PROJECT REPORT

ON
“Corporate Governance Deviation –
Infosys Case Study”

Submitted in partial fulfillment of the requirements

for the award of the
degree of
MASTER’S OF BUSINESS ADMINISTRATION(FINANCIAL ANALYSIS) to
Guru Gobind Singh Indraprastha University, Delhi

Under the Guidance of Submitted by : Submitted by:

DR. DIVYA VERMA KESHAV KHARBANDA

MBA FA

EnrollmentNo.:02416659421
 CONTENT

Acknowledgement And Certificate

Executive Summary and Objective

Chapter I: Introduction

Chapter II: Review of Literature

Chapter III: Research Methodology

Chapter IV: Data Reduction, Presentation &

Analysis

Chapter V: Data Interpretation

Chapter VI: Summary & Conclusions

References/ Bibliography

Appendices

-
List of Tables

List of Figures
 ACKNOWLEDGMENT

I offer my sincere thanks and humble regards to UNIVERSITY SCHOOL OF MANAGEMENT

STUDIES, GGSIP University, New Delhi for imparting very valuable professional training in
MBA. I pay my gratitude and sincere regards to DR DIVYA VERMA, my project report guide
for giving me the best of her knowledge. I am thankful to her as she has been a constant
source of advice, motivation and inspiration. I am also thankful to her for giving her
suggestions and encourangement throughout the project work. I take the opportunity to
express my gratitude and thanks to our computer lab staff for providing me opportunity to
utilize their resources for the completion of the project. I am also thankful to my family and
friends for constantly motivating me to complete the project and providing me an
environment, which enhanced my knowledge.
Date: 21/06/2022
Name:KESHAV KHARBANDA
Enrollment No.: 02416659421
Course: MBA FA
 EXCUTIVE SUMMARY

Infosys Limited is an Indian multinational information technology company that

provides business consulting, information technology and outsourcing services. The
company was founded in Pune and is headquartered in Bangalore.

The major organizational transformation journey of Indian software

bellwether firm, Infosys, from 2014 until 2017 under the leadership of
first non-founder member is captured in this case study. The
entrepreneurial ambitions and zeal to grow through organic and
inorganic moves saddled with lack of cognizance of corporate
governance resulted in deviance leading to turmoil followed by the
resignation of the CEO. The company values, the roles of founder
members, institutional investors, shareholders and other aspects came
under the scanner to understand the reasons behind the corporate
governance deviance.
Although the company also pleaded not guilty to charges of
misconduct in business administration, a dispute between the board
of directors and founders, particularly the former CEO, continued
with the CEO's resignation.
 OBJECTIVE
Corporate governance is a concept that has recently received increased attention and is
evolving. The purpose of corporate governance is to encourage the efficient use of
resources and to require accountability for those resources. The aim is to balance the
interests of individuals, corporations, and the community. Individuals such as shareholders
desire high return on their investment, while the community desires responsible corporate
behavior that benefits the community. At the same time, the corporation and those within it
desire long-term preservation of the corporation. Often, the needs of these various groups
conflict with each other. Good corporate governance properly balances the needs and
desires of these groups.
Corporate governance is generally recognized as involving many diverse aspects of
business. Thus, a different definition of corporate governance exists to cover each different
aspect of interest. For instance, when economists define corporate governance, they
recognize factors affecting the supply and demand of corporate leaders and tend to
emphasize the importance of motivating leaders through the use of incentive programs. On
the other hand, financiers tend to emphasize the role of corporate leaders to provide a good
rate of return, while accountants focus on the responsibility of corporate leaders to provide
effective internal controls, accurate records, and required disclosures.

1. A properly structured Board proficient of taking independent and objective

decisions is in place at the helm of affairs.

2. The Board is balanced as regards the representation of suitable number of non-

executive and independent directors who will take care of the interests and well-

being of all the stakeholders.

3. The Board accepts transparent procedures and practices and arrives at decisions

on the strength of adequate information.

4. The Board has an effective mechanism to understand the concerns of stakeholders.

5. The Board keeps the shareholders informed of relevant developments impacting

the company.

6. The Board effectively and regularly monitors the functioning of the management

team.

7. The Board remains in effective control of the affairs of the company at all times.
INTRODUCTION TO THE STUDY
A.Infosys Limited (the “Company”) recognizes that the enhancement of corporate
governance is one of the most important aspects in terms of achieving the Company’s goal
of enhancing corporate value by deepening societal trust. Efficient corporate governance
requires a clear understanding of the respective roles of the Board and of senior
management and their relationships with others in the corporate structure. Strong
Corporate Governance founded on values is the bedrock of the sustained performance at
Infosys and fuels the Company’s vision to achieve the respect of stakeholders. The corporate
governance standards established (Updated from time to time) by the Board of Directors
(the “Board”) of Infosys Limited provide a structure within which directors and management
can effectively pursue the Company’s objectives for the benefit of its stakeholders. These
guidelines are framed in conjunction with Company’s Memorandum & Articles of
Association, the charters of the committees of the Board and applicable laws/ regulations /
guidelines in force for the time being in India and the USA and other jurisdictions, as
applicable.
B. BOARD STRUCTURE AND COMPOSITION
B1. Board Size The Size of the Board shall be as per the Memorandum & Articles of
association of the Company read with Companies Act, 2013 and rules made thereunder
(“the Act”), SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, as
amended from time to time (“Listing Regulations”) and such other laws/ regulations in force
for the time being, to the extent applicable to the Company.
B2. Board Diversity Given the global and complex nature of the Company’s business, it is
important to consider diversity of thought, perspective, knowledge, skill, regional and
industry experience, cultural and geographical background, age, ethnicity, race and gender,
in evaluating candidates. The Nominations and Remuneration Committee based on above
parameters has defined standards under Board Diversity policy, recommends candidates for
consideration of the Board of directors to be proposed for the approval of Company’s
shareholders or any director nominees to be elected or appointed by the Board to fill Board
vacancies.
B3. Mix of Executive, Non-Executive and Independent Directors The Board of the company
shall have an optimum combination of executive, non-executive and independent directors
with at least one-woman independent director. Not less than fifty percent of the Board shall
comprise of non-executive directors and such other requirements to comply with various
laws from time to time.
B4. Separation of Chairperson and CEO Positions The Board shall have a designated
Chairperson. The roles of Chairperson and the CEO shall be clearly demarcated and kept
separate. The Board does not have a policy as to whether the Chair should be an
independent director, a non-executive non-independent director, or a member of
management. The Board may from time to time decide, if the director appointed as Chair
shall be an independent or a non-executive, non-independent or an executive.
B5. Lead Independent Director To ensure robust independent leadership on the Board, if
the individual appointed as Chair is not an independent director, or when the independent
directors determine that it is in the best interests of the Company, the independent
directors may appoint a Lead Independent Director. The Lead independent director serves
as a liaison between the non-executive directors and management and performs such
additional duties as the Board may determine. The general authority and responsibility of
the Lead Independent Director are to be decided by the group of Independent Directors.
B6. Annual Director elections One third of the Board members shall be subject to
retirement by rotation, such Board members who are willing to get re-appointed shall be
elected annually by the Company’s shareholders. Each year, at the Company’ annual general
meeting, the Board shall recommend names of directors eligible for re-election by
shareholders. The Independent directors shall not be subject to retire by rotation as they
are appointed for a specific term
INTRODUCTION TO THE ORGANISATION
About Infosys
Infosys Limited was started by a team of seven software engineers. It began its journey in 1981 as
a software development organization. It opened the first international office in the USA in 1987.
The major revenue of the company came from a dedicated offshore development centre. Later, it
also started delivering its services in handling projects, dealing with the re-engineering, migration
and maintenance of legacy systems to graduate to the client–server environment etc.
Infosys came out with an initial public offering in 1993 and became the first Indian IT company to
get listed on the NASDAQ in 1999. It had a global presence with offices opened in UAE, the
Netherlands, Argentina, Singapore and Switzerland. Mr. Narayan Murthy made a modest
beginning by launching Infosys with six co-workers and a borrowed sum of US$250. In 2017
Infosys was an US$11.12 billion company to be listed on the NYSE, with a market capitalization of
approximately US$42.2 billion and an employee strength of 209,000. It also became the first
Indian software company to provide customized software in world markets.

Infosys was founded by seven engineers in Pune, Maharashtra, India with an initial capital of

$250 in 1981. It was registered as Infosys Consultants Private Limited on 2 July 1981. In 1983, it
relocated its office to Bangalore, Karnataka, India.
The company changed its name to Infosys Technologies Private Limited in April 1992 and
to Infosys Technologies Limited when it became a public limited company in June 1992. It was
later renamed to Infosys Limited in June 2011.
An initial public offering (IPO) was floated in February 1993 with an offer price of ₹95 (equivalent
to ₹580 or US$7.70 in 2020) per share against a book value of ₹20 (equivalent to ₹120 or
US$1.60 in 2020) per share. The IPO was undersubscribed but it was "bailed out" by US
investment bank Morgan Stanley, which picked up a 13% equity stake at the offer price. Its
shares were listed in June 1993 with trading opening at ₹145 (equivalent to ₹890 or US$12 in
2020) per share.
Infosys shares were listed on the Nasdaq stock exchange in 1999 as American depositary
receipts. It became the first Indian company to be listed on Nasdaq. The share price surged
to ₹8,100 (equivalent to ₹30,000 or US$390 in 2020) by 1999 making it the costliest share on the
market at the time. At that time, Infosys was among the 20 biggest companies by market
capitalization on the Nasdaq. The ADR listing was shifted from Nasdaq to NYSE Euronext to give
European investors better access to the company's shares.[15]
On 28 July 2010, then British Prime Minister David Cameron visited Infosys HQ in Bangalore and
addressed Infosys employees.

