Exorcising the promoter fever will not hurt

Exorcising the promoter fever will not hurt
Facing up to the past is the best insurance for the future as some realise. The latest round of promoter share sales at Infosys left the markets in disarray with $2 billion being knocked off the market capitalisation of the once hallowed bellwether.

Promoters diluting their shares in small, meaningful doses has been happening at the company for quite a while, though the latest round has been noticeable for its timing. A non-promoter CEO has taken charge for the first time, the stock has seen smooth sailing, so pray why?

For, the Infosys case has always begged the question of whether unhealthy performance by promoter-guided managements actually deserves shareholder trust. Infosys had heavily lost ground against IBM, Cognisant and even scam-hit Satyam (now Tech Mahindra). Infosys co-founder and then CEO S D Shibulal blamed market slackness and demand famine for the lacklustre performance of the company quarter-upon-quarter, though it was amply clear that the troubles were more internal. And, investors, backed by analyst angst, gave the thumbs-down to the company stock in no uncertain terms.

Last week, the same investor fretted over three promoters collectively selling Infosys stock worth $1.1 billion. This defies logic since foreign investors participated in a big way in the promoter share sale, nearly 80 per cent. Apparently, in the collective investor consciousness which logically supports independent and impartial decision-making in the running of a company, the charismatic shadow of the promoter exercises more influence than the niceties of market performance.

Letting go

The carefully built aura of the larger-than-life promoter in Infosys was as unique a phenomenon in the Indian corporate landscape, as its ability to consistently reward shareholders with well-timed bonuses and stock splits. But for over eight quarters from 2011 to mid-2013 neither of the two happened. Investors and analysts had enough cause for complaint.

Promoter exits in companies are not common, and in the Western hemisphere, are often viewed as a necessary eventuality of years of excessive management control and board-level cronyism, resulting in company performances deteriorating, often beyond repair. In many privately held companies, the infusion of fresh talent has often resulted in the board of directors rescinding on its earlier trust and the promoter-led managements reasserting their iron grip over company affairs.

Whither shareholder trust when promoter CEOs could not really fathom how the market had changed and what it took to actually imbue their traditional services model with the right value-adds and retraining for employees? The return of the promoter in the person of co-founder N R Narayana Murthy did serve to reinforce trust in the founding management, but the issue of perpetuating control by being part of a founder genetic pool still rankled with Infosys shareholders, and importantly, the analysts. Murthy took the cue, called in SAP veteran Vishal Sikka as CEO and left as briskly as he walked back in.

With Sikka’s return and the stock showing strong signs of stability in the last few months, the gameplans of Infosys 3.0 and the Sikka-era Infosys ‘Next’ do not look too different, though the stock has so far risen 23 per cent since he was named CEO in June. But the shareholders can perceive key changes being brought in on how projects are to be approached as not just deliverables, but as strong technology plays for company and client alike. “Design thinking” has caught the fancy of Infoscions and investors alike, but a true mindset change comes with retraining and projects which will tap high-end programming skills and constant knowledge upgradation of employees, not static, low-end coding.

Sikka’s plan to stick to the company’s bread-and-butter model of pushing for people-intensive system integration and application development projects may not really help push a design-oriented services mindset among many Infoscions. The company relies hugely on Sikka’s vast and broad range of client contacts.

But these will have to be monetised by better evangelising Infosys’ wide range of services and the lower cost of delivering them, while at the same time being competitive against Cognisant and TCS on billing and retaining the trust of its clients in its platform, design, product development and consulting capabilities.
Lateral thinking will be as crucial as design thinking going ahead. While crafting a new generation of leaders at its Leadership Institute, Infosys will have to imbue in each of them the determination of its promoters and the vision of a Lee Iacocca or Andy Grove, two paragon non-promoter CEOs.

Truly independent?

It is a whole new set of challenges which Sikka has already sunk his teeth into. The first quarter following Sikka’s entry has been largely a windfall from carryovers of previous quarters and project overflows from older projects. The path ahead will require a combination of his will, wisdom, experience -- and promoter detachment from day-to-day company affairs.

The promoter group has down the quarters diluted their equity as part of pursuing their personal philanthropic, social and personal investment agendas. Investors or the lay public can have no quarrel with this or with foreign shareholding in the company rising. With over 45 per cent of its total equity held by foreign institutions, Infosys has, in a sense, always been a foreign-owned company.

The will of the promoters to pursue challenges beyond Infosys is a novelty in corporate India where promoters who pursue their personal passions and “gut feelings” with scant respect for shareholder interest have run down cash-rich holding firms without worrying about the consequences on their employees and partners. The names are known here and for good reason withheld.

The key is the toothlessness of independent directors from large public sector banks, insurance firms like LIC and others who hold substantial stakes in listed private companies. However, their nominees have next to no powers in opposing the decisions of managements, and often, bend backward to accommodate investor-unfriendly moves from promoters.

Indian companies, even the listed one, have had a particularly tawdry record in recent years. Sebi is still in the process of deciding the limits for independent director activism, but things may get moving in this direction if the promoters decide their limits on their own. Infosys is a good start in exorcising the promoter pyrexia. For other Indian companies, it will be a slow and messy struggle.

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