W14015

INFOSYS: PEER REVIEW AT BOARD LEVEL

R. Chandrasekhar wrote this case under the supervision of Professor Yaqi Shi solely to provide material for class discussion. The
authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised
certain names and other identifying information to protect confidentiality.

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Copyright © 2014, Richard Ivey School of Business Foundation Version: 2014-02-21

Infosys Technologies Ltd.1 (Infosys), an information technology (IT) company headquartered in Bangalore, India
where, in April 2001, N.R. Narayana Murthy, chairman of the board and chief mentor, introduced a model of Peer
Review at the board level.

In April 2008, Murthy was taking a fresh look at Peer Review for two reasons.

First, Murthy was on the verge of reinforcing Peer Review with a new model of performance appraisal called Board
Review. In Peer Review, each individual member of the board was reviewing the performance of every other
individual member of the board. In Board Review, each individual member of the board would be reviewing the
performance of the board as a whole.

Second, the Nominations Committee, a board level committee with the mandate to screen and review appointments
to the Infosys board, had recently put a new charter in place. The charter mandated the Nominations Committee to
“coordinate and oversee the annual self-evaluation of the performance of the board and of individual directors in the
governance of the company.” The Nominations Committee was thus acquiring a proactive role at the Infosys board.
Its new stature was consistent with the enhanced roles of other board committees like the Audit Committee,
Compensation Committee, and Risk Management Committee (which also had their own charters). These measures
were meant to raise the general profile of corporate governance at Infosys.

Said Murthy:

I have had a firm belief in the usefulness of Peer Review as a performance appraisal tool at the board level
ever since its launch. But, as I re-examine it in the light of new developments, some questions begin to
surface. Is Peer Review adding value to boardroom discussions? Or is it a nice-to-have tool? Does it
supplement Board Review? Or will it duplicate it? Should we choose between Peer Review and Board
Review? Or do we need both? Should we make self-review a standalone exercise? Or should we retain it, in
its present form, as part of Peer Review? These are fundamental questions. I am not sure we have the
answers.

1
The company was renamed Infosys Ltd. on April 30, 2011.

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BEGINNINGS

Infosys had secured a listing as a public limited company on the Indian stock exchanges in June 1993, a little over a
decade after it was founded by a team of seven Indian IT professionals. The team had been working together at an
Indian software firm located in the city of Pune in western India and had left it to start Infosys. The board of Infosys
at the time consisted of the seven founding directors who held executive positions, heading different roles, as full-
time employees of the company. It was in 1997, as part of preparing for a listing on NASDAQ, the American stock
exchange, that the Infosys board had begun to identify potential inductees for independent director positions on the
board.

NASDAQ had made it mandatory for a listed company to have on its board independent directors who “play an
important role in assuring investor confidence.”2 It had also made it mandatory for various board committees of a
listed company to have only independent directors as their members. In addition, rule 4200(a) (15) of NASDAQ’s
Marketplace Rules had identified attributes that would prevent a person from holding the position of an independent
director on the board of a company. The objective was to demarcate the role of management and governance,
thereby ensuring the integrity and independence of the board. By the time Infosys got listed on NASDAQ in March
1999, its board had 10 directors – six founding directors3 and four independent directors.

By March 2001, Infosys had promoted, for the first time in its history, three members of the Management Council
— the company’s second line of command responsible for strategy implementation and for day to day operations —
to board level positions. They were non-founding members and their elevation took the number of executive
directors to eight.4 To ensure parity, Infosys simultaneously brought four new independents aboard, bringing the
total number of independent directors to eight as well.

An increase in the size of the board had brought the issue of performance appraisal at the board level into centre
stage at Infosys. It was a grey area in many companies, including global enterprises. The only yardstick of
performance used by them was the number of meetings attended by board members — of both the board and the
board committees — in relation to the number of meetings held during the year. The disclosure of this information
to stockholders was mandatory; the information was therefore in the public domain.

Internally, some of the NASDAQ listed companies had a system of Board Review wherein each member of the
board would evaluate the performance of the board as a whole once every year. This evaluation was confidential; its
disclosure to stockholders was not mandatory.

Infosys was benchmarking its corporate governance practices with the best in the world from the beginning. But on
the issue of performance review at the board level, it was keen on striking a path of its own. Peer Review was a step
in that direction.

