The dilemma

Should the new CEO be the face of Infosys or should it remain a faceless company?

By Mohan Sule
The surgery was quick but not painless. A year after being recalled from retirement to head the company he co-promoted, N R Narayana Murthy is making his second exit, scotching apprehension that he was grooming his son to take over. The nearly dozen top-deck departures appear to be the collateral damage of the shakeup to allow the new CEO and MD to begin on a clean slate. Is the worst over for Infosys? Shares looked up on buzz of a buyback and in the run-up to the appointment of a new captain. It is now clear that Murthy’s comeback was necessary for a company that had become complacent. Since his stepping down on 20 August 2006 on attaining 60 years, the stock had underperformed the broad market, the sector index as well as its peers till Murthy returned last year. Since then, it has outperformed the market though return lags in comparision with competitors. A stock’s behavior against the broad benchmark is a widely-used criterion to measure a boss’s success. On that count, Murthy has not disappointed. Nonetheless, it is puzzling why the market panicked at the high-level resignations. The executive turmoil should have been greeted favourably as it enabled the outgoing executive chairman to pick the best person to lead the company. However, the market has greeted the end of Murthy’s short reign with relief, a surprising reaction to a person who was the face of Infosys.

This throws up a contradictory picture of investors wanting stability as well as restructuring in troubled companies. Mass exodus of senior managers is frowned upon but low- and mid-end staff retrenchment is welcomed as a cost-cutting measure. The attitude to promoters, too, is ambivalent. Murthy’s comeback was met with concern that the symbol of India’s outsourcing sucess was going to become one of those family-run firms. Yet, investors derive comfort from promoters holding sizeable equity, which ensures that they remain engage with their businesses. No one expects promoters owning a controlling stake of a company going through a rough patch to step aside. Imagine the market reaction if Anil Ambani were to relinquish charge for the losses at RCom or Ratan Tata were to step down taking responsibility for the misery of the shareholders of Tata Motors and Tata Steel following the costly acquisitions of UK-based Jaguar and Land Rover and Corus. Rather than viewing Murthy’s return as essential to put the company back on track, it was construed as a reiteration of its slide. This is in contrast to the reaction to the sacking of founder Steve Jobs by Apple’s board for his expensive habits. One reason for the market’s different outlook to companies controlled by families and those run by managers could be that most old-fashioned groups are in commodity businesses, where cyclical ups and downs rather than the management style determine profitability. No wonder the FMCG and pharmaceutical sectors, where marketing and product reinvention are crucial, are dominated by MNCs and first-generation entrepreneurs. The governance bar for these promoters is set higher than for those in the business where proximity to the government is important.

Circumstances also play a role. Murthy retired in 2006, when the bull run was gaining momentum. Three years later, the global credit crisis hit Infosys’s main market, the US. There hardly has been a blip since Tata stepped down in favour of his chosen heir Cyrus Mistry, whose ascension coincides with global recovery as is evident from the turnaround in the market’s sentiment towards Tata Motors and Tata Steel. Apple’s stock has lost luster partly after the founder’s demise and also due to intensifying competition. At the same time, Samsung has been going from strength to strength despite lack of name recognition for its CEO. Why is this so? Apple is known for its innovations, while Samsung caters to the cost-conscious market with me-too products. When the Indian tech sector was in the nascent stage and corporate governance unheard of, the differentiator was the credibility of promoters to deliver quality services on time. At that stage, Murthy’s pioneering practice of making employees stakeholders and nipping the prevalent fashion of inducting family members and relying on meritocracy instead resonated with investors in the first flush of liberalization. Outsourcing is now becoming a generic business, where the focus is on clinching deals while protecting the margin. So Infosys has to decide whether it wants to be another Apple closely identified with its promoter but known for its innovations or another Samsung, where the systems are so well entrenched that who the CEO is hardly matters.