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Lessons from the Infosys Drama

It finally boils down to cutting losses with an investment gone bad than hoping for things to recover on its own
By Narayan Krishnamurthy | August 24, 2017

For an entire generation, the idea of Infosys was one of pride and respect. The company epitomised several unheard of things in the early 1990s after it got listed. Terms like disclosure and transparency, responsibilities of management, professional board of directors, and shareholders’ rights and equitable treatment were all phrases that are spoken of today by all, but flashback 25 years ago, and it was an Uber phenomenon – very different, refreshing and something completely unheard of at that time. It was also a company that made many millionaires of its employees across levels.

In that sense, all the noise around former Infosys CEO Vishal Sikka’s exit and the much public spat between founder N R Narayana Murthy (NRN) and the board is a sad story. The company’s reputation is in tatters and everything that it stood for is basis of debate and doubt. For all the talk around exiting Infosys, founder NRN could perhaps never leave Infosys with anyone else.

He stepped down after a long stint as CEO and passed the baton to other founder members, before completely exiting the company. But, he did make a comeback a few years ago, with his son in toe—a move that cast the first dent on the transparency and merit-based running of the company. Yes, one would argue that his son did not take up any executive role, but, that is different from staying away completely from the company. Anyway, Vishal Sikka happened to be the first non-founder CEO of the iconic Infosys at a time when it was not in the best of its health.

In fact, Infosys was no more the technology bellwether stock that it was for years, as it had ceded that spot to TCS during the tenure of S. Gopalakrishnan. In fact, when another co-founder stepped into the top role, things got far worse, which was reason enough for NRN to come back to rescue his baby for a brief period. If one goes by the performance of the company under Sikka, it in fact did bring back some respect and also started to bridge the gap with TCS. Here are a few lessons that every investor can take a leaf out of the unfolding drama.

Lesson 1: At some level, all of us are prone to behaviours and emotions that can lead to poor decisions. Financial decisions could be worse if one bases them only on emotions. For instance, one of the most common pitfalls is to exit an investment as soon as it starts falling. Check if the fall is due to any fundamental reason or is it riding on some hysteria. If it is the latter, you will be better off retaining your investments.

Lesson 2: Hoping for things to get better is like praying for a miracle. Miracles are not common, so do not expect things to change just because someone exists or someone comes back to helm the operations. The talk of Nandan Nilekani’s return is only reinforcing a myopic view that the company will regain its lost glory just because a founder is back to run it.

Lesson 3: The current outcome is due to poor succession planning. The company for all its claims of corporate governance and merit over everything else has repeatedly failed to find a strong leader to run it. In a lot of ways, the founders muscled their way into the corner room to run a company, just because they had started it. Yes, things were good when Nilekani was around, but that was over a decade ago and a lot has changed since then.  

Lesson 4: Too many cooks spoil the broth—having a board with some impeccable personalities is one thing, but the board overtly listening to the founder’s concerns, was bad for the running of a company. It was worse because the founders wanted to be classified as ordinary shareholders and not promoters.

Lesson 5: Culture mismatch resulted in having a CEO who was not stationed in India and going purely by costs, was an expensive resource in comparison to his predecessors. This public information did not go down well with the founders and there were several investors who felt it was a costly proposition. The situation was akin to how a retired very senior citizen who for decades has kept his money in the bank, one fine day decides to put it into equities at the top of the stock markets, only to suffer a correction within weeks.

Lesson 6: Stock movement is not all about finances, it is also about emotions. The fact that the Infosys stock tanked about 10 per cent the day Sikka resigned is testimony to how markets behave. The company is currently headless and provides a wonderful opportunity to risk takers, who are confident that the stick price will shoot up and it is just a matter of time before that happens. Use the current crisis as an opportunity to make big gains from this old performer.

Remember, it is nearly impossible to avoid losses altogether, but it is possible to minimise them. Cutting losses may seem an obvious thing to do, but it’s less common than you might think.

 

nk@outlookindia.com

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