Narayana Murthy's regret - reflection on board structure

Regret comes from his displeasure that board failed to uphold culture, values he established

In 2014, information technology major Infosys adopted a governance structure, in which two different persons hold the positions of chairperson and chief executive officer (CEO). Narayana Murthy, co-founder of the company, who held the position of executive chairman, and steered the company for over 30 years, decided to retire and handed over the management to a team headed by Vishal Sikka, who would operate under the guidance and supervision of a professional board. 

Currently, the board has 10 members, of which only two are executive directors (CEO and COO) and others are independent directors. The chairperson is an independent director. 

Until 2014, Infosys had adopted a corporate governance model where an individual holds both the positions of chairperson and CEO. Murthy was at the helm of the affairs of Infosys till 2011 as chairman and CEO (1981-2002) and as ‘chairman and chief mentor’. In June 2013, he was called back to take charge of the company as executive chairman. During his tenure, Infosys became the bellwether of corporate governance. 

Most experts would consider Infosys’ new corporate governance structure to be an ideal one. Although, there is no conclusive evidence that separation of the positions of the CEO and the chairperson improves the performance of the company, there is almost a consensus among experts that separate persons should be appointed to the post of chairperson and CEO, to balance the power between the CEO and the board. One of the Securities and Exchange Board of India’s (Sebi’s) discretionary requirements is that separate persons should be appointed to the positions of chairperson and CEO. 

In an interview with CNBC 18 on July 17, Murthy said that his biggest regret is that he decided to retire in 2014. 

Murthy’s regret perhaps comes from his displeasure that the board has failed to uphold the culture and values he established. He had expressed his displeasure on several corporate governance issues, such as transparency, severance pay, higher compensation to the CEO and other members of top management compared to the median pay, and excessive office expenses incurred by the CEO. Murthy might be feeling that had he continued as executive chairman for some more years, he could mentor and help Sikka to imbibe the Infosys culture and values, and could have persuaded the board to take decisions based on his own understanding of the philosophy of ‘compassionate capitalism’. 

The present board is adhering to ethical standards acceptable to regulators and shareholders, including institutional shareholders, who together hold more than 58 percent of the outstanding shares. Sebi’s enquiry and enquiry by the external consultant appointed by the board to enquire into the allegations of a whistle-blower have cleared the management and the board from alleged wrongdoing. But, Murthy is unhappy, as company’s corporate governance and ethical standards fall short of Murthy’s own culture and values. 

The Infosys case highlights the fact that a fully-professional management, without the engagement of the promoter with the board, cannot fully appreciate, safeguard and manage the culture and values of the promoter (and the business family). 

Culture and values cannot be described fully due to their complexity, although those are observable into day-to-day operations of the business. They evolve with industry changes and leadership transition but permanence of ‘core’ family culture and values provide competitive advantage to the business and also attract investments. Therefore, in family-managed companies, it is preferable that someone from the family should occupy the position of chairperson to ensure family values are represented on the board. Although, it is most appropriate that the promoter or someone related to him/her chairs the board, it enhances the risk that the board acts only as an advisory board and its monitoring function gets diluted. 

In order to address that risk and protect the interest of non-controlling shareholders, Sebi requires that if the chairperson is an executive chairperson or if the non-executive chairperson is the promoter or someone related to the promoter, half of the board should comprise independent directors, while in other cases, one-third of the board should comprise independent directors. Sebi should consider mandating appointment of ‘lead independent director’. He/she provides leadership to independent directors and liaises with the CEO, on behalf of independent directors. The practice of electing a lead independent director by independent directors has emerged as a good practice globally. 

Promoter’s active engagement in governance of a family business is appropriate.  The challenge is to strengthen the institution of independent directors. 

The writer is adjunct professor in the Institute of Management Technology (IMT) Ghaziabad; and Chairman of Riverside Management Academy; e-mail: asish.bhattacharyya@gmail.com