Infosys, Bangalore

Its annual revenue reached US$100 million in 1999, US$1 billion in 2004 and US$10 billion in
2017.[11]
In 2012, Infosys announced a new office in Milwaukee, Wisconsin, to serve Harley-Davidson,
being the 18th international office in the United States. Infosys hired 1,200 United States
employees in 2011, and expanded the workforce by an additional 2,000 employees in 2012. In
April 2018, Infosys announced expanding in Indianapolis, Indiana. The development will include
more than 120 acres and is expected to result in 3,000 new jobs—1,000 more than previously
announced.
In July 2014, Infosys started a product subsidiary called EdgeVerve Systems, focusing on
enterprise software products for business operations, customer service, procurement and
commerce network domains. In August 2015, the Finacle Global Banking Solutions assets were
officially transferred from Infosys and became part of the product company EdgeVerve Systems
product portfolio.

Products and services

Infosys provides software development, maintenance and independent validation services to
companies in finance, insurance, manufacturing and other domains.[21]
One of its known products is Finacle which is a universal banking solution with various modules
for retail and corporate banking.

Glass building in Pune campus

Its key products and services are:

 NIA – Next Generation Integrated AI Platform (formerly known as Mana)

 Infosys Consulting – a global management consulting service
 Cloud-based enterprise transformation services[23]
 Infosys Information Platform (IIP) – Analytics platform
 EdgeVerve Systems which includes Finacle, a global banking platform
 Panaya Cloud Suite
 Skava – now rebranded as Infosys Equinox
 Engineering Services
 Digital Marketing
Case Background

The major organizational transformation journey of Indian software bellwether firm,

Infosys, from 2014 until 2017 under the leadership of first non-founder member. The
entrepreneurial ambitions and zeal to grow through organic and inorganic moves
saddled with lack of cognizance of corporate governance resulted in deviance
leading to turmoil followed by the resignation of the CEO. The company values, the
roles of founder members, institutional investors, shareholders and other aspects
came under the scanner to understand the reasons behind the corporate governance
deviance.
Though the Company got a clean chit against the corporate governance deviance
charges, the conflict between the board of governors and founders, particularly the
ex-CEO continued which culminated into the resignation of the CEO. What are the
roles of founder members, board of governors, institutional investors and
shareholders in case of corporate governance deviance?
Infosys had come a long way for its business model to deliver excellence along with
its leadership to perform on corporate governance norms. Entering the second
decade of the 2000s, the company’s profits declined. This was largely attributed to
the increasing costs of labor in India and losing out to outsourcing. Profits also took
a beating owing to sluggish western markets. Despite increasing labor costs and job-
hopping in the software industry, Infosys’ leaders believed its strength lay with its
people. Hence, employee development and job engagement were always a priority
of the company. In spite of the innovation and burgeoning growth, critiques
cautioned that the momentum of growth could not be sustained. With time, Infosys
exhibited sluggish growth, and unstable leadership with as many as 13 exits from the
senior management. A high pricing margin model and complex contracting
procedures made the company struggle even to retain average industry growth
rates. While client needs were changing in the global space, Infosys was struggling to
innovate, diversify and transform. 
Impact

It was observed by many former associates of Infosys that

company may have been known for good corporate
governance standards in the past, but it displayed poor
standards elsewhere. Under Mr. Murthy’s watch as an executive
chairman, the company followed poor disclosure standards
when it came to a significant profit warning that sent its stock
down by over 8%. Similarly, a number of analysts and industry
experts had raised eyebrows when Mr. Murthy decided to bring
his son along when he was appointed executive chairman in
2013. The company’s former CFOs who were demanding that
the company returns a larger proportion of cash back to
shareholders seemed to have forgotten that Infosys had a
history of holding on to cash, even under their watch. Some
investors and also suggested that the new CEO must be given
room to function freely and not bogged down by needless
accusations. But being given freedom to function shouldn’t be
used as a sanction for transactions that raise red flags. Besides,
it wasn’t that Mr. Sikka had an outstanding run as a CEO.
Infosys shares were only marginally better off since Mr. Sikka’s
appointment was announced. Therefore, clearly, not all
stakeholders were enamored by the new CEO.
 LITERATURE REVIEW

RESEARCH AND DEVELOPMENT IN LARGE SOFTWARE COMPANIES AND

MULTIPLE ORIENTATIONS –

A CASE STUDY OF INFOSYS SONIA VISWAM PhD Scholar in Financial Management,

Department of Business Studies, Central University of Karnataka, Gulbarga E-mail:
[email protected]

Abstract - Purpose: The role of Research and Development in the Software sector is
inevitable. Also the long term competitive advantage and the survival of the software
companies is dependent on the Research and Development activities and the innovations they
are going to bring. But at the same time R & D is confined mainly to ‘adaptive’ area of
multiple orientations .There should be R& Ds in other orientations also. Also the generative
and adaptive and other strategic learning should combine to transform the organization into a
fully reactive and thriving entity. So the purpose of the paper is to analyze the R &D‘s
effectiveness on the gross profit of the company and linkage of the R & D initiatives with the
creation of innovations and creation of new knowledge and integration of new knowledge.
Design/Methodology/Approach: This is based on the exploratory case study of Infosys R &
D expenditure and knowledge management and comparing it with the new initiatives in the
knowledge management in the IT industry. Findings: The R & D activities do not have bigger
impact on the return of the organization. Multiple Orientations are lacking in Infosys. The
definition of R & D is not connoting innovativeness or entrepreneurship. Research
Limitations and Implications: Practical Implications: The survival of the IT companies is very
much dependent on the multiple orientations and knowledge management. Originality/value:
The scope of R & D was confined before to technology, but now under multiple orientations
assumes a new dimension and it’s a combination of R & D in different orientations.

I. LITERATURE REVIEW In the modern strategic management the existence and

competitive advantage of a company is based on the multiple orientations rather
than a single orientation. The multiple orientations can be market, customer,
entrepreneurial, technological etc. (Schindehutte, 2008) Pearson (1993) has
already proved that a firm concentrating in one orientation will not be successful
in the long run. But usually the Research and Development activities of a firm is
concentrated around the new Software development according to the changing
needs of them market .But there is no Research and Development activities can be
also in those multiple orientations and the integration of those knowledge into
one. This can produce a bigger impact on the performance of the software
industries. Different studies have been done in the area of the combinations of
these multiple orientations. Some researchers are of the opinion that risk taking
factor of entrepreneurial orientation is against the performance of the software
companies. Covin and Slevin (1989) and Li et al (2008) have proved accordingly.
II. ORGANIZATIONAL LEARNING AND ENTREPRENEURSHIP The role of
the organisational learning in the survival of an organisation is indispensable.
Actually organisational learning is a by product of the entreprenuerial activity in
an organisation.Wang (2008), Slater & Narver (1995) states that entreprenuership
and the learning of a company are directly related. Also the learning of a company
can be differentiated on the basis of the aim of the learning.Different orientations
create different type of learning.Market orientation creates the ‘adaptive
learning’.This learning is for the survival of the organisation.Whereas the
generative learning is created by the learning for the learning sake within an
organisation. (Baker & Sinkula, 1999) According to the opinion of Tiwana (2003)
the global IT companies have to integrate their knowledge into an interactive
whole to exist in a competitive environment. Also due to the knowledge
explosion, the companies have to create new knowledge from time to time.
(Mathaissen & Pourkomeylian, 2003) Also as new knowledge proliferates it is
hard for companies to exist without producing new knowledge and manage
themselves without the proper scientific knowledge management. (Conner &
Prahlad, 1996) So a new kind of learning is required to manage knowledge and to
combine the different learnings in relation to different multiple orientations.
According to the Infosys website the R and D services are working in two major
areas.

