The 36th Annual General Meeting (AGM) of Infosys was significant in more ways than one. To begin with, it marks the last AGM that will be chaired by R Seshasayee, who is currently the Chairman of the Board. Mr. Seshasayee turns 70 next year and as per the internal rules, he will be stepping down from the post. But the AGM was also significant for the fact that the promoter shareholders of Infosys including Murthy, Nilekani, Sibulal and Kris chose to skip the AGM. The promoters were unhappy with the style of the board’s functioning and had expressed the same on numerous occasions. Here are the key takeaways from the 36th Infosys AGM…
It was always doing the rounds that IT companies were laying off large numbers of people across functions. With weak IT spending and thinning margins in the traditional businesses, it was always going to be difficult for Infosys to sustain its large workforce. The last nail on the coffin, probably, came from the US H1-B visa restrictions imposed by Donald Trump. IT companies realized that in the new dispensation the model will have to change. Infosys has confirmed in its AGM that they have actually laid off over 11,000 employees, which was a direct outcome of the greater focus on automation. From the wordings of the AGM speech it does appear that it may be the beginning of a series of such lay-offs at Infosys.
The Infosys AGM has obviously taken a cue from the objections raised by the founder promoters pertaining to the huge compensation differential between the top-management and the lower level staff. Murthy had specifically objected to the liberal cash compensation given to Vishal Sikka the CEO and Pravin Rao, the COO as well as the severance pay to Rajiv Bansal. The Infosys AGM has confirmed that the compensation of senior management of Infosys has been largely restructured to include a lower level of fixed component and a much higher proportion of variable component and stock options. Both the variable component and the stock options will only be payable if the company actually starts performing better on critical financial parameters.
The idea of special dividends and buyback came up after the promoter shareholders started demanding that Infosys distribute some of its surplus cash to shareholders. Buybacks offer a more tax-efficient way of rewarding shareholders compared to special dividends as these dividends will be subject to tax in the hands of HNI investors. Out of its total cash stash of $4 billion, the Infosys AGM has confirmed that $2 billion will be distributed during the financial year 2017-18. However, the manner of the distribution (special dividend or share buyback) has not yet been clarified. Recently, Cognizant and TCS had announced a buyback of shares to reward shareholders.
The fact that the core promoter group consisting of Mr. Murthy, Nilekani, Sibulal and Kris opted to avoid attending the meeting indicates that the all is not well between the promoter group and the board. While the board has addressed the promoters’ key concerns on executive compensation and profit distribution, the aspects of corporate governance are still to be addressed. The bigger challenge, that has not been addressed in the AGM is the setting up of an institutionalized process for incorporating the promoter inputs through a mutually acceptable forum. That will be in the larger interests of the promoter group as well as the Board of Infosys. Even the institutional shareholders of Infosys, who own over 70% of the company, will prefer if an institutional mechanism for engaging with the promoters is put in place. That remains a challenge for the Board and has not been addressed in this AGM.
The big question still remains as to who will take over as Chairman of the Board of Infosys once Seshasayee moves on next year. It may be recollected that the board of Infosys already has a co-chair in Ravi Venkatesan. Incidentally, Ravi is the former head of Microsoft India and seen to be closer to the promoter group. His elevation to the role of the next chairman after Seshasayee appears to be the most logical option. Hopefully, that should enable a smoother relationship between the board and the promoter group, which will be in the larger interests of the company.
But for now, the real challenges for Infosys will be outside what has been discussed in the AGM. The big challenge remains the business environment for IT companies. Traditional IT spending is compressing and Infosys needs to leap a few paces to catch up with TCS on the digital side of the business. Optics apart, this business challenge is likely to engage the board much more keenly in the coming year.