The Infosys power play: will an insider work as a CEO to manage the company’s work ethos?
Tuesday August 29, 2017,
8 min Read
Vishal Sikka found the going tough at Infosys from the word go. With Nandan Nilekani taking over, the baton is firmly in the hands of the founders, but what will it take for the next Infosys CEO to succeed?
In late September 2014, at the quarterly earnings, Vishal Sikka, the newly appointed CEO of Infosys, had gone on to close 55 large deals for the company. One of them was a long-term services contract with Daimler AG, a landmark deal for the company because Infosys would use the “cloud” for data centre operations for Daimler and deliver the service from Bangalore. At that time digital and cloud were being discussed in every boardroom and Sikka wanted to be a breath of fresh air for Infosys by presenting such deals at earnings conferences to show he meant business. He began to realign strategy and focused on future businesses, where money would come from software and not services. He told this reporter at the time that “as a CEO, I close all the business deals”.
It was just a couple of months earlier that two Infosys founders hurried to the T-3 terminal at Indira Gandhi International Airport in Delhi, and sat down with Sikka to discuss whether he would be interested in taking Infosys to the next level. Sikka had just left SAP AG and was known for creating the architecture for HANA in the memory database. A similar problem, akin to Infosys, had occurred in SAP for Sikka. Sources say he exited because Hasso Plattner, the promoter of SAP, could not convince the board about Sikka taking over as co-CEO. Sources say the spat over Americans (where Sikka is from) versus Germans became a wedge in SAP, and Sikka left company over a leadership tussle.
Enter Vishal Sikka
While all this was unfolding in late April 2014 Infosys realised they could bring in a global leader like Sikka to run the company. The timing was right because Sikka was gunning for a CEO’s role. After some hurried conversations the deal was inked, but without looking at the cultural foundations of Infosys, and the way it was run for 33 years, Vishal Sikka got into a business that had several expectations.
Infosys was managed by six of the seven founders, with four of them actively involved in the company with defined rules. Murthy held the “fort” in India while Nandan Nilekani, Kris Gopalakrishnan and SD Shibulal took turns as CEOs; all of them built the business from India. These founders travelled abroad only to close business deals. Sikka, on the other hand, was based in Palo Alto, California; he wanted to be closer to his customers. There were 220,000 employees who were used to their leaders’ presence in India. Sikka also did not realise that an exit of the promoters, although they are not majority shareholders, did not really mean they would not want to be abreast of Infosys operations.
Sikka was always going to find the match with Infosys tough. Soon, questions were raised about his management style. He was managing the company out of the US and company insiders began to ask why a leader wasn’t chosen from within the company and why the board had brought in an outsider to run the company.
Mohandas Pai, Managing Director of Aarin Capital, says, “The company has more than two hundred thousand employees and managing it remotely was always a challenge.”
Bring in an insider as the CEO
As soon as Nandan Nilekani returned as non-executive Chairman of Infosys, the company appointed executive search firm Egon Zehnder to find a suitable CEO. The company now has until March 31, 2018, to find the right suitor.
Some say finding an external CEO is not the right move. Insiders believe that it would be best if an internal senior executive was groomed to the role of CEO and guided by founders.
Since 2013, Infosys has seen a number of senior executives, at least 12, leave over leadership rows. The top names included Basab Pradhan, who headed global sales and marketing, and was in Infosys for more than 15 years. Leaders who left with him were Subba Goparaju, with Infosys for 25 years, and V Balakrishnan, a former CFO who was in the company for 20 years.
Praveen Malhotra, the Founder of Positive Moves, an executive search firm, says, “The company needs an insider who knows the three things that make up Infosys – working with a large employee pool, a global clientele and omnipresent promoters. This leader should also build on the digital journey that Sikka had set out towards.” He adds that promoter-run companies have globally never made a good transition after the founders have existed because they are involved one way or the other.
Infosys has seen a steady rise in revenues and the company cannot afford strife in its management. Since 2013, when Narayana Murthy returned as Executive Chairman, and exited in October 2014, when he became Chairman Emeritus of the company, the company has not been able to give free rein to the management.
The Sikka-Murthy wrangle
Tussles between Sikka and Murthy began right after the Panaya acquisition, in 2015. Murthy sought answers from the board for taking a decision on acquiring Panaya. Sources say the deal was valued at $200 million, and several Infosys insiders alleged the acquisition saw a lapse in governance and due diligence. At the same time a board decision to pay Rs 17 crore as severance to Rajiv Bansal, the former CFO, also led to several questions amid the founders and shareholders. Murthy has justified himself in asking the questions, but neither the board nor the shareholder community have been able to find any proof of wrongdoing.
In the end, sources say, Murthy just wanted Sikka out.
Manoj Thelakkat, founder of Flex-i Partners, another executive search firm, says, “Infosys never really moved on from the founders. The founders had to create a succession plan and the current challenges have come up since there was none.”
He adds that finding any CEO from outside the company would create the same problem like with Sikka. “Only an insider can fix Infosys,” Manoj says.
The next few months will be interesting as Nandan Nilekani will guide Infosys through some key events. The second quarter results are a month away and the management will have also restore faith with employees and clients about the core values of Infosys being a transformational company.
The history of promoter power struggles
Research from Harvard has shown that the morale of employees plunges when founders leave the company. The startup industry in India has already witnessed several companies, like Flipkart and Snapdeal, where founders have exited and do not have any control over the future. Perhaps the most popular company to have seen a founder exit quickly, over tussles with the investors, was Housing.com.
While startup founders are at the mercy of their investors and sales targets, companies whose founders manage to make their businesses successful love to be hands-on when it comes to running company. This is how the IT Services industry was built. The promoters seized the Y2K boom and later, with offshoring, created sizeable businesses. Wipro Technologies has a CEO, but is firmly under promoters. HCL Technologies, too, has promoters running the company. It has had three CEOs in a decade - Vineet Nayar ran the company for six years, followed by Anat Gupta for three years and C Vijaykumar who took over last year. Even conglomerates like Aditya Birla Group and Reliance Industries have powerful promoters, not powerful CEOs.
Mahesh Lingareddy, Founder of Smartron, says: “There has to be respect for the board and the promoters must be answerable to them. In India, it is the opposite. Founders of large companies are powerful individuals who will run their companies even if they bring in a CEO.”
Those interested in corporate lore may remember that Steve Jobs, the founder of Apple Inc, was ousted by CEO John Sculley in 1985 over disagreements in running the company. Here is a list tussles curated by YourStory.
Will an insider be a better bet?
One may wonder how the Infosys promoters wield power even after holding shares as low as 12.76 percent of the company. The biggest shareholders in the company are LIC, Vanguard and the Singapore government’s investment arm. Interestingly, LIC owns 7 percent of the company while the other investors own less than 2.5 percent. This puts the founders, as a collective, in a unique position and they remain powerful individuals in the larger scheme of things.
If one looks at the history of Indian conglomerates and promoter-run businesses, most have a distinct cultural flavour - the promoters never really stop running the company.
Whatever is happening at Infosys has precedence in Indian corporates. From Mukesh Ambani to Kumara Mangalam Birla, from Narayana Murthy to Shiv Nadar, their CEOs must build the business with the blessings of the promoters (and keep them in the loop).
All said and done, Infosys will be happy with an insider as a CEO instead of a C-Suite leader or technocrat being brought in from another company.