1. Machine to Machine services 2. Mobile Infrastructure services 3. It helps them

1) To increase their profitability. 2) Predictability in the market 3) Ability to
innovate 4) Improving the products quality 5) Helps Differentiation
(infosys.com) The impact of the Research and Development on the
profitability of the companies is arbitrary.But the method to measure the
impact of the Research and development on the profitability is the Return on
Research Capital. (investopedia.com) Silvola, H (2006) states in his research
that there is no significant difference in the capital budgeting process
employed by the small software companies and the large software
companies.Also the formal sources of capital are used for the strategic
investment in high tech companies.The R & D intensity the size of the
software industries etc.does not affect the methods used for the measurement
of the cost of the capital. It was found that cross border acquistions will help in
the innovation of the organisation .Also it will also provide greater profits for
the organisation to invest in the R & D activities and innovation. (Kobrin,
1991) Also it can be also based on the strategic orientations of the
organisation.Some organisations like the executives in Korea give importance
to the growth more than the returns whereas the US executives gives more
importance to the returns more than the growth.Also the type of strategic
orientation may not be helpful to the company if they did not choose it
consciously. The Daewooo Motors preferred growth whereas the General
Motors preferred the returns and it proved disastrous to both of them. (Hitt
etal, 1997) It is not assured that spending for R & D will always bring
succes.The return on the investment is also not a justification for spending on
R & D.There are other factors which are affecting it like the product life
cycle.Also an investment of around 50 % of the revenue.Also sufficient care
should be taken to the definitions given to the R & D expenditure.Some tell it
is the amount spent by the engineering department without even considering it
is used for develoeping a new product or it is for producing some innovations.
So R & D Effectivenes is introduced instead of the R& D expense as a
percentage of the revenue return based on the next year. R & D Effectiveness
Index = % of new product revenue*(net profit %+ R & D %) R & D
percentage (McGrath & Romeri, 1994) III. METHODOLOGY The
methodology is the case study method in the light of the R & D expenditures
of the Infosys.This is an exploratory case study method which will shed a light
on the method of functioning of R & Ds in the organisation.Also the trend in
the R & D expenditure is found out by the annual reports of Infosys.Also it is
analysed on the basis of the knowledge management theories to understand the
multiple orientations existent in the Infosys.A comparison is also done on the
basis of R & D expenditure of other IT companies. Also the future of multiple
orientaions in the company is predicted on the recent trends in the IT industry.
IV. FINDINGS RORC= Current Year’s Gross profit /Previous Years R and D
Expenditure
The new job roles hover mainly around the mobile networking area which constitutes the major
chunk of the digital technologies.It can be in the areas of mobile app development, development of
interfaces, Social media, data scientists, cyber security etc.And the new skills are Internet of Things,
Artificial Intelligence, Cyber Security etc.Other prospects-the digital payments have got an annual
compund growth rate of 50%.The e- commerce sector is growing by 19 %.The mobile transactions
has increased by 40 times in the last years. (nasscom.in) Analysis of the R & D expenditure returns
and its linkage with innovation Here the expenditure on the R & D is showing a decreasing trend and
rises up in 2011, 12, 13 and then again decreases.At the same time the RORC is showing a decrease
trend until and then shows an increasing trend in 2015.So the investment in the Resaerch and
Develoepment activities are becoming evident in the later periods.So also the increase in the
innovative element in the R & D activities, leads to the proportionate increase in the return of the
organisation is to be explored further.The Mc Grath Romeri formula is not used here since its
creditability is to be proved by further researches But the R & D expenditure is not directly related to
innovation.Usually a small portion of the R & D is used for innovation.The majority of the R & D
expenditure is used for testing the configurations of the softwares already present.So the R & D
expenditures are neceassarily not leading to innovation.Acording to the annual report of the Infosys
2016-2017; it is giving importance to software led automation. The automation is for replacing
people with machines.So the R & D is going on in the sector of Data analytics,knowledge
curation,process monitoring,fixing test frame works etc.These are for the automation of services in
BPO

sector,services,infrastructure etc.Panaya is another software developed by Infosys for automation in

the field of enterprise resource planning(ERP).This helps the businesses to develop test scripts of the
business processes and at the same time it can be documented.This will help to save time ,costs etc
associated with the business processes.Assist Edge which is a robotic automation equipment will
help to digitise the business processes very well.Also Nia is a software which will help in the
automation of the information technology based business processes.It helps in the data extraction,
classification, resolution of the data etc. This will help to automate the processes of
deterministic,intelligent and cognitive areas.This has almost help to replace work force of more than
11,000.So many other sectors are also using Nia platforms like pharmaceutical sectors forecasting of
sales,fraud analysis for the banks etc.The company adopts the method of zero distance where the
company maintains a nil distance of providing cutting edge technologies to the clients.The Skava
Platform of the client provides customised solutions to the customers also.When a firm faced
difficulties in reconciling with the monthly end statements they were automating the process and
the suitable solution was found out .All these show that the Infosys is concentrating around testing
new configuration of existent ones but there is an increasing tendency towards innovation which
may gain sufficient momemtum in future. But on the basis of the knowledge management theories
of Zack (1999) catogories knowledge thus- ‘the core knowldege’-essential for existence, ‘advanced
knowldege’-which provides the competitive survival capability,’innovative knowldege’-which helps
the innovative long term competitive advantage capability .And the R & D capabilities and multiple
orientations can be identified on the basis of this definition . The Infosys is trying hard to survive in
the competition.Also innovations are just to satisfy the needs of the customers in the market.There
is no generative learning taking place here.So there is no innovative knowledge creation in Infosys.In
connecting this with the multiple orientation , there is no combination of different learning or
multiple orientations.Since new and new products are to be developed in the software sector,the
product life cycle is very short in the software sector.But at the same time the spending on R & D
cannot be avoided for Infosys to survive in the Industry.But in relation with the product life cycle the
R & D spending cannot be expected to produce returns for a longer period.Though there is sufficient
income from the onsite centres their gross profit margin is low.So they cannot be said as deriving
sufficient income for the R & D expenditure. .Since the segmental operating income is highest for the
European segment ,there is scope for further studies whether the income should be utilised for the
R& D innovation in the European area or for the all the areas in general.This extends the scope of
the applicabilityof multiple orientations should be region based or based globally. So this shows that
knowledge management is a dynamic process of interaction with the customers, other stakeholders,
technology, innovative capacity etc.So the integration of these learnings and multiple orientaions are
essential within a company.Also the scope of multiple orientations in new areas of technology like
cloud analytics are to be further explored.Also the combinations of multiple orientations are
subjective to each organisation,the suitable combiantion should be derived on the basis of the
core,advanced and innovative knowledge generation and management within an organisation which
will lead to multiple orientations.

CONCLUSIONS

Multiple orientation is lacking in Infosys.It is also lacking in similar IT companies.So a new

perspective to learning and research and innovation in different orientations and the combinative
capability will help the IT companies to gain competitive advantage over others. Also the in the
modern of cloud computing,digital analytics etc, the scope and the opportunties gained from
multiple orientations are ever increasing.Also the R & D expenditure is not leading into innovations.It
is just for testing the configurations of new softwares.So the companies are not able to move from
the rfealm of core knowledge management to the realm of innovative knowldege management.This
where the multiple orientations lie.The IT companies cannot just thrive just by investing in
developing new software.It should be the product of the combinative knowledge management.Also
the onsite segmental revenues are insuffiicient to fund the R & D activities in other areas.The
definition of R & D is not related to innovation in Infosys.Knowledge Management is inevitable for
the survival of software companies including Infosys.Also knowledge management and learning and
the suitable combinations of multiple orientations is subjective to an organisation.The R & D
activities do not have a bigger impact on the return of income as substantiated by previous
researches. LIMITATIONS The study is based on secondary data Ignores the role of small software
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Organisational Learning”.Journal of the Academy of Market Science.Vol 30 .No1.pp 70-86 [15] Hogan
,T.Hutson,E(2015)”How Useful is the Satge Model Theory in explaining the Capital Structure of
Venture-Capital bcaked and Non-Venture capital backed Firms?”.New Technology Based Firms in the
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Globalization and convergence in corporate
governance: evidence from Infosys and the Indian
software industry
Abstract

In contrast to the much-studied role of capital markets in fostering convergence in corporate

governance practices worldwide, we argue that the globalization of product and talent markets has
affected corporate governance of firms in the Indian software industry. We model several possible
reasons why a particular firm, Infosys, has emerged as the exemplar of good corporate governance
in India, traditionally a backwater of corporate governance practices. We further analyze the manner
in which Infosys has attempted to shape corporate governance practices in India more generally, and
why these attempts have had limited effects thus far. journal of International Business Studies
(2004) 35, 4

