Infosys needs to make CFO payout probe public: Mohandas Pai

Pai said that a company's Chairman has to be an independent person and ensure that governance is at the highest level and that creation of shareholder value has to be the objective of the board.

Corporate governance is an issue of trust and that has to be solved – trust has been broken, which needs to be bridged, says Pai. He believes that to regain the trust the board has to be restructured.

For the good of the company, it is time for the founders and board to come to an agreement and improve transparency, says Pai.Below is the transcript of Mohandas Pai’s interview to Shereen Bhan and Prashant Nair on CNBC-TV18. Shreen: Important to note now is what the road ahead looks like. Mr Seshasayee there saying that a lot of these issues have been dealt with, we believe that the severance issue is now a dead issue. We will put a policy in place to ensure that none of this is repeated in the future. We value different points of view. We have appointed Cyril Amarchand Mangaldas to work out a framework of governance. Do you believe that this will now bring to closure some of the issues that have concerned founders and forge out a path ahead? A: Just a word on the CFO issue. What has been said in the press conference is not right at all. Let me give you data. In October, 2015 a press release was made saying that the CFO is stepping down voluntarily and the CEO said nice things, the CFO said nice things. No disclosure of any severance package was made. Severance package is always given when a person goes involuntarily, not voluntarily. And again, in the month of December of the December quarter, no disclosure was made. Then a newspaper item comes out and in response to this they spent so much of money. The key question is who negotiated this package? Was it the nomination committee, nomination remuneration committee, combination of that, did they negotiate, did they approve that? Did the audit committee talk to the CFO? Did they approve that? The board put it down in the month of October when the whole thing was signed. And the severance package, contrary to what the company is saying is separate from the employment package. The employment that we meant that nobody has more than three months, therefore the three months separation in India. Nobody has that. I do not know if anybody has that. Now the signed separate agreement, you do not sign the severance agreement when the person goes voluntarily. So there is something that has happened for him to go. And most people know the reason why it happened. The Chairman has got to be straight and honest and say what happened and say that let us remedy the situation. This is not good corporate governance. There was a system weakness, there has been a governance weakness, it is best to accept yes, we have made a mistake, we will remedy the mistake. We accept the suggestions given by Narayan Murthy and we will go along, we want to work together. But instead of justifying, what has been done is totally wrong. Shereen: While they will continue to justify some of the decisions that were taken and you may not necessarily agree with the justification, but let us talk about the road ahead because this sort of public battle, this public airing of differences is not good for the company, it is not good for the company’s future, it is not good as far as shareholder value is concerned. So, if I were to ask you about what this governance framework that Mr Seshasayee has said that Cyril Amarchand Mangaldas is going to put together, what would you expect to see, what should it look like? A: What kind of governance framework will any lawyer put in? The corporate governance norms and all, the Chairman has to be an independent person, the Chairman has to have a counter point, the Chairman should make sure the CEO is under control, the board has to make sure that governance and management is different. Governance is at the highest level. Creation of shareholder value has to be the objective of the board and the board has to interact with shareholders. Everybody knows this, it has been common. I do not know what framework they are going to put there in future. Shereen: Yes, there are shareholders which include the founders, but there are other shareholders, for instance, if you look at what investors are saying, open Oppenheimer and other funds coming out in support of Vishal Sikka, in support of the current management strategy, and I understand that the founders are not questioning management strategy as much as they are questioning governance issues. But investors at this point in time believe in the Infosys strategy, believe in the current management strategy to take the company forward. A: This is about governance, not about management. And about management too, I heard the CEO talking about in the annual conference and he said productivity has gone up, 17,000 people are hired one year, next year 5,000. But per capita income has come down in the last six quarters by 7-8 percent, so productivity is still not kicking in. the company has to be upfront, honest and say what is the issue and not bluster. Yes, some of the shareholders have said they support the management, but the Oppenheimer gentleman had no business talking about any other people. He must talk for himself what he wants the company to do. People who are 13 percent have a right to talk. And this deep governance issue, governance issue raises the question of trust and that matter has to be understood. Now the future is very clear. The board has to be restructured, confidence has to be restored in the board and this matter to an independent