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Infosys infighting pushes CEO Sikka to the exit

Resignation over 'malicious' attacks comes at a critical time for the IT sector

Infosys aims to find a replacement for CEO Vishal Sikka by March 2018.   © Reuters

MUMBAIInfosys Managing Director and CEO Vishal Sikka has stepped down amid infighting between the company's board and founders over corporate governance, in events reminiscent of the turmoil at Tata group late last year.

Sikka announced his resignation on Aug. 18, three years after founder N.R. Narayana Murthy brought him in to restore the company's status as a bellwether for India's information technology industry. Sikka said he was tired of "constantly defending against unrelenting, baseless, malicious and increasingly personal attacks," and thought it was better to part ways with Infosys because he felt unable to focus on growing the company.

Sikka did manage to increase Infosys' revenue to 684.84 billion rupees ($10.6 billion) for the fiscal year ended March 2017, from 533.19 billion rupees for the year through March 2015. Net profit rose to 143.53 billion rupees, from 123.29 billion rupees, during the same period. Nevertheless, friction over governance got the better of him.

Murthy had criticized some decisions taken by the board, including a 173.8 million-rupee severance package given to former Chief Financial Officer Rajiv Bansal, and the $200 million purchase of Israeli company Panaya in 2015.

Chief Operating Officer U.B. Pravin Rao will fill in for Sikka in the interim. To oversee the transition, Sikka will stay on as executive vice chairman until a new CEO and managing director is found. The company hopes to appoint someone by March 2018.

BOARD SUPPORT Infosys' board and management team had made a point of showing confidence in Sikka as CEO, even as founder-shareholders led by Murthy criticized the board's performance. A number of key executives appeared with Sikka when he spoke to analysts and reporters: R. Seshasayee, the chairman of the board; CFO M.D. Ranganath; Rao; and independent director Ravi Venkatesan.

Infosys founder N.R. Narayana Murthy, seen here in January 2015, has criticized the company's governance.   © Reuters

Sikka had mentioned the "distraction" in financial statements for the past few quarters, as Infosys' growth slowed from the peaks of the previous two years. The last straw, perhaps, was a letter from Murthy that appeared in local media on the morning of Aug. 18., in which he said that some board members saw Sikka as chief technology officer material -- as opposed to a CEO.

"Murthy's continuous assault, including this latest letter, is the primary reason that the CEO, Vishal Sikka, has resigned despite strong board support," the board said in a statement to the Bombay stock exchange. "Murthy's letter contains factual inaccuracies, already disproved rumors and statements extracted out of context from his conversations with board members."

The board termed Murthy's earlier statements over corporate governance issues a "misguided campaign" and assured stakeholders that it would continue adhering to the highest international standards while pursuing profitable growth.

The board said that when Sikka took over, the company was lagging significantly behind the industry in terms of growth rates. Now "we are in [the] top quartile from a performance perspective."

"This was done while keeping a strong focus on margins, closing this past quarter at 24.1% operating margin, beating some competitors for the first time in many years, and improving against nearly everyone in the industry." Attrition, which was a major concern before Sikka's appointment, fell to 16.9% in the year ended March from two years earlier.

The board also said investigations into wrongdoing related to the Panaya deal were proved baseless, and that Murthy's demands for policy and operational changes were "inappropriate."

Murthy responded by saying it was his responsibility to look out for corporate governance standards, to ensure the longevity of the company. He said he was not seeking personal gain.

The upheaval calls to mind the public spat in 2016 between Tata group and ousted Chairman Cyrus Mistry.

Institutional Investor Advisory Services said that while Murthy may be a larger-than-life presence, he must know that with great power comes great responsibility. "And therefore, power must be wielded judiciously. He may find solace in Vishal Sikka's resignation, but shareholders have paid the price: His comments have been a constant distraction, periodically destabilizing the company. Infosys' investor call also raises some important questions -- will a new leadership change direction for Infosys again? And will it undo what Vishal Sikka has attempted to achieve?"

HDFC Securities research analyst Amit Chandra pinned the blame on the Infosys board's inability to strike the right balance between the CEO and certain shareholders. "It is not a reflection on Sikka," he said.

INDUSTRY IN TRANSITION Sikka's resignation comes at a challenging time for the IT sector. The industry is shifting to an internet-based technology model from the traditional, people-based outsourcing services model. On top of this, various factors are creating head winds: Brexit, Donald Trump's election and ensuing visa issues, and a slowdown in spending by important clients like banks and financial services companies.

To adapt to the changing market environment, IT companies have been altering their hiring practices -- including head count reductions and a shift to more local recruitment.

Tata Consultancy Services, India's largest software services exporter, reported a 10% quarter-on-quarter decline in net profit for the three months ended in June, to 59.45 billion rupees. The steepest slide in two years came as a stronger Indian currency and wage hikes ate into operating margins.

Chandra said the days of double-digit growth are over for the industry, and that 7-8% will be the new normal. He foresees IT spending increasing from October on, but margins will start improving only when digital technologies constitute 50% of the companies' revenues.

As for Infosys, Angel Broking's Sarabjit Kour Nangra said that while Sikka's exit is a setback for the near term, the board has the strength to overcome it. Still, the uncertainty hit the company's stock price hard: Infosys shares ended Aug. 18 nearly 10% lower, at 923.10 rupees. The price dropped further on Aug. 22, hitting a 52-week low of 873.50 rupees.

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