Introduction

We document the under-studied effect that global product and labor markets can play in the
convergence of corporate governance systems worldwide. This complements our understanding of
the much more extensively-studied role of capital markets in fostering such convergence through,
for example, cross-border listings and global institutional investor activism. The software industry
offers a unique setting to test the role of global product and labor markets for two reasons. First, for
a large part of the industry, there is a global market for technical talent. Second, capital plays a
smaller role in software than in most other global industries. Thus, one can, to some extent, isolate
the impact of global talent markets from the effect of global capital markets, although, admittedly, it
is harder to disentangle the effects of global talent from global product markets. Further, the
emergence of the Indian software industry offers a unique experimental setting to ask whether
globalization can promote convergence in corporate governance. This is because India is home to a
globally competitive set of software powerhouses and because India is generally very far from world
standards in what constitutes good corporate governance. The success and generally positive
reputation of India's software firms - in contrast to most of India's other firms - provides at least
surface credence to the idea that the global markets to which these firms are exposed has affected
their governance systems This is the proposition that we explore in depth through a case study of
the Indian software industry, and of one of India's leading software companies, Infosys. The popular
press frequently cites Infosys as a model for sound corporate governance in India and, indeed, in
Asia.' In our research, we ask why it is that Infosys developed a reputation for being committed to
shareholder value creation in a country, India, where corporate governance has, historically, not
been a first-order concern. We also attempt to document the extent to which the corporate
governance practices of Infosys are to be found in other Indian software firms and among Indian
firms more generally. Our interviews with the top management of Infosys, and related field research
in India, suggest that exposure to global capital markets is a result, rather than a cause, of Infosys'
decision to adopt world corporate governance standards. The proximate cause of the aspiration to
good corporate governance at Infosys, in turn, is its need to attract talent with truly worldwide
options, which in turn is necessitated by fierce global product market competition. Part of our
narration of the Infosys corporate governance case study is a description of the efforts on the part of
its management to help institutionalize good corporate governance in India. Indeed, diffusion of
corporate governance practices in India is rendered partly feasible by a coalition between firms and
regulators that serves to educate regulators and provides a blueprint for engineering a transition
from a stakeholder to a shareholderbased corporate governance system. Ultimately, however, the
corporate governance standards at Infosys are the exception rather than the norm in India. Some
data on corporate governance in India suggest that most firms fall far short of the Infosys
benchmark, including most firms within the software industry. Further, our companion large-sample
econometric analysis suggests that there is very little evidence that globalization of any form is
correlated with adoption of US-style corporate governance around the world (Khanna et al., 2001).
We therefore dedicate the last part of the paper to exploring why the effect of globalization on
corporate governance convergence might be limited. The case study is based on interviews and field
research at Infosys in early 2001, and with several dozen field interviews with competitors and
regulators over the past three years. In the remainder of the paper, we first briefly summarize the
state-ofthe-art literature on convergence of corporate governance. We then provide, in the
following two sections, brief overviews of the Indian software industry and of the state of corporate
governance in India in the 1990s. The subsequent two long sections constitute the analytical heart of
the paper. We first consider three, non-mutually exclusive reasons for Infosys' adoption of corporate
governance practices. As part of this section, we develop a model to demonstrate the interaction
between Infosys, its competitors and the regulator in the corporate governance adoption process.
The next section considers why the spillovers of Infosys' corporate governance practices to other
firms have ultimately been limited, and why globalization has not hastened corporate governance
convergence in the aggregate. A final section presents our conclusions. Theoretical perspectives on
convergence in corporate governance The idea of convergence in 'form', or literal convergence,
postulates that efficiency considerations and, implicitly, some form of global competition, will
dictate that all nations will ultimately adopt the same corporate governance system. This view is
most forcefully expressed by Hansmann and Kraakman (2000) in their paper entitled 'The end of
history for corporate law.' They, and numerous earlier proponents of this view (see, for example,
Karmel, 1991), point to the current consensus that the anointed system towards which convergence
in form will occur is that of the US. Skeptics aver, however, that it is plausible that countries' systems
can fall from grace - witness the favor in which Japan was held in the 1980s and early 1990s and its
current disfavor - suggesting that the current consensus will be short-lived. Further, there have been
several theoretical arguments for pros and cons of different systems. Failure to agree on the end-
state of convergence, in turn, calls into question the idea of convergence in form.2 A less extreme
perspective rests on the idea that there is sufficient plasticity in each country's institutions so that
the key function of corporate governance - the protection of resource providers - can be largely
achieved within the constraints of the country's institutions. This perspective is referred to as
'functional convergence' by Gilson (2000).3 The idea of functional convergence per se has a long
pedigree in social science (Merton, 1968), and has recently been applied to financial systems more
generally (Crane et al., 1995). At the other extreme from the convergence in form perspective is one
that forcefully claims that path dependence has led different economies to very different corporate
governance systems, and that these are not easily dislodged, not even by global competition
(Bebchuk and Roe, 1999). One reason why even functional convergence might not obtain is that
there remains considerable disagreement about the functions of corporate governance. Specifically,
should corporate governance systems primarily protect providers of capital, or also cater to other
stakeholders in the firm, notably labor (Shleifer and Vishny, 1997; Tirole, 2001)? Whether
convergence occurs in form or function, some form of global competition is implicitly assumed to be
the proximate cause. Perhaps most emphasized is the idea that global institutional investors, largely
originating from the US, will flex their muscle and compel firms that demand their funds to adopt
corporate governance standards with which they are familiar.4 Also often emphasized is the idea of
a sorting of a country's firms, with the higher quality ones listing in centers of global capital (most
commonly, New York and London) and the lower quality ones remaining in the home country, with
resultant pressure on the local capital markets to upgrade (Coffee, 1999).s The consensus view on
the causes of convergence assigns considerably less importance to global product market
competition forcing convergence, and none at all to global talent market competition forcing
convergence. The Indian software industry In this section, we focus on the role that the Indian
software industry plays within the global software industry. The discussion is necessarily limited. The
section draws on a variety of sources, including Heeks (1996), Ghemawat et al. (1999) and Kapur and
Ramamurti (2001). Fuller accounts of the software industry may also be found in these works. As an
organizing device, we first describe the supply and demand sides of the Indian software industry,
and then describe industry features that illuminate the industry equilibrium. Table 1 shows a
timeline. Supply side Firms in the industry include older firms diversifying into software services,
often from completely unrelated (in a product market sense) businesses, as well as de novo startups.
Prominent firms in the former category include Tata Consulting Services (TCS, part of the House of
Tata), Satyam and Wipro Technologies. Prominent examples from the latter category include Infosys
and PCS. Approximately 70% of the cost structure of a software company is accounted for by
personnel related costs. India's initial entree into the software business has to do with its access to
cheap talent. India produces more engineers and scientists than every country in the world other
than the US. The key feature of the talent is that it is much more globally mobile than labor in
general. Indians (especially programmers), in particular, account for more than 40% of the HIB visas
(temporary work visas) issued by the US to foreign talent. Further, the Indian diaspora, long-
established successfully in the US, has played a key role in facilitating the flow of talent back-and-
forth between India and the US (Kapur and Ramamurti, 2001). Indian firms compete vigorously in
the global product market. Firms from countries like Russia, Ireland and the Philippines are
prominently cited as direct competitors, for example. Software firms from advanced economies like
the US are also indirect competitors, in that clients may choose between generally more
sophisticated services from these expensive advanced-economy firms and the less sophisticated but
cheaper services from emerging economies. What role has the government played in facilitating the
operations of Indian firms? Heeks (1996) points out that there have been fits and starts in the
liberalization process pre-1991. Since 1991, the government has largely stayed out of the way and
allowed the software industry to compete in an unfettered way. As Zaheer and Rajan (2001) point
out, the last two areas to be deregulated were internet access in 1998 and international bandwidth
provision in 1999. The party currently in power (as a leader of a coalition), the Bharatiya Janata Party
(BJP), was the first to explicitly support the software industry in its election manifesto. An interesting
feature is that most of India's state governments have explicit information technology promotion
policies and compete to attract firms to their states. The formation of the industry lobbying group,
NASSCOMM, provides an efficient means for dialogue between the private sector and the various
state and central governments. Demand side Three types of demand for software services existed
that were relevant to India.6 At the low end was the demand by foreign firms for on-site services,
also referred to in a derogatory sense as 'bodyshopping'. This practice involved Indian programmers
relocating to the host country, typically for a short period of time and for significantly lower wages
than local programmers in the host country. Clients generally received the services of the
programmer 'bodies' with much less by way of organizational knowledge from the software firms.
One reason why many Indian software companies started this way had to do with their lack of access
to appropriate hardware in India, in turn caused by regulatory (typically foreign exchange)
restrictions. The other type of demand was by foreign, primarily US companies, for Offshore
Development Centers. These were physical locations in India that companies dedicated to the needs
of a particular advanced-economy multinational, where teams of Indian programmers and some
personnel from the foreign company worked together for long time periods and with more intensive
knowledge exchange. The third type of demand was a mixture between bodyshopping and the
offshore development centers. Equilibrium Several indicators of India's success in the global
software industry are worth reviewing. The Indian software industry grossed $5.7bn in revenues in
1999-2000, $4bn of which came from software exports. This represented a growth rate of 53% over
the prior year. Software exports were 10% of India's total exports. Software industry market
capitalization on Indian stock exchanges rose from $4bn in January 1999 to a high of $90bn, and
then, following the NASDAQ crash and its ripple effect in India, settled at $55 bn by mid-2000. By
then, 185 of the Fortune 500 outsourced their software requirements to India. Given the cheap
talent and the initial absence of reputation, Indian firms started out at the low end providing
primarily bodyshopping services. They gradually built reputations for reliability and high quality of
services and began to provide more value-added services (Banerjee and Duflo, 2000). By 1999-2000,
offshore services, the more valueadded part of the Indian software firms' offerings, had risen to 58%
of export revenues from 5% in 1991-1992. Five of the nine software development centers in the
world with CMM Level 5 ratings, the highest ratings on the predominant quality scale developed for
software at Carnegie-Mellon University, were located in India. Companies like General Electric,
Citicorp and IBM had their only CMMcertified operations in India rather than in the US.7 The
upgrading of the Indian software industry was expected to continue. Expected revenues by 2008
were set in the neighborhood of $87bn by a NASSCOMM-McKinsey study, as long as government
continued to remove bottlenecks for the development of the software sector. Talent now
increasingly captured a piece of the software pie, partly as a result of global pressure on domestic
wages. A Jardine Fleming study suggested that the costs of an Indian programmer had risen to as
much as $3000/month (although this was still 1/3 of the costs of a US programmer). It is worth
emphasizing that the Indian software industry was exposed to global product and global labor
markets before raising capital overseas ever became an issue.8 The standards of corporate
governance in India9 As late as the early 1990s, corporate governance was not a well-understood
concept in India. Indeed, until 1991, the objective of government policy was to maximize loans to
the industrial sector in the belief that this would lead to industrial development and employment
creation. Monitoring of the loans was not a major priority. The major financial institutions, which
were government owned and controlled, were often instructed not to disturb management, and to
side with them in the event of any dispute; they virtually never divested their ownership stake in any
firm. Second, financial institutions were never provided with any incentives to monitor. Pouring
more money after a bad loan, in the hope that the distressed firm would find its way out of trouble,
was consistent with the objective of maximizing loans. Attempting to shut down distressed firms was
prohibitively costly. Third, competition among financial intermediaries was non-existent for several
reasons. Regulations had eliminated the possibility of most bases of competition. The Indian Banks
Association (IBA) functioned as a de facto cartel, fixing wages, prices and service conditions. Firms
granted a license under the pre-1991 'license raj' more or less were guaranteed financial support
from state-run financial institutions. Finally, intermediaries, most of whom were government owned,
were not monitored themselves. As of 2001, corporate governance scandals were discussed almost
routinely in the Indian business media.10 In addition to the absence of potential monitoring by
banks, there were also constraints on monitoring by external capital markets. The Companies Act
placed restrictions on the acquisition and transfer of shares, and so prevented the development of a
market for corporate control. With half to two-thirds of the equity in any firm being illiquid (since
the enterpreneurs and the financial institutions never sold their shares), takeovers were difficult to
implement. However, several positive developments occurred on the corporate governance front
since India's 1991 balance-of-payments crisis: (a) The Securities and Exchange Board of India (SEBI)
Act of 1992 created a regulatory body with the explicit mandate to improve the functioning of Indian
financial markets. (b) The incentives of the state-run financial institutions to monitor were improved.
They began to be weaned off their historically privileged access to funds. The resulting need to
access public capital markets made them more conscious of the bad loans on their balance sheets.
Deregulation of interest rates and the gradual elimination of consortium requirements increased
competition among the financial institutions. Private sector mutual funds were allowed to compete
with the state monopoly. (c) A takeover code was introduced in late 1994, after a public outcry over
legally sanctioned price rigging.11 (d) Restrictions on the entry of foreign investors were eliminated
and regulations on their investments were substantially clarified. However, Indian corporate
governance was still deficient for multiple reasons, including the following: (a) SEBI had found that it
had insufficient powers to police violations of regulations. It continued to adapt and modify
regulations as it learned more about how to regulate financial markets. (b) Takeovers continued to
be difficult given the paucity of timely information and high transactions costs in both the primary
and secondary equity markets.12 (c) There was still little competition among financial
intermediaries. The state-run intermediaries were still saddled with bad loans, which affected their
ability to act as monitors. (d) Disclosure problems continued to abound. Requirements under the
Companies Act were not stringent. Financial results were published only at half-yearly intervals, and
the absence of consolidated accounts reduced the transparency of firm performance. Some data
from Credit Lyonnais Securities Analysis (CLSA) supports this assessment of the current state of
Indian corporate governance. The data are from a set of questions regarding corporate governance
administered to 482 companies in 24 emerging markets in 2001. The companies are generally the
