By Asish K Bhattacharyya
As reported widely in the media, CLSA Asia Specific Markets, a brokerage firm, had written an open letter to Mr. S.D. Shibulal (the CEO and MD of Infosys) raising a few important and relevant questions on the company’s strategy. For example, it has questioned the marketing strategy, including the pricing strategy, of the company on the face of the changing business environment and the rationale for holding huge amounts in cash and liquid investments without having a clear road map for investment.
CLSA had claimed that it was just acting as a channel for communicating the consolidated thoughts of institutional investors. It explained that the letter was an effort to understand why have shareholder returns trailed sector peers across time periods over the last 4 years, something that is quite unprecedented in the history of the company. The reaction of Infosys CFO V Balakrishnan, to the open letter, was quite interesting. As reported in the media, he had said that the company did not want to comment on any analyst report, as those were personal views. He also clarified that the company talks to all their investors all the time and addresses their concerns. The CLSA open letter and the comments of the Infosys CFO together have thrown some important issues in corporate governance.
Engagement between investors and the management
Infosys is the torchbearer of the Indian IT industry and is highly respected for its strong corporate governance system. Therefore, quite likely, Infosys holds regular interactions with institutional investors. That is what is claimed by the CFO of the company. If it is so, why should CLSA write an open letter? One reason might be that the engagement between investors and the management of Infosys is ineffective. The second reason might be that investors never asked questions on strategies when the going was good and now the management is avoiding discussion on uncomfortable issues.
How to address uncomfortable questions
The curt comment of the CFO of Infosys reminds me the way AGMs are held in umpteen number of companies. Investors, who ask uncomfortable questions at the AGM, are dubbed as troublemakers. Companies avoid answering those uncomfortable questions. In absence of support from most of the investors, who do not have information needs and attend the AGM to enjoy the gathering, so-called troublemakers fail to gather the desired information. In the past, companies used to physically throw out those investors. This is unfortunate but not unusual. However, this does not happen at AGMs of respected companies like Infosys. The curt comment of the CFO of the company does not fit into the general perception about the Infosys’s approach towards investors. Does it signal declining respect for investors?
Companies should discuss company’s strategies in public
I am not suggesting that the management of companies should discuss company’s strategies in public. Disclosure of strategies often hurt the investors, rather than benefitting them because that might weaken the competitive position of the company. Investors expect that the board invest adequate time to audit the business model and strategies of the company. Investors’ frustration arises from the loss of confidence in the board of directors.
A case of Infosys board
The star-studded Infosys board must be doing their job efficiently and effectively. They might have taken a long-term view while auditing strategies and reviewing the performance of the company. But the market thinks otherwise. It holds the view that the company is unable to put its acts together and is operating ineffectively and inefficiently. It feels that the board has failed in enterprise governance, even if the corporate governance mechanism is operating effectively. The Infosys board should take the responsibility to bring back the confidence of investors on the functioning of the board.
Role of a independent director in a crisis situation
I think that the Chairperson of the board or the lead independent director of companies has the responsibility to engage with large investors in a crisis situation like this. In absence of such an effort, a company, whose recent economic performance is not satisfactory, is likely to come under pressure to improve short-term performance ignoring the long-term impact on the earning capacity of the company.
A company’s performance reflects the performance of the board. For poor performance, we should not point fingers only to the executive management because the board is responsible for the enterprise governance.
The million-dollar question is how intensely the board should engage with the executive management in a challenging environment.
It is an established principle that the board should not intervene in day-to-day management of the company. But, when the situation is challenging, close monitoring is essential and the line of demarcation between day-to-day management and policy initiatives may be shifted a little bit to expand the domain of the board.
About the Author
Asish K Bhattacharyya is the Chairperson, Riverside Management Academy.
Recent Affiliation: Distinguished Professor, Shiv Nadar University. Founder, Nonlinear Insights. Former Director at Institute of Management Technology.
Former Professor at Indian Institute of Management Calcutta. (Updated on August 14, 2022)
Views are personal.
Also Read: Corporate Governance 2014-15 : Retrospect – India CSR Network
