Narayana Murthy on CEO-shareholder conflict

Being open and transparent is the best way to resolve any issues around the remuneration of a CEO and top management, says NR Narayana Murthy, co-founder and former chairman of Infosys, in an exclusive interview with Fortune India.

In a clear throwback to the controversy around the excessive remuneration of Infosys’ first professional CEO that ultimately led to Vishal Sikka’s exit in 2017, Murthy once again reiterated a view that he kept advocating at the peak of the conflict.

Murthy told Fortune India that transparency in decision making was a good antidote whenever there were competing and conflicting demands. “Agency cost becomes an issue when the compensation of the CEO and the senior management staff is perceived as high and unjustifiable by the shareholders. The best way to sort it out is to be reasonable, to be totally transparent with the shareholders about the process and the parameters, and to explain the rationale for such compensation,” says Murthy.

The deviation from the principal’s (shareholders) interest by the agent (management) is termed as “agency costs” and usually happens when there is a separation of ownership and control (as in the case of Infosys).

During his tenure (FY16), Sikka was the most expensive CEO in the IT sector with an annual pay of Rs 49 crore compared with the-then TCS CEO N Chandrasekaran’s pay of ₹25.6 crore and Wipro CEO Abidali Neemuchwala’s pay of ₹12 crore.

In April 2017, Murthy had also written a letter to the board against a proposed 35% hike in COO Pravin Rao’s pay, stating that such an increase was improper when most other employees’ compensation was increased by just 6%-8%. “This is grossly unfair to the majority of employees including project managers, delivery managers, analysts, programmers, sales people in the field, entry level engineers, clerks and office boys who are toiling hard to make the company better. The impact of such a decision will likely erode the trust and faith of the employees in the management and the board,” he had reportedly said in his communication to the board.

In fact, only in FY21 did Infosys CEO, Salil Parekh’s salary hit ₹49.68 crore, with more than half of it coming from exercising of stock options. To put it in context, Parekh had taken over the reins in 2018 at 1/3rd of Sikka’s remuneration. The pay hike came on the back of record deal wins that stood at $14 billion—the highest in the company’s history. While revenue went up by 10.7% to ₹1,00,472 crore in FY21, net profit was higher by 16.6% to ₹19,351 crore in FY21.

While Murthy felt that there will be competing demands in every pluralistic entity, and trade-off would have to be made, the duty of a leader is to resolve all these conflicting demands in a peaceful and harmonious way without losing the hopes of the party that loses in a decision or a transgression. “That is the job of a leader…It is also to energize the entire company towards the highest class of objective, the unified objective. My own experience has been that adopting fairness is a good way to reduce the disappointment of taking such conflicts. You demonstrate fairness by adopting the golden rule -- Do unto others as you would have them do unto you. I have found that use of data and facts, and adopting transparency make the decision more acceptable and bearable for losers in that decision,” says Murthy.

Elaborating on what he meant, Murthy cited the example, as early as 1994, when the head of HRD in Infosys, introduced the system of open six-monthly assessment of employees, where both the employee and the immediate reporting head would rate each other, simultaneously. “What we found was very interesting. The innate fairness of two human beings involved in the transaction, generally, resulted in very few conflicts. If the difference between the two went beyond a certain limit agreed upon by the HRD folks, the skip-level boss intervened and rerated the employee, if necessary. This whole process was open and transparent. This brought a lot of confidence in the minds of our employees on how decisions were made in the company. It reduced most of the tension among our employees.”