investigation has to be put behind and a proper structure has to be known. Shereen: An independent into what? A: Independent investigation into what was paid to the CFO, why it was paid. Shereen: There was an investigation that was done by the company. A: Yes, that has to be made public. Let them make it public. If the investigation is made public which is good corporate governance, the matter will be set to rest. If somebody says something, you have an investigation, let the investigation be made public. Put in the public domain, why sit on that? Corporate governance is a question of trust between the board of directors and all of the people. The trust has to be restored, trust has been broken people have to accept they made a mistake, they will not do it again, they will get along and we will settle down.Shereen: So, you are saying that in order for the trust deficit which has arisen to be bridged, it is imperative that the board is restructured? Pai: Yes. Shereen: I am given to understand from what I heard there from R Seshasayee that that process is what Cyril Amarchand Mangaldas has also been tasked with – expansion, reconstitution. He did talk about several people retiring. In fact Seshasayee’s term itself ends in 2018. However to avoid what we have seen happen, if I could ask you for specifics, what is that you would like to see being put down because this business of cost to value policy for instance we are now discussing a chartered flight taken by CEO, how much it was used and so on and so forth? Let us take a pragmatic approach, we are living in competitive times, how should this cost to value policy for instance be put together? Pai: The question was not a chartered flight taken by the CEO. The question was, was the chartered flight taken for CEO with his family onboard? You don’t use corporate resources for personal purposes, that has been an old established practise. We never took our wives on business trips, we never shared any room with them without paying for it. The value system is very well set down, value system is very articulated, this is all there in the system and they have to follow it. Between personal requirements and corporate resources there was a Chinese wall. Do not use USD 650 thousand for security for your house without a board approval. Without the shareholder approval you do not do certain things. It is up to the chairman to put his foot down and say it is not done rather than support somebody who is doing something which is wrong. These are all value systems which are already there. It is nothing new, it won’t require any lawyer to come and tell you these are the value systems. The company has a deep value system, it has worked for 20-25 years with that value system and now you have an outsider and you have a weak outsider and he does not take care, what do you do? Everything will go for a six. I don’t want to tell you some of the things of what is happening there, I don’t want to tell you that because I love the company, it is my company. We spent our blood, sweat and tears building it up, travelling in the economy, staying in crappy hotels, putting the cash in the banks and I just heard the chairman of the audit committee say, we have seen the cash requirements for transformation, I think it is adequate, I don’t think they made a study. Why tell us stories? There is USD 5.2 billion of cash, every year USD 2 billion is generated for the next four years, USD 1 billion goes for dividends, that means you will end up with USD 9.5-10 billion by 2020. Your USD 1.5-2 billion may go for acquisition, that is what the CEO has said in his one of his press statements. So, you have USD 7-8 billion lying there. At a time when the stock price is down, capital allocation is required. Look what Cognizant did to Elliott. Look at what Accenture has done over the last 5 years. Is it such a big thing and what motivated the audit committee chairman to come and say we have seen transformation? What transformation you require so much of cash? I was the CFO, we never had 50 percent of the annual revenues as cash. It is 50 percent, it is excessive. If there is excessive cash, that needs to make more adventures. Now you have USD 20 billion target and if you are not able to reach it, somebody will come and say let us make a USD 5-10 billion acquisition, let us put a cap. That will hurt the company. You need to have a proper capital allocation plan, you need to be upfront with the shareholders, not go on rubbishing the shareholders whenever they ask for something. I wish we had institutional investors in India like Elliott Capital. Elliott Capital bought the stock and demanded performance from everybody. I wish our institutional shareholders had more guts, they stood up and said this is not good governance, we want to look at allocation and please do it. I wish they do it for better corporate governance. You can’t push it all under the carpet, make wishy-washy statements, you must stand up for the truth especially for India’s best company. Prashant: I have interacted with you when you used to head the finance function in Infosys and that used to be the question even then – why not spend the cash? The company has grown larger, the cash pile has also grown larger, the question is exactly the same as then as now. So, why is it any different? Pai: In those days we were growing at 20-25 percent than 15-20 percent. When you are growing at that pace you require something. Now were are growing at 7-9 percent and growth is not going to go to 15-20 percent in the near future organically. Prashant: Don’t you think all the more reason to spend the cash you have even more carefully? Pai: All