As if Monday morning blues aren’t enough to rock one’s world, folks at Infosys had it worse on Monday, 21st October. At about 9 am IST, the media reported another round of supposed corporate governance issues at Infosys. And post that, my phone never stopped buzzing. Nearly everyone (clients, media and investors) wanted to know whether or not the allegations were true, what will be the implications and will clients run amok. Let’s put this news in perspective.
First Things First, No Company’s Processes Are Fool-Proof, And Many “Get Creative” When Reporting Numbers To The Street.
Yup, you read that right. Any professional who has done their time in strategy, sales, finance or any senior management role can confirm that creative financial techniques are often used to report numbers in a way that comfort shareholders and the street. A classic example of this is companies having to report numbers under new umbrella terms like cloud and digital. We at Greyhound Research have seen multiple instances where technology vendors have rebadged traditional contracts under the umbrella of digital. Hence the assertion.
Fact is, no investor or financial analyst wants to hear that the company isn’t ready and will in the first instance downgrade share price the moment it gets a whiff about the company’s inability to deliver on new-age technology. The situation is worse for traditional IT services firms that are having to walk the fine rope of delivering robust numbers while dealing with traditional strategic outsourcing contracts and dated skills. In our ongoing tracking of the market, we at Greyhound Research believe most traditional IT Services companies are relatively slower to change on account of well-established (albeit dated) services and practices that continue to deliver the large chunk of numbers.
Having said that, these companies are also pulling their weight behind new-age technologies and investing in skills to build practices that are important to be in line with the changes at the clients’ end. Naturally, this balancing act between the traditional services and new-age competencies is no cakewalk for these traditional IT services firms and creative financial techniques are the most natural way out to keep investors at bay while the company quietly develops skills internally to be relevant in the new world of digital. Think of it like a duck paddling hard below the surface while appearing calm above the water.
Circling back to this second case of supposed governance issues at Infosys, we at Greyhound Research believe the industry must show restraint and wait for the company to report the outcomes of its due diligence process. Any company of the size of Infosys is governed by an independent director and a committee that looks into such cases. Hence, before any of us announce a verdict on the overall level of ethics at the company, we must wait for the results from this committee.
But Then, Any Large Global Corporation Worth Its Salt Will Toe The Line With A Whistleblower Complaint.
Infosys is a publicly listed organization that is governed by strict compliance laws both in the US and India. A company of this scale fully understands the need to be on the right side of the law since any slip in governance will attract strict action from the likes of Securities Exchange Commission (SEC).
One of the areas where companies of this scale are cautious about is whistleblower complaints. In this specific matter, Infosys has done the right thing by announcing its intent to deal with this complaint objectively and ensure independence by recusing the CEO and CFO from this matter. Per a statement by the company, the Audit Committee is in consultation with independent internal auditors (Ernst &Young) on terms of reference for their prima facie investigation. Also, the company has announced its intent to retain the law firm of Shardul Amarchand Mangaldas & Co. (starting 21st October, 2019), to conduct an independent investigation.
We at Greyhound Research believe these steps are in line with the standard protocol that publicly listed companies ought to follow when under scrutiny for such a topic. While the objectiveness on behalf of Infosys is appreciated, we at Greyhound Research believe that the company ought to handle this case a little differently compared to the last case where it refused to release the report of the audit. This is a critical ask from many in the investor community who felt at a loss last time around when the company didn’t release the audit report.
So, Will The Clients Run Amok?
We at Greyhound Research believe the answer to this will much depend on how Infosys deals with the situation this time around. If the situation is dealt with transparency and with visible commitment to change in governance and broader policies, the clients will be happy campers.
What Must Infosys Do To Avoid Such Allegations In The Future?
With business conditions changing rapidly, traditional IT Services firms (including Infosys) are fighting too many battles at the same time. These battles span reporting sales figures with sufficient growth, healthy profitability, watertight governance and most of all, building new capabilities and practices to be relevant in the near future.
Truth be told, these are tough battles to fight on all accounts and Infosys is not alone. Companies like TCS, HCL and IBM have all fought their fair share of battles in the recent past. The most prominent case worth mentioning is of IBM that reported 22 consecutive quarters of shrinking sales and only reported revenue growth in 2018.
We at Greyhound Research believe the IBM case is worth learning from for Infosys and all others in the fraternity. Despite being a publicly listed company, IBM managed to change course and return to growth. Yes, it took five and a half years to return to growth, but the company’s long-term bets on Cloud, Cognitive, Artificial Intelligence and other new-age technologies is beginning to pay off. And all this while being in the public eye and not going private. This couldn’t have been possible without the support of Independent Directors that also believed in these investments.
We at Greyhound Research believe Infosys needs to follow suit and make suitable adjustments to its board of independent directors, both in terms of the best practices and the current mix of skill sets. Any forward-looking board includes a mix of new-age and traditional skills and governing policies that allow for both, focus on long-term bets and a room for short-term slips on accounts of sales, profitability and other such metrics.
Sanchit Vir Gogia: Sanchit is the Chief Analyst, Founder & CEO of Greyhound Research, a Global, Award-Winning, Technology & Innovation Research & Advisory firm. To read more about him, click here.
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