Perspectives from ISB

This article was first published in on August 21, 2017; Authors- Nupur Pavan Bang and Kavil Ramachandran

Founder shareholders have the right to question the CEO if the performance is not up to the mark. But they must realize their special status as the “founders” and choose the forum wisely.

Unceremonious exits of Cyrus Mistry and Vishal Sikka have sparked the debate on whether it is difficult for the professional CEOs of firms with ‘legacy’ to perform and work.

There are ample examples against it: AM Naik to SN Subrahmanyan at L&T, YC Deveshwar to Sanjiv Puri at ITC, KV Kamath to Chanda Kochhar at ICICI Bank and S Ramadorai to N Chandrasekaran at Tata Consultancy Services are just a few examples of CEOs who served/are serving companies with ‘legacy’ with aplomb. It cannot be generalized. Even in mid-sized firms like Jyothy Laboratories, professionals like Ullas Kamath have made their own identity aside from the founder M P Ramachandran.

The CEO is usually appointed after a lot of due diligence and search. Compatibility of the CEO with the values and culture of the company is an important aspect. So is the ability to take the organization to the next level. There may be many decisions that need different approach than what were taken earlier. In pursuit of long-term performance and transformation of the company there may be a path that was not trodden by the predecessor that is needed to be taken now. Different does not mean wrong. To question the decision of the CEO at each step and not allowing him to work without a sword hanging on his head is unfair and undermines the very selection process.

Passing the baton

Promoters of family businesses often find it difficult to pass on the baton to their successors, especially if the successor happens to be a non-family professional. As a result, transition in leadership is one of the biggest challenges faced by family businesses. While finding the right successor is one part of the challenge, the preparedness of the founder to retire and letting go is the other part. Continuation of the legacy and respect for what has been achieved in the past is healthy. But continued need of the founder to feel acknowledged, useful and important is not.

Succession planning

Infosys was one of the first companies in the country to follow the highest standards in corporate Governance. They faltered in succession planning though. Founders took turns to become the CEO of the company irrespective of whether they were best suited for the job or not. Many good senior executives left Infosys due to meritocracy being overlooked in favour of founders. That was perhaps one of the reasons that when the last of the founder CEO, SD Shibulal, expressed his desire to retire, the Nominations and Governance Committee of Infosys could not find anyone within Infosys to lead the company.

Even if it is assumed that Mr. Murthy has valid concerns about the governance standards at Infosys stooping after the founders stepped down voluntarily in 2014, even if it is assumed that the current board at Infosys is not upholding the core values of governance and transparency set by the founders, what cannot be denied is that the founders did not nurture a successor while at the helm of affairs. The entire Infosys and Tata saga points to the importance of succession in organizations and that the incumbent CEO or the founder do not spend enough time to tackle the issue.

I, me, myself

One of the most important life lessons that the founders and the CEOs should learn is to let go of ‘I, me, myself’ syndrome. The moment one starts taking credit for everything they start alienating people. That is perhaps what is happening with Murthy as well. In his latest letter to the media as well, there are numerous references to how things were great when the founders were at the helm of affairs. While many of his concerns may have merit, the tone of the letter alienates him from the readers and generates sympathy for Sikka.

Right forum

The founder shareholders have the right to question the CEO if the performance is not up to the mark. But they must realize their special status as the “founders” and choose the forum wisely. Else it becomes a case of ‘trial by media’ for the CEO and as Sikka said in his resignation letter to the Infosys board, “This continuous drumbeat of distractions and negativity over the last several months/quarters, inhibits our ability to make positive change and stay focused on value creation”.

Non-founder shareholders with significant shareholdings

Deutsche Bank Trust Company Americas and the LIC of India are the largest shareholders in Infosys as individual entities. Qualified Foreign Investor together hold about 38 percent shares, Insurance companies hold 12 percent and Mutual Funds hold more than 8 percent shares. Institutions collectively own about 59 percent shares. Assuming that most of these institutions have invested for the long-term, they are expected to have an in-depth knowledge of the company and seek clarifications from the board from time to time. It is difficult to believe that these institutions would blindly continue to be invested if there were governance lapses at the company.

In conclusion, the problem is not with companies with “legacy”. The problem is with people with an extended sense of “legacy”. When people start to consider that the company is an extension of their own identity and refuse to let go even after they decide to bring in a professional CEO, difficult situations arise.


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