ones of greater interest to foreign investors, typically characterized by some subset of the following
characteristics - large size, greater equity float and foreign listings. When we ranked countries by the
mean corporate governance score constructed by CLSA, we found that India ranked in about the
middle. Since most countries in these data have poor average corporate governance (with some
exceptions like Hong Kong and Singapore), and since the selected companies are generally the better
governed ones, this confirms the characterization offered above. Governance in the Indian software
industry The same CLSA data, however, also point out that the corporate governance ratings of the
software firms are higher than those of other Indian firms. The mean ratings for software firms (of
which there are eight in the CLSA data) and for non-software firms (of which there are 72) are,
respectively, 64.3 and 54.7 (minimum of 0 and maximum of 100), with the difference statistically
significantly with a P-value of 0.02. The medians are, similarly, 62.9 and 53.8, with the difference
statistically significant with a P-value of 0.2. The data also confirm that software firms are, on
average, more exposed to global competition than other Indian firms. To ratify this assertion, we
supplemented CLSA data with a variety of indicators of global competition. Software firms are more
likely to be traded on a US stock exchange (P-value 0.02) and on the London Stock Exchange (P-value
0.08) and more likely to be listed on the NYSE (P-value 0.01). Software firms garner a higher
percentage of their revenues through exports (P-value 0.01), are more likely to employ foreign talent
in senior managerial positions (P-value 0.01) and are somewhat more likely to employ a Big 5
accounting firm (P-value 0.12).13 Corporate governance at Infosys We describe corporate
governance at one of India's leading software companies, Infosys, the one most credited with
adopting good corporate governance practices. A subsequent section considers reasons why Infosys
adopted the practices that it did and the effects of this adoption on other firms in the software
industry and in India more generally. Brief introduction to Infosys In 1981, seven software engineers
started Infosys on a shoestring $1000 budget. One of the seven, ultimately the public face of the
company, was Narayan Murthy, a 1969 graduate of the Indian Institute of Technology, Kanpur. The
fledgling company immediately focused on the demands of the international market, perceiving
there to be insignificant domestic opportunity. The company grew slowly through the 1980s, almost
going under in 1989. The early 1990s saw a confluence of two events - one internal to Infosys and
one external. Externally, a foreign exchange crisis prompted the opening up of India to global
competition and the scrapping of the stifling regulatory regime that had come to be known as the
'license raj.' Internally, the departure of a key founder prompted introspection at Infosys as to the
right way to capitalize on the new external opportunities. The contours of the strategy that emerged
were the following: shifting so as to do software development within India as opposed to purely at
foreign clients' sites; a relentless focus on attracting and retaining talent; and conservative financing.
Subsequent growth at the company was rapid. The company went public on the Bombay Stock
Exchange in 1993, and on NASDAQ in 1999. It became the employer-ofchoice not just in the Indian
software industry but in India more broadly, was identified as the public face of India's globally
competitive software industry and accepted as Asia's leading information technology firm. Murthy,
with his spartan self-image, became a revered public figure and journal of International Business
Studies Convergence in corporate governance in Indian software Tarun Khanna and Krishna GPalepu
490 spearheaded a general drive towards professionalism throughout the Indian corporate sector.
Corporate governance at Infosys A centerpiece of the Infosys success story was the attention paid to
corporate governance. (See Table 2 for a timeline of the adoption of various corporate governance
practices.) Infosys prided itself on several 'firsts' in the Indian context, disclosing these in its annual
reports (Kuemmerle and Coughlin, 2000). Interestingly, eight of the twelve such firsts had to do with
adopting corporate governance practices far beyond those mandated by Indian corporate
governance standards. We are cognizant that the idea of functional equivalence alluded to in our
earlier literature review suggests that this may not be the only set of meaningful dimensions of the
form which good corporate governance practices take. This critique, however, would apply to any
chosen set of dimensions. Financial reporting and disclosure Infosys was the first Indian company to
follow US GAAP (Generally Accepted Accounting Principles), to value human resources and
voluntarily disclose such a valuation with the statement of accounts, to value its brand and disclose
this information with the balance sheet, to distribute audited quarterly reports to all investors, to
guarantee publication of audited annual balance sheets very soon after the close of the fiscal year
(typically by April 15 for a March 31 year-end), to provide the audited balance sheet in soft copy
format (floppy disks and CD-ROM) to investors and to make the balance sheet available on the
internet. These reporting practices put Infosys at the leading edge of Indian practice in terms of
financial reporting and disclosure. Management compensation Infosys was one of the first
companies to offer stock options to all qualified employees (Kuemmerle and Coughlin, 2000), not
just to senior management. The intention was to provide appropriate incentives for the employees
to create shareholder value, and to share a part of the value created with the employees. Pay-for-
performance was not adopted widely in India at this time.14 In fact, Indian regulations prohibited
companies from distributing employee stock options. Infosys and the rest of the software industry,
therefore, broke new ground in this respect by lobbying the government to change the regulations.
Board structure and practices Infosys did not play as leading a role in ensuring a board that was
comprised of independent directors, but was quick to remedy this deficiency soon after the adoption
of other corporate governance practices. Currently, the company's board consists of several
outsiders, including several international experts, and its practices for evaluating the performance of
board members are considered cuttingedge. However, the adoption of these various practices were
symptoms of a more resilient underlying attitude that is worth noting. Infosys developed an unusual
reputation for probity, honesty and transparency in all its dealings. Our interviews revealed several
illustrative examples, three of which are described briefly below (in chronological order): (1) 'In
1984, when the company was working for Borland, it was importing software from the US. At the
time you had to pay customs duties on the software (150%). Some companies creatively interpreted
the law. To get around it companies would sell books (there was no duty on books) and manuals
with floppies. If you had software that was worth $60, they would say that the charge of the
software was $10 but the book to go with it was $50. So they were able to avoid the duty and
achieve higher margins. Infosys refused to do this, and said they would rather sell the software at
halfprice (lower margins) than try to circumvent the law.' (2) 'In 1992, Infosys gave a fixed price bid
to a company. The fixed price was based on assumptions about the time and people it would take,
etc. After a short while on the project Infosys realized it had vastly underestimated what the
cost/time requirement would be. They had two choices: (1) to try to change the contract or (2) to
honor the contract. The law would have permitted some room for Infosys to back out, but they
didn't. They put more people on the project and honored the contract. 'Corporate governance is
about honoring your commitments; to your customers, your employees, your investors.' (3) 'Infosys
collected a lot of money through its public offering in the early 1990s. It was waiting for the
government to give it clearance to invest that money in a subsidiary in Table 2 Key events in Infosys'
voluntary adoption of international corporate governance standards (illustrating salient events in the
evolution of Infosys' corporate governance practices) From founding (198 1) to 1986: Company
founded on a shoestring budget of $1000 contributed by seven founders who left another software
startup, PCS. First project in New York. Global product company from the outset. From 1986 to 1992:
General reluctance to use debt. Financing mostly through profit retention. Founders continued to
contribute through acceptance of lower-than-market salaries. 1989: 90% of Infosys revenues came
from work done at client sites outside of India. Uncompromising exposure to global product
markets. 1993: Among first-market priced IPOs in India (following removal of controls on IPO prices
that existed prior to 1991). 1994: Reporting per US GAAP caused by the need to present a clear
picture to customers in the US. 1996: Move toward having independent directors. Such directors do
not hold stock in the company. 1997: Development of an audit committee modeled on Blue Ribbon
Committee's charter. Subsequently forms the standard for SEBI's recommendations of what audit
committee should look like. 1997: Webcast annual shareholder meeting. Post presentations made by
CFO and CEO to analysts on the website. 1997: Quarterly reporting initiated. Late 1997: Formed
compensation committee comprised entirely of independent directors. Committee determined
senior management compensation. This committee was set up because both NYSE and NASDAQ
listings required this. Early 1998: Disseminated all press releases on web site. 1998: Changed
designations of senior management to suit global requirements to prepare for NASDAQ listing.
Developed voluntary 10K form, which included an additional risk factor section. In India, risks were
traditionally described but not evaluated. In India, there was not the same absolute liability
associated with not analyzing risks as there was in the US. March 1999: NASDAQ listing. Infosys
voluntarily opted to behave like a US domestic issuer, rather than subjecting itself to the less
stringent standards of a foreign issuer. 2000: Infosys was the first company worldwide to comply
with new 20F regulations. Companies can file 10 OQ's and 20F's within 90 days of end of quarter and
190 days of end of year. Infosys typically files within 8-9 days. Infosys also distributes quarterly
reports to US shareholders, though it is not required to. the US. While it was waiting, several board
members suggested that the money, instead of sitting in the bank, should be invested in Indian
stocks. Infosys lost quite a bit of money in the ensuing transaction. Then there was the question of
what you tell people about what happened. Most Indian companies would not have disclosed this,
and Indian law would not require such disclosure either. But Infosys decided to disclose the losses.
The board was ready to face the wrath of the investors, and they figured they would be kicked out
and replaced. But when the meeting came, the investors said 'we respect what you have done.
Because you have disclosed something when you are in trouble, we can trust you.' The real indicator
of good corporate governance is how you respond in difficult times.' Why did Infosys adopt good
corporate governance measures? Analytically this question can be answered in two parts. First, what
factors explain Infosys' adoption of good measures, and, perhaps equally importantly, why did
(most) other software firms not adopt similar measures?15 We consider these in turn. Lack of capital
market pressure Infosys executives and others that we interviewed in India are quick to dismiss the
idea that the corporate governance practices at Infosys were adopted to attract capital. Thus,
Jayanth Verma, a member of the Securities and Exchange Board of India, stated to us, The industry
that probably needs capital the least, went after the international capital markets most
aggressively.... In fact many of these companies don't know what to do with the capital they raised...
. The pressures that the capital markets can put on a company that doesn't need to raise capital are
next to nothing. In this regard, it is also worth noting that many of the practices for which Infosys is
lauded were adopted by the company far in advance of its NASDAQ listing and, indeed, in advance of
its listing on the Bombay Stock Exchange in 1993. Further, a high reliance on internally generated
capital, and strict adherence to a zero debt policy, suggests that the stringent governance standards
are unlikely to have been adopted purely to assuage the concerns of external capital providers.16
That Infofys was relatively less in need of capital is borne out by an analysis of sources and uses of
funds. Specifically, we examined the line items 'Cash from operations' and 'Cash used in investing
activities' for Infosys and 166 other Indian software companies using data collected by the Center for
Monitoring the Indian Economy (Mumbai). These data for Infosys were available for each of six years
(1995-2000) and were available for the other firms for varying numbers of years (ranging from 1 to 6
years). We used a 'difference measure' -'Cash used in investing activities' - 'Cash from operations' -
as our crude measure of need for capital. Infosys had the third least need for capital out of 91 firms
for which data were available in 2000, second least out of 89 firms in 1999, second least out of 63
firms in 1998, sixth least out of 54 firms in 1997 and second least out of 46 firms in 1996. Further,
when comparison of the difference measure between Infosys and other software firms was
restricted to those 14 firms for which we had a reasonable timeseries (6 years), Infosys was the
second least capital constrained of this set. In contrast, the primary reason cited for adoption of the
corporate governance measures is to gain credibility with customers in the rough-and-tumble of the
software product market. This is especially so for a company originating in a country with a baggage
of negative corporate governance. Equally important is the need to be transparent and forthcoming
with talent that has truly global options. Infosys remains an employer of choice on the campuses of
the leading Indian engineering and management schools today.17 Of course, these reasons are
inter-related. The talent is needed in order to be able to successfully compete in the product market.
s To shed some further light on the kinds of factors that might have caused Infosys to adopt good
corporate governance, we also conducted a smallsample detailed analysis of the latest annual
reports of a set of Indian public companies that all have US listings - Videsh Sanchar Nigam Limited
(VSNL, the state-run telephone company); Dr. Reddy's Laboratories (one of India's leading
pharmaceutical companies); and Wipro Limited (a leading software company and Infosys rival).19
Some results of this investigation are in Table 3. Unsurprisingly, all conform to certain minimal
standards required of companies listed on US exchanges, such as a reconciliation of the Indian GAAP
accounting statements with US GAAP. However, there is quite a bit of variation in the extent to
which other information is provided. The state-run VSNL
provides the least information, at least along the profiled dimensions, suggesting that mere need to
access capital markets is unlikely to explain Infosys' adoption patterns. Some would aver that this is
an unfair comparison, given the lack of competitive pressures felt by what was until very recently a
state monopoly.20 Dr. Reddy's Laboratories, a pharmaceutical company in the vanguard of another
knowledge-intensive industry, perhaps provides a fairer comparison. Indeed, it provides very
interesting information on the value of its intangible assets, for example. However, it too falls short
of the Infosys report in a number of ways. Thus, a company that clearly competes in global product
and capital markets, but arguably not as much as software companies do in the global talent
markets, does not disclose as much as does Infosys. The final comparison with Wipro, is perhaps the
closest apples-to-apples comparison within the software industry. Again we see that a company that
is as much in the throes of global product and talent competition falls short of Infosys, suggesting
ultimately that there is an Infosys-specific effect, in addition to whatever effect can be attributed to
the global software industry. Table 4 shows the evolution of a set of corporate governance practices
at Infosys, gleaned entirely from its annual reports. In every year from 1994 to 2001 more
information relevant to corporate governance is released (with the exception of the transition from
1999 to 2000 during which time there is no change). Why Infosys rather than other software firms?
It is worth pondering why Infosys chose to adopt these corporate governance measures, while other
firms, arguably comparably exposed to global competition for products and talent, did not. We
consider three classes of possible, and nonmutually exclusive, explanations in sequence: unobserved
heterogeneity in type; positive externalities through a variety of means; and altruism on the part of
Infosys management. Firm asymmetries The possibility of (possibly unobserved) heterogeneity
among firms might suggest an answer. Specifically, it could be that Infosys was sufficiently different
from other candidate software firms to make adoption most beneficial for it (or to make adoption
least costly for it). Stated differently, consider a situation where there is an informational asymmetry
between firms and customers or suppliers, and there is a separating equilibrium under which some
firms find it worthwhile - presumably less costly - to adopt corporate governance and signal their
type, while others do not (Spence, 1974; Blass and Yafeh, 2001). Then the proportion of firms that
adopt good corporate governance procedures is determined entirely by the proportion of 'good'
firms in the population. One constraint to adopting good corporate governance is immediately
identifiable for several of the other now-prominent firms in the industry. Wipro, Tata Consultancy
Services (TCS), and Satyam are all part of broader business groups.

