocal critics were chief financial officers in Infosys at different points in time and they are raising questions about severance paid to a CFO who succeeded them, somebody who must have been a junior officer during their respective tenures. This may not have any material bearing on their protestations but it’s a point that needs to be kept in mind.

Finally, an all-important question: Did the original promoters and former senior executives adequately future-proof the company, in terms of products, processes and delivery platforms