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Infosys shares tank after CEO announces resignation

August 18, 2017

Infosys Ltd.'s stock led a decline in India’s benchmark equity index Friday after Vishal Sikka resigned as CEO of Asia’s second-largest outsourcer of software services.

Sikka squarely blamed the “continuous noise” that hurt him and the company as he stepped down after months of acrimony between the board and a cohort of founders led by ex-chairman N R Narayana Murthy.

The 50-year-old technologist, who’d helped grow Infosys’ revenue about 25 percent since taking the helm three years ago, assumes the vice chairman role till a successor is found even as the industry deals with a difficult transition to digital services and data-based computing.

The resignation comes about three months after the India-based company said it would hire 10,000 U.S. workers by 2021, including 2,000 in Indiana. Earlier this week, Infosys announced a five-year agreement with Purdue University to train many of the U.S. workers it plans to hire in the coming years,

Infosys and its larger rival, Tata Consultancy Services Ltd., also face a U.S. administration that’s cracking down on the work visas they need to serve key American clients. But the hardest challenge for Sikka, it turned out, was managing the expectations of the Indian company’s iconic founders.

“I cannot carry out my job as CEO and continue to create value, while also constantly defending against unrelenting, baseless/malicious and increasingly personal attacks,” Sikka wrote on his personal blog after announcing his resignation. The noise, he said later in a video conference from Infosys’ offices in Palo Alto, California, “took a personal toll on me and the company.”

The resignation of Sikka, who joined from European software giant SAP SE in 2014, caps a yearlong battle with a billionaire who accused the company he co-founded of numerous governance lapses. Infosys openly blamed Murthy in a statement for attacking Sikka, most recently in a leaked emailreported on Fridaythat cited independent directors as saying Sikka was more chief technology officer material than CEO material.

Infosys’ shares fell as much as 13 percent on Friday, wiping $3.5 billion from the company’s market value. Before Friday’s plunge, the company had gained about 21 percent over Sikka’s tenure, outperforming TCS’ 4 percent decline.

“Murthy’s continuous assault, including this latest letter, is the primary reason that the CEO, Dr. Vishal Sikka, has resigned despite strong board support,” according to a statement from Infosys. Murthy’s letter contains “factual inaccuracies, already-disproved rumors, and statements extracted out of context from his conversations with board members.”

Murthy responded saying he was “anguished by the allegations, tone and tenor of the statements,” and that his primary concern was with the “deteriorating standard of corporate governance.” He said he would respond to the board at the right time in the right manner.

Sikka’s exit marks a blow to the company as it struggles with the evolving needs of customers from Goldman Sachs Group Inc. to Daimler AG. Sikka said on his blog he remained dedicated to the company but decided to throw in the towel rather than grapple with unspecified distractions. Co-Chairman Ravi Venkatesan later told reporters Infosys hoped to put the dispute with its founders “to bed” in coming weeks, while Sikka helps pick his successor.

Interim CEO

Current Chief Operating Officer Pravin Rao has become interim CEO until Infosys can find a permanent replacement, targeting March 2018.

The conflict with the founders dates back to a year ago and Infosys has since been battered by allegations of poor corporate governance by Murthy and fellow founders, including criticism of acquisitions and executive pay. Murthy and his cohort signed a letter asking why Sikka’s compensation was increased, a person familiar with the matter said in February, asking not to be identified. The letter also questioned severance packages offered to two top-level executives who departed the company.

Sikka was paid 487 million rupees ($7.3 million) in base salary, bonus and benefits in fiscal 2016, compared with a base salary of 45.6 million rupees for a partial period in 2015.

The acquisition of Israeli software company Panaya Inc. in 2015, which was questioned by a whistle-blower and later investigated by Infosys, was at the heart of the battle between management and some of the company’s founders.

In a sign that Murthy’s wasn’t yet willing to end his battle with the board, he said in a statement on Friday that some shareholders, who have read the whistle-blower report, have told him “it is hard to believe a report produced by a set of lawyers hired by a set of accused, giving a clean chit to the accused, and the accused refusing to disclose why they got a clean chit!”

Salary of $1

Sikka will for now focus on strategic matters and interact with large customers—in other words keep his old job with a new title—and receive an annual salary of $1.

He was always unusual for an Infosys CEO in that he isn’t one of the founders and is based in the United States, where the company gets nearly two-thirds of its revenue. He attended his first media briefing after quitting via video conference from the Palo Alto office, which ironically was a sore point with the founders who considered the expensive location a wasteful expenditure and criticized Sikka for flying private charters to meet customers.

“Bickering among the founders and the chief executive officer indicated that the resignation of Mr. Sikka was bound to happen one day or the other, that it happened so soon was a shocker,” said Shradha Agrawal, an analyst at Mumbai-based Asian Markets Securities Pvt. “It is too early to comment on the change in recommendation of the stock as we need to watch further steps and appointments by the company.”

Infosys has been trying to haul itself out of a growth slowdown through job cuts and investment into new areas such as data analytics, and had only just shown signs of a revival. Sikka’s resignation now adds leadership instability to its list of challenges.

Murthy co-founded Infosys with six other engineers in 1981, starting out with $250 in capital. Since his two decades as CEO ended in 2002, four founders have taken turns at the helm, with Murthy returning in 2013 before handing control to Sikka.

“The board understands and acknowledges Dr. Sikka’s reasons for resignation, and regrets his decision,” Infosys said in a statement. “The board denounces the critics who have amplified and sought to further promote demonstrably false allegations which have harmed employee morale and contributed to the loss of the company’s valued CEO.”

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