As such, their ability to reengineer their corporate governance systems may well be subject to inertia
of a sort that did not apply to a professionally managed startup like Infosys.22 Note that one
dimension of heterogeneity - degree of exposure to global competition - should not be over-relied
on here. Infosys, while more exposed to global competition than the median Indian software firm, is
not more exposed than comparably global TCS and Wipro. A second mechanism can be sketched out
whereby firms differ sufficiently in their type so that some find it worthwhile to adopt while others
do not. Suppose that governance choices are made at the outset by firms when each could either
have incurred expenditure to adopt good governance or could have foregone this investment
possibility. Suppose further that firms expect that Indian industry will upgrade over time. In its early
stages, there is commodity demand and not much benefit to good corporate governance. In later
stages, demand for quality rises and benefits of good corporate governance become more apparent.
In such a world, it is possible to derive asymmetric equilibria where ex ante symmetric firms make
different (fixed in long run) choices, that is, some take the proverbial 'high road' and adopt good
governance and profit in later stages, while others forego good governance, and profit in earlier
stages, and no firm finds it beneficial to switch given the actions of others. The difference from the
signaling model earlier is that there is no uncertainty in type here, but the heterogeneity among
firms is driven by long-run decisions made at the outset. Externalities A second class of explanation
has to do with Infosys' actions imposing positive externalities on the rest of the environment.23
However, this class of explanations must still answer the question: Was Infosys better served by
being the only (or one of a small number) well-governed company in the Indian software firmament,
uniquely able, in the eyes of global customers, talent and customers, to benefit from India's low-cost
talent base? Or was Infosys better served by upgrading the corporate governance systems of other
firms in India? Answers to these questions depend on Infosys' ability to capture some of the benefits
of these positive externalities in one of two ways. Either the externality imposed on the environment
results in a lower cost of capital for Infosys or talent is easier to attract, for example, through the
diaspora community, as a result of their being a larger number of well-managed Indian software
firms as potential employers. We consider four distinct mechanisms through which these positive
externalities might arise: perceptions of global customers and providers in factor markets;
emergence of specialized intermediaries; resolution of uncertainty; and regulatory education.
Regarding the first of these, note the quote by Mohandas Pai, Chief Financial Officer of Infosys
(Kuemmerle and Coughlin, 2000), We have learned that you can create wealth in a legal and ethical
manner. We have a ... [big] competitive advantage through our transparency. But we do not want to
just simply keep it for ourselves. We want to share all our best practices with all Indian companies
and will even help them implement it. That is how you create maximum value in all of India. But Pai
went further in comments to us that implied that there is a positive externality emanating from
being surrounded by well-governed entities. Thus, You are always subject to the external
environment, and if you can improve it, it will serve you well. For instance, if global capital perceives
India to be a great place to invest, you're obviously going to have a greater number of investors
coming to India to invest. And for that, it's not good to have just one company like Infosys that has
good corporate governance standards. The whole thing changing is good for India, and obviously
what is good for India, is good for us. So our goal has been to work with everybody else to make a
good external environment. Second, Infosys' adoption of good corporate governance might
stimulate the development of specialized intermediaries, which, in turn, will benefit other Indian
software firms. For example, analysts, having been exposed to Infosys' superior disclosure practices,
might demand the same from other companies. This is especially so as analyst capabilities, normally
stunted in an illiquid market, themselves develop.24 Third, one can make the argument that the
benefits of corporate governance are uncertain and that, once Infosys adopted and the benefits
became clear, others will become more willing to adopt. This has the flavor of models of herd
behavior, such as those by Banerjee (1992) and by Bikhchandani et al. (1992), which typically rely on
the revelation of some information to one party and the gradual resolution of uncertainty to drive
adoption by other firms. Finally, pressure might arise from a now-educated regulator. Thus, we were
told in our interviews: The fact that there were companies who moved forward despite the lack of
regulations, made the task of creating requirements easier for regulators. Now the regulators can
say, 'If some of India's leading companies can do this, so can you.' Today the implication of
resistance is that you have something to hide, and that is not a risk that companies are willing to
take. So as a result of companies moving ahead of regulation made: resistance to change lower &
demand for change higher. Both from the point of view of users of financial information and
providers of financial information, people saw what better standards looked like and they liked what
they saw. Circumstantial evidence in favor of the 'educated regulator' hypothesis is most developed,
so we consider this at some length. Infosys, and Murthy in particular, has played a central role in
helping diffuse good corporate governance practice. Aware of the barriers to good corporate
governance, Murthy has gone out of his way to help circumvent them. Part of this effort has been
through voluntary membership in various governmental and quasigovernmental bodies that play a
role in such diffusion. Murthy and other senior managers played a prominent role in helping design
the Securities and Exchange Board of India's (SEBI) guidelines on corporate governance. Murthy was
a prominent member of the Kumar Mangalam Birla Committee on Corporate Governance.
Interestingly, if one examines the constituent list of the Birla committee, other than Birla himself,
there is no industrialist or representative of a company on the committee other than Murthy.25
Further, Murthy has served as chairman of NASSCOMM, the prominent software industry lobbying
group from 1992 to 1994, and Nandan Nilekani, one of the Infosys founders, was a founding
member of NASSCOMM (Kuemmerle and Coughlin, 2000). The various activities have resulted in
some mandated diffusion of corporate governance. That is, activities by SEBI, the Birla Committee,
the Confederation of Indian Industry's (CII) corporate.

