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Infosys: Beyond numbers - Views on News from Equitymaster
 
 
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  • May 21, 2001

    Infosys: Beyond numbers

    Infosys has held the stocks markets in awe. Of course, the brilliant growth rates and a superb operating margins did have a significant contribution, however, its quality of corporate governance and the high disclosure standards have also contributed to its success. A good measure of the disclosure standards would be the fact that Infosys, for the sixth consecutive year, has received the Silver Shield from the Institute of Chartered Accountants of India for the best presented accounts among the entries received from non-financial, private sector companies.

    Infosys’ zealous commitment to corporate governance can be an example for others in the corporate sector. For Infosys has benchmarked itself against global practices. Infosys’ philosophy is “the company respects the inalienable rights of its shareholders to information on the performance of the company and considers itself a trustee of its shareholders “.

    To implement this philosophy the company has constituted a board that is relatively large compared to other corporates in the country. What is interesting to note is the fact that 50% of the board members are independent i.e. they do not have any interest in the company. The independent members include Prof. Marti G. Subrahmanyam, Senator Larry L. Pressler, Dr. Omkar Goswami to name a few.

    Board of Directors composition
    Category No. of
    directors
    %
    Founder directors 5 31.2
    Executive directors 3 18.8
    Non-executive, independent directors 8 50.0
    Total 16 100

    To oversee financial reporting Infosys has an audit committee that as per Blue Ribbon committee report has only independent and non-executive directors. Deepak M. Satwalekar, MD, HDFC Standard Life Assurance Company Ltd., heads the committee.

    The primary objective of the committee is to ensure that the financial reporting that takes place is accurate, timely and transparent. Its very interesting to note that Infosys has decided that the committee shall consist solely of independent directors and minimum of three directors in the committee shall be ‘financially literate’. At lease one of the members of the committee should have a financial management expertise.

    Infosys has not only managed comply with the Kumar Managlam Birla committee on corporate governance but also with other standards that are used globally like the Cadbury Committee recommendations in the (UK), Euroshareholders corporate governance guidelines and the Blue Ribbon committee (US).

    As a result of complying with these recommendations Infosys has managed reporting standards that are one of the best in the Indian corporate sector. The depth of reporting in every quarter is quite significant. Infosys is one of the very few Indian corporates that publish a balance sheet every quarter.

    In a recent study by CLSA (Credit Lyonnais Securities Asia) on emerging markets, Infosys was ranked No 2 in corporate governance. It scored 93.3 out of a possible 100. The company that did better than Infy was HSBC, which scored 95.5.

    The study found that good corporate governance begets good stock performance. According to the study, the stock prices of the largest 100 companies covered fell an average 8.7% last year, while the stocks of the 25 companies rated best for corporate governance rose by an average 3.3%. The bottom 25 companies (ranked by their quality of corporate governance) saw their stocks fall by an average 24%. A very important conclusion that was drawn from the study was that the correlation between good corporate governance and share performance for the largest companies is "a near perfect fit."

    Those pessimistic about Infosys performance should take a clue from here. The concern is about growth. One statement in the directors report reads “ As of 31st March, 2001 the company had 1.6 m square feet of space capable of accommodating 10,100 professionals and 1.9 m square feet under construction”. This should allay fears about growth.

     

     

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