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Infosys must learn to deal with activist shareholders

In a statutory filing with the US Securities and Exchange Commission (SEC), Infosys has said that activist shareholders may adversely affect its ability to execute strategic priorities and devalue its stock. Though Infosys clarified that the filing did not refer to any particular group of shareholders or individuals, the hint was quite clear: They are none other than the company’s founders who have more than once publicly locked horns with the board in recent times. Responding to the activists can divert the attention of the board, management and employees and adversely affect their ability to execute the company’s strategic priorities, Infosys said in the filing.

Indeed, taking on shareholder activists is not easy: Lawyers and public relations firms have to be hired, and there is some loss of management bandwidth. But a responsible company has to treat this as a way of life and deal with it appropriately instead of whining about “distraction”, or the cost of statutory audits. On the contrary, the Infosys board and management appeared defensive after the founders expressed their unhappiness over the high compensation received by Chief Executive Officer Vishal Sikka and other senior executives and questioned the wisdom of some of the acquisitions made by the company. They also said that the board, led by R Seshasayee, had failed to provide the right guidance to the management. Mr Seshasayee’s response at that time was disappointing as he said that such controversies were “usually distracting” and had hoped that such an outpouring of bitterness would not happen again. It was reported that Mr Sikka had to cancel a meeting with a client in order to deal with the public relations crisis at home. The controversy was reportedly one of the reasons for Infosys’s poor showing in the previous quarter and it was the first indication that the war of words was taking a toll on the company’s performance.

The SEC filing is evidence that the mangled communication lines between Infosys’ founders, who own 12.75 per cent of the company, and the board have not been repaired. The board tried to address some of these concerns. Mr Sikka, who was promised a salary of $11 million for 2016-17, was given $6.7 million after Infosys managed only 7.4 per cent dollar revenue growth during the year. To ensure better communication, law firm Cyril Amarchand Mangaldas was appointed to serve as a bridge between the founders and the board. And Ravi Venkatesan, who was already on the board of Infosys, was appointed co-chairman as founder Narayana Murthy had advised. All of this suggested that tempers had cooled on both sides. Monday’s filing, however, shows that may not be the case.

Now that Infosys has listed shareholder activism as a risk factor, it should do all it can to ensure that the channels of communication with the founders are open and every difference of opinion does not blow up into a controversy. Founders’ concerns should not hinder the company’s operations. At the same time, the founders need not bombard the board and management with advice all the time, now that they don’t have a presence in either. Of course, they can exercise their rights as shareholders, but that has to be at the right forum – the annual general meeting of the shareholders. The board and management need independence. On its part, the Infosys board and management should not be seen as trying to deflect attention from the company’s uninspiring performance that has led to dropping its $20-billion revenue target.