governance initiative - spurred along by individuals like Murthy - have institutionalized the idea that
corporate governance should spread. Note the Birla committee's assessment that, to disseminate
good corporate governance, 'a statutory rather than a voluntary code would be far more
meaningful.' (p xx). The idea was to get a critical mass of companies signing on by fiat, and then to
isolate detractors and eventually shame them into adopting the standards. This was seen to be the
way to get around those blocking adoption of such corporate governance standards. The phase-in of
the SEBI regulations began on April 1, 2001. The top 200 companies were to have complied by this
date, and more companies will have to comply each year. The 200 companies that had to comply by
April represent about 80-90% of the market capitalization that is usually traded, and are the cream
of corporate India. The new SEBI guidelines mandate changes in two broad areas. First, there are
proposed amendments to the board structure. In particular, the SEBI guidelines suggest that the
board have more independent directors and an audit committee. The second broad area of
improvement that is mandated is improvement in the accounting standards. This is somewhat tricky,
since, unlike the US. SEC, SEBI does not have direct oversight over the accounting industry. SEBI has
thus left it up to the accounting body to set standards closer to international norms. It has also said
that it would enforce some of these standards through modifications on currently lax listing
requirements. Among the modifications to existing accounting practices are the following:
Consolidation of accounts; Disclosing accounting results by business segment and geographic
segment; Deferred tax accounting; and Related party disclosures, especially to enforce the rights of
the minority shareholder. Another area where regulatory changes played a role was in the adoption
of employee stock options. Till recently, Indian laws prohibited the granting of stock options to
employees, limiting companies' ability to align the incentives of employees with shareholders. The
software industry was the first industry to be granted an exception to the rule, thanks in part to the
lobbying efforts of the software industry association NASSCOMM. Once this practice became
widespread in the software industry, other companies began facing pressure in the labor market. As
a result of lobbying by these companies, the Indian government recently changed the law, making it
possible for all companies to grant employee stock options. Several large companies began to adopt
this practice, even though the practice is currently far from being wide spread among Indian
companies. Figure 1 provides a schematic showing the (hypothesized) inter-relationships between
some of these positive externality mechanisms.

