In an email dated September 20 to the Infosys Board and the United States Securities and Exchange Commission, Ethical Employees, a whistleblower group, alleged that Infosys CEO Salil Parekh was indulging in “unethical practices” to boost short-term revenues and profits.
This case once again raises important questions about the mechanics of whistleblowing and its implications for the Indian corporate sector. After the letter, ordinary shareholders of the company, which is into business consulting, information technology and outsourcing services, appear to have lost 16% (~44,000 crore) of market capitalisation in one day. This out-of-proportion reaction of the market to one letter is indeed a matter for concern. It also reflects an unjustified lack of faith in culture of Infosys, which has been a well-run company. One would strongly urge the regulator to look long and hard at the short sellers in the stock market, and enquire into the motivations of those people.
Prospective whistleblowers must learn from this episode and introspect. It is indeed well accepted that if a CEO, or his senior team indulge in questionable behaviour, the only way to get evidence of corporate malfeasance are employees of a company. So, whistleblowers are important.
In this case though, the major concerns raised in the letter written by Ethical Employees to the regulator may not stand up to the classical tests of what justifies as whistleblowing. It is worth assessing, with the limited evidence at hand, how likely it is that any merit will be found, in these accusations.
The first of the allegations made in the letter is that some deals were done at zero or low margins. I would argue that it is within the purview of senior management of a company to decide on the profitability of the deals they choose to do. They do not need to highlight low-margin deals. It would, over time, be captured in lower profits. The chief executive officer (CEO) of a company may choose to mention this to the board — or he may not — if they are otherwise getting the numbers.
The second accusation that has been directed at the management is that the CEO and chief financial officer (CFO) differed with the auditors on various issues, including the charging of visa fees. The letter also states that the auditors (Deloitte) pushed back and their view prevailed. The mere articulation of a different opinion cannot be a reason to accuse a company of improper accounting. Visa costs, for example, could be subject to multiple conditionalities (for instance, will employees stay/leave) that need to be fulfilled before they are likely to be incurred. Managements may have different views on these issues.
The third allegation has been made that substantial profits were made through treasury operations by taking greater risk. A decision on the extent of risk to be taken by a company is best left to the CFO and the audit committee. It is not really open for others to question these, unless these acts were in violation of audit committee or board policies. Companies must have degrees of freedom to use these tools to keep profits intact so long as this is declared in investor calls.
Fourth, there is also an accusation that the Infosys management sidelined people who had differences with the senior management. The presence of malafide intent is difficult to prove. Organisations are complex animals and the powers of judgment delegated to the topmost persons in a company are substantial. This should never have been a complaint.
Whistleblowers need to distinguish between what they may feel is poor management practices and evidence of illegality. The tone at the top is important, but you cannot whistleblow if you don’t like it. Not nice to hear, but there you have it!
The listing regulations provide for anonymity for whistleblowers. However, during an enquiry, whistleblowers should expect that their fingerprints will be visible on the complaint, and that their bosses will have a strong suspicion of who they are. The Securities and Exchange Board of India (Sebi), along with auditors, can perhaps seek to come out with a largish checklist of situations (perhaps by industry) where they would support whistleblowing, and others where they would be forced to go with the judgment of managements. While this can neither be complete nor perfect, it will let whistleblowers know the type of situations in which they are liable to be believed.
There is still an unimplemented proposal, for rewards for whistleblowing, but these rewards are too small to offset the career limiting damage that whistleblowers face. The likelihood of a suspected whistleblower getting a reference for a new role is low.
If a whistleblower complaint were felt by Sebi to be bonafide (even if they ultimately had to bow before the judgment of management), the company could be required to make a substantial payment for him for the remainder of his career. Given that whistleblowers are important, but whistleblowing must be done in the rarest of cases, we need to find unconventional approaches to finesse this.
As for Infosys, the problem appears to lie elsewhere entirely. This is the third whistleblower complaint in Infosys over the last four years. All companies will have situations where managers feel unhappy, but these do not need to boil over into the type of angst we have seen in Infosys. There may be a strong need to treat insiders with greater respect, and to acculturate new recruits into the value systems of the founders. Organisation culture, as always, has the last word. Nandan Nilekani has to reinforce the culture Infosys was well known for. That is his task now.
Govind Sankaranarayanan, former COO and CFO at Tata Capital , is currently vice chairman at ESG Fund ECube Investment Advisors. The views expressed are personal
This post was originally published in The Hindustan Times dated Oct 31, 2019