the more reason to buyback and to make sure that shareholders get an EPS accretion of 11-13 percent. Shereen: To be fair, this is not an issue that has been raised by the founders and this is not a governance issue. You have been seeking a buy-back since 2014 and as Prashant pointed out, question were asked of you when you were the CFO on capital allocation as well. A: Capital allocation is fundamental to corporate governance. That is the most important task of the board. Shereen: But it is not an issue that has been raised in my understanding. This is not an issue that has been raised by the promoters. A: This has not been an issue that has been raised by the promoters, the promoters have raised two major issues. One was the issue about the huge amount of money to the CFO for which there is no logical explanation and the second is the issue about the huge salary paid to the CEO of USD 11 million for which targets have to be set every year and if it is not reached every year, it should lapse. That has not been made clear at all. These were the two large issues and you must remember, software engineers who started at the company today have not seen an increase in their compensation, starting compensation for the last seven years. Now the culture of the company was that you paid more money to the people at the bottom, the rest to the top. The whole thing is turned topsy-turvy. It is hurting the morale of the people, there is many other things. The CEO issue is a signal of what is happening in terms of compensation for certain people. They have to take is sensitively. Look at that and make sure that there is fairness, there is a meritocracy. When you promote people, you do not promote a class of people two times, three times, in 2-3 years because they are close to you and do many other things. And you have to have proper processes. All that have been broken in the last two years. Prashant: Two very short questions. One, did you find it surprising that Mr Seshasayee essentially fronted the whole press conference? Dr Sikka came in at specific points and when he came in, he made sure he said that all is happy between him and the founders. And my second question is at one point, there was a specific question that was asked to Mr Seshasayee saying that there have been some reports that founders are not happy with him, the Chairman of the board. You said the board will have to be shaken up. Were you suggesting anything specific there? A: Unless people accept that they made a mistake and give a logical reason, they are not speaking the correct thing. And it is very important for a Chairman of the company to stand up and do that. Please remember, in 1995, when we lost GE account, everybody went before the public, stood up and said clearly what happened. We are very upfront. Infosys knowing by being upfront, you cannot cover up by giving some vague statement. And this is a matter between the shareholders and the board, not a matter between CEO and the shareholders, so the CEO should not be answering and I think that is the right thing to do. But the Chairman should have been upfront and should have clarified what happened. There is a report made about the payment to the CFO. Let the company make it public. There is no harm absolutely, right? Shereen: That is what Mr Murthy suggested in his statement as well today that there should be transparency. But let us talk about, as I keep going back to the road ahead. These are difficult times for the Indian IT industry, it is difficult times for the company that we are talking about in specific as well, as part of this transformation that is taking place, the disruption that is taking place. At some level, investors would be keen that this is put in the past and the company now stays focused on the task at hand which is to grow profits and to grow revenues. Do you think that it is now imperative to sort this out, resolve these issues, arrive at some conclusion and move forward on business? A: I totally agree with you at this time that both parties, the founders and the board sit down to work out an agreement and get along with it and make it very transparent and known to everybody. There are no vested interests. Both people are on the same side, but the board has to reach out. For example, Murthy has been raising this question since May, 2015. Look at the Elliott transaction. In three months’ time, they sat down, they settled it and they went along. From May, 2015 till the whole matter came up with the media, it was blown up, what was the board doing, what the Chairman doing? Shereen: It was 2016?A: 2016, sorry, May, 2016, because he resigned in October, 2015. May, 2016 the matter was raised. May, 2016 to January, 2017 is a long time. Look at the Elliott thing. I am just again and again coming to Elliott because Elliot Capital and Cognisant had demonstrated how to sit down and resolve issues in boards and shareholders. The right thing to do there is sit down at the table, decide it and do it. Not appoint a lawyer, not dilly-dally, not say I will give reports and the lawyer should advise. Everybody knows corporate governance, the systems have been set, it has worked beautifully for so many years, why is it that it has gone bad in the last two years? That is the answer they must give and restore confidence and get along with business. All people, the shareholders want the company to do well, to become a star again and to grow and to have a credible plan to reach that USD 20 billion by 2021. The plan has to be credible and explain to people so there is credibility. The whole thing has to be done. It cannot be wishy-washy and just make some statements.