Conclusion Does product and labor market globalization cause convergence in corporate
governance? Our case analysis suggests that the answer to this question is a 'constrained yes. ' A
summary of our interpretation of the case follows. Software firms', and especially Infosys', exposure
to global product markets, first, and then to global talent markets, seems to have driven some
adoption of shareholder-style corporate governance in India. In contrast to the stance taken by the
existing literature on the convergence of corporate governance, we do not find much of a role for
capital markets as drivers of this process. If anything, Infosys and some other Indian software firms
accessed global capital markets long after their exposure to global product and global talent markets
had driven them to adopt good corporate governance practices. Infosys may have chosen to be a
lead adopter of such practices in India for several reasons that we analyze - as a signal of its high
quality, to benefit indirectly from positive externalities that its adoption decision had on other
software firms in India, or as a consequence of Infosys' CEO's ideological bent. We discuss how this
latter reason results in a Journal of International Business Studies Convergence in corporate
governance in Indian software Tarun Khanna and Krishna GPalepu 502 pro-active role taken by a
coalition of firms in 'educating the regulators' in how good corporate governance should be adopted.
However, the Infosys success story and its efforts at regulatory education notwithstanding, there is
only limited diffusion of such practices to other firms in the software industry and to other firms in
India. We explore several reasons why, in practice, the effects of globalization on corporate
governance convergence are somewhat limited. It is possible that the effects of adoption decisions
taken by Infosys, by other leading software firms, and by other leading firms in global industries in
India, are only just beginning to be felt.3s Perhaps the conclusion of limited diffusion (along the lines
sketched out in Figure 1) is premature. In ongoing work, we are hand-collecting large sample data to
shed light on both a positive and a normative question. The positive question has to do with
quantifying various barriers to the diffusion of US style corporate governance. The normative
question has to do with the extent to which such practices should diffuse in the emerging market
context of India. Acknowledgements We thank the management of Infosys for providing access and
relevant information, Kat Pick for assistance with several interviews in India, Joe Kogan for help with
econometric work that is closely related to this paper, Suraj Srinivasan for his work on a companion
paper on disclosure, and Chris Allen, Sarah Eriksen and Kathleen Ryan for their assistance with
collecting relevant public-sources data. Omkar Goswami (Chief Economist, Confederation of Indian
Industry and Board Member, Infosys), S Ramadorai (CEO, Tata Consultancy Services), Fred Hu
(Managing Director, Goldman Sachs, Asia), Fritz Foley, Simon Johnson, Bjorn Jorgensen, Joe Kogan,
Greg Miller, Ravi Ramamurti, Jasjit Singh, Yishay Yafeh, Bernard Yeung, Sri Zaheer and the Global
Corporate Governance group at the Harvard Business School provided helpful comments. We also
benefited from discussions with seminar audiences at the HBS/Tsinghua University Conference on
Global Corporate Governance in Shanghai (July 2001), at the Academy of Management Meetings in
Washington, DC (August 2001) and at the William Davidson Institute and Aspen ISIB-sponsored
conference on 'Impact of Cross-border Interactions on Social Institutions' in Aspen (September
2001). Comments from the editor, Arie Lewin, and two anonymous reviewers greatly improved the
paper. Notes 'See, for example, Krishna and Khozem (2000). 2Bhide (1993) points out that there are
pros and cons to a financial system with dispersed shareholdings. Such a system encourages an
active external market for corporate control, and thus can foster good governance. On the other
hand, the lack of a large block shareholder who can internalize the externalities inherent in providing
monitoring services also means that shareholders will not actively engage in internal monitoring, but
will choose to vote with their feet. Thus, there are tradeoffs inherent in different systems of
corporate governance. 3Kaplan (1994) has provided some econometric evidence of this for a
particular aspect of corporate governance. Statistically, poorly performing CEOs appear equally likely
to be dismissed in the US, Germany and Japan, despite the very different formal systems in place.
4As an example, Tiger Fund forced SK Ttelecom, a Korean firm belonging to the SK Group (chaebol)
of companies, to abandon shareholder unfriendly practices. Slsrael provides an example of such a
sorting mechanism (Blass and Yafeh, 2001). The burgeoning number of global capital issues also
suggests the importance of this issue (Karolyi, 1998). Of course, the flight of high-quality issuers
might have the opposite effect of causing a degeneration, or hollowing-out, of the local capital
market. Such concerns have been expressed, for instance, in South Africa recently, as well as in
Mexico (Moel, 1999). 6lndian industry has generally played only a very small role in other large parts
of the global software industry, such as packaged software. We eschew discussion of these parts of
the industry for brevity. Also, we focus on export markets, rather than on the domestic Indian
software market, since our interest is in global competition in this paper. 7It may be that quality
concerns are greater when a firm is located in an environment with a reputation for poor
governance and poor quality products. Perhaps US firms do not find it necessary to seek certification
of this sort. 8Of course, portfolio investment into India has occurred in parallel, with some increase
following India's 1991 liberalization. 9This section draws extensively from Khanna and Palepu (2000).
10Two recent corporate governance disasters indicate the state of affairs in 2001. The celebrated
Ketan Parekh scandal, named after the protagonist broker, involves banks lending money to
unscrupulous entrepreneurs to invest in, and thereby exacerbate, India's journal of International
Business Studies Convergence in corporate governance in Indian software Tarun Khanna and Krishna
G Palepu 503 information technology-led stock market bubble, with ultimately disastrous
consequences. The second has to do with the failure of the Unit Trust of India, the state-run mutual
fund in which tens of millions of Indians have their life-savings invested, and its unprecedented
'repurchase freeze' which prevents savers from redeeming their savings. The Ministry of Finance has
endured heavy criticism for its inept handling of the UTI affair, especially since problems at the fund
were apparent and discussed in the country's Parliament and in the media in 1994 and 1998. The
situation is perhaps best summarized by the scathing critique issued by ex-Finance Minister
Manmohan Singh, the architect of India's 1991 reforms, 'First and foremost, we need to improve the
quality of governance in this country. Making a mockery of the system, not enforcing the law, letting
respective state governments play havoc with law and order, having non-uniformity in
implementation of law depending on the status of the persons involved and letting loose an era of
extortions either through direct ransom or through bribery in every field of life, including the
judiciary, have played havoc on the minds of people' (Business India, August 6-19, 2001, 48). "In
1993-1994, many firms issued preferential equity allotments to the controlling shareholders at
steeply discounted prices. 12A detailed account can be found in SEBI (1994). The need to transact
physically imposes limits on trading volumes and on the speed at which orders can be handled. With
the open outcry system (as opposed to screen-based trading), it is difficult to establish audit trails.
There were no depositories, making settlement difficult (and no legislative means to establish
depositories). Trades were often consummated outside the exchange. This left a lot of room for
manipulation, with cases of fraud becoming legion. 13However, there is no statistically significant
difference between software and non-software firms in the proportion of equity held by institutional
investors. 14Note that Wipro had a stock ownership plan for senior employees dating back to the
mid-1980s. 151t is prudent to point out the possibility of reverse causality in our reasoning regarding
why Infosys adopted good corporate governance practices. While we reason that good corporate
governance yielded factor market advantages that helped Infosys succeed, it could be that Infosys
succeeded for reasons unrelated to corporate governance, and subsequently chose to invest
available resources in adopting new practices. At a minimum, given the talent that flocks to Infosys
in the domestic Indian labor markets, it is implausible, in our opinion, that this reverse causality
captures reality entirely. 16Relatedly note that Azim Premji, CEO of another leading Indian software
company, Wipro, lists the following reasons for his company's recent NYSE listing: (1) obtain
acquisition currency, (2) retain talent, (3) strengthen brand and credibility and (4) impose discipline
on organization (Ramamurti, 2000). This list of reasons assigns only partial importance to capital
market factors. 17We lack original data to make this point persuasively. Note, however, that Infosys
was judged 'India's Best Employer' by the first Business Today-Hewitt Survey conducted in December
of 2000. (Business Today is one of India's leading business magazines.) 18Indeed, it is possible to
overstate this distinction between globalization of capital vs other kinds of markets. For instance,
should listing overseas to be able to issue dollar-denominated options to talent be classified as a
capital market effect or one caused by exposure to global talent markets? We are conscious of this
difficulty, but nonetheless concur with observers at Infosys that access to capital, in some intuitive
sense, is not the driver of adoption of several of these corporate governance practices. 19Botosan
(1997) constructs a disclosure index for a sample of US companies by similarly examining a more
comprehensive (but also ultimately ad hoc) set of indicators in annual reports, and shows these to
be related to the cost of the firm's equity capital. 20Theoretical work on the effect of competition on
disclosure investigates whether mandatory disclosure (regulatory fiat) is necessary in the face of
competition, and how disclosure varies with the nature of competition and with the degree of
information asymmetry between managers and economic agents outside the firm. See, for example,
Verrecchia (1983), Dye (1985) and Darrough (1993). 21Business groups are collections of legally
independent firms, typically diversified across a range of industries, often controlled by a single
family. The firms in a group are linked by several formal and informal ties. Arguments can be made
both in favor of, and against, the idea that groups would adopt better governance techniques
(Khanna, 2000). Here, a possible rationalization of Infosys adopting good corporate governance, and
some group affiliated software firms not doing so, is as follows. Groups had access to other sources
of factor inputs and did not need to rely on external markets - hence did not feel governance
pressures to the same extent. 22Lest these business groups are tarred with too broad a brush, note
that TCS is, by most accounts
RESEARCH METHODLOGY

OBJECTIVE OF MARKETING RESEARCH

PRIMARY OBJECTIVE

The main objective of research is to analyze the employee awareness of consumer governance of
organisation.

To find out the perception, satisfaction and acceptance level of the corporate governance in the
organisation

SECONDARY OBJECTIVE

The primary target of the market research was to find out preference of Infosys share.

Research design

Research design is the plan, structure and strategy of investigation conceived so as obtain answer to
research to question and to control variance. ‖ The definition consists of three important terms –
plans, structure and strategy. The plan is an outline of the research scheme on which the researcher
is to work. The structure or research is a more specific outline or the scheme and the strategy shows
how the research will be carried out, specifying the method to be used in the collection and analysis
of data.

TYPE OF RESEARCH DESIGN

DESCRIPTIVE RESEARCH DESIGN Descriptive studies are under taken in much circumstance. When
the researcher is invested in knowing the characteristics of certain group such as age, sex,
educational level or income, descriptive study may be necessary. Other cases when a descriptive
study could be taken up are when he is interested in knowing the proportion of people in a given
population who have behaved in a particular manner, making projection of certain thing or
determining the relationship between two or more variables. The objective of such a study is to
answer the ― who, what, when, where and how ‖ of the subject under investigation. There is
general feeling that descriptive studies are factual and very simple. This is not necessarily true.
Descriptive study can be complex, demanding a high degree of scientific skill on the part other
research. A two part of descriptive research design

• Longitudinal

• Cross sectional

In this survey we have used Cross Sectional Design CROSS SECTIONAL DESIGN Descriptive design
gives the present picture of the situation at a given point of time A cross sectional study is a
connected will a sample of elements from a given population. Thus it may deal with house holding,
dealer, retail store or other entities. Data on the number of characteristics from the sample element
are collected and analyzed. Cross sectional studies are if two type – field studies and survey.
Although the distraction between them is not clear cut, there are some practical difference which
needs different techniques and skills.
RESEARCH APPROACH

Basically there are two approach in collection of primary data

• Observation

• Survey

We have used survey in our research Survey there four method by which data can be collection in a
survey.

The methods are – Personal survey, Mail survey, Telephone survey and Computer survey. We have
used Personal Survey.

RESEARCH INSTRUMENT

Marketing research has a choice of to main research instrument in collection primary data:
questionnaires and mechanical devise. In my marketing survey I have used questionnaires for
collection primary data. Questionnaire constitutes the most prevailing method of information
method among the communication method used. Both structure and unstructured questionnaire is
used in marketing research. Different scale of measurement can be conducted and used to capture
appropriately the strength of audience response We have used structure questionnaires. A structure
Questionnaire is a formal list of questions framed so as to get the fact The interview asks the
question strictly in accordance with a per – arranged order. If for example the market researcher is
interested in working the amount of expenditure incurred on different type of clothing i.e. cotton
woolen or synthetic, by different household classified according to their incomes he may frame a set
of questions seeking this factual information. If the marketing researcher appoints some interviewer
to collect information on his behalf, the interviewers are expected to adhere to the same order in
asking the question as contained in the questionnaire. Structure questionnaire is one where the
listing of questions is in a prearranged order and where to the object of inquiry is revealed to the
respondent.
SAMPLE SIZE & AREA

One has to decide how many elements of the target population are to be chosen. We have chosen a
sample size of 150 respondents .

SIGNIFICANCE OF THE STUDY Significance the geographical scope of the study is restricted to Pune
only..All the analysis and suggestions are based on the analysis of the both primary and
secondarydata.

LIMITATION OF RESEARCH

Study report may feel constraint from following factors:

• Lack of time period

• Lack of experience