Group Dynamics

A board position was an acknowledgment of years of achievement in business or of domain expertise which was
valuable to the company. Directors in Indian boards, and particularly the independent directors, were not used to
being evaluated. So, when Murthy first discussed the idea of Peer Review among his colleagues on the Infosys
board in 2001, a minority of them felt uncomfortable. They held the view that a one-on-one evaluation would be out
of place in a corporate boardroom characterized by shared, rather than solitary, responsibility. There were also
questions of its usefulness, if the information would remain confidential, and if it would be a disincentive for new
appointees. The majority view at the board was favourable, however, and therefore prevailed.

2
www.sec.gov/rules/other/nasdaqllcf1a4_5/nasdaqllcamendrules4000.pdf, accessed August 2, 2013.
3
One of the founding directors had left the company in 1989.
4
One of the founding directors had retired in 2000 on reaching the age of superannuation.

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Said Murthy:

Board level performance depends on many variables. The way in which the individual members relate to
each other is one example; the way in which group dynamics comes into play is another. But one common
factor is that by the time an individual comes aboard as an executive or an independent director, he or she
would have built up an impressive track record of success. They don’t have to prove themselves per se. A
close parallel would be a tenured position in academia. But they need to be motivated. So what motivates
them? The only thing that motivates them, in my view, is the respect he or she receives from the peers on
the board. The peers are the only ones who see him or her perform on the board; they are the only people he
or she interacts with on matters relating to a company. I realized that at a subconscious level, peer opinion
is highly valued by members of the board. Peer feedback would also be the most effective instrument for
improvement. That was how I introduced the concept of Peer Review.

It was also driven by a mindset among founding directors that every position at every level of Infosys must be merit
oriented and held only by the most deserving. The corollary was that every position, however exalted, must be
subject to regular appraisal and should have appropriate channels for providing and receiving feedback. Thus, Peer
Review came into play at Infosys as a mechanism for board members to review each other’s performance and
provide feedback to improve board effectiveness.

PROCESS

Infosys did not enlist external help in either designing the process of Peer Review or putting it in place. Murthy
personally led the initiative in developing a Peer Review Questionnaire (see Exhibit 1). Accordingly, each member
of the board had to rate each of the 15 other directors on eight different attributes with one of three ratings: Very
Satisfactory, Satisfactory, and Fair. The questionnaire also had a single column provision at the end for what it
called self-review which was open-ended. The chairman would send the questionnaire electronically to each director
a few weeks before the final board meeting for the year. The board meeting was usually scheduled in the second
week of April, in advance of the annual shareholder meeting.

Each director had to respond to the questionnaire and return it to the chairman electronically. Once all the responses
were received, the chairman would arrive at the average score on each of the eight attributes for each director and
also the highest average recorded on that attribute by an individual director. These two data points would be fed into
the Peer Review Feedback Form (see Exhibit 2) which, in turn, became the basis of a discussion between the
chairman and each individual director.

Confidentiality

This discussion was confidential in the sense that no director would have access to the average score of the other 15
directors. Each director would only have access to his or her own average on each attribute and the highest
individual score on that attribute. This discussion between the chairman and the individual director would take place
either on the day of the final board meeting of the year or during any of the preceding two to three days. The
chairman’s performance was discussed by the lead independent director who would give the chairman an average
rating on each attribute and also the highest individual score on each attribute.

Peer Review had two characteristics. It was not linked to remuneration of either independent directors (whose
compensation was determined as a fixed sum per annum by the board and approved by shareholders) or executive
directors (who, being employees of the company, had regular appraisals of their managerial roles). It was also
confidential. It was not discussed outside the board and beyond one-on-one even within the board. Even Murthy’s
personal staff, sworn to secrecy in the normal course, did not have access to information about which director scored
the highest rating on which attribute or how he or she ranked overall in a year.

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Said Murthy:

Peer Review is a mechanism through which each director gets a sense of where he or she stands on
particular attributes vis-à-vis the best on the board. It provides an indication of the areas for improvement.
The findings are guarded between the chairman of the board and an individual director. The process is
transparent between the two. Each director would be free to choose the way forward on the basis of that
information. There is no follow up because there are no consequences attached to Peer Review.

GLOBAL IT SERVICES INDUSTRY

The industry had its origins in the changing role of IT — from supporting businesses to transforming them — which
was becoming evident in the early 1990s. It had grown at about 30 per cent per annum to become a US$708 billion5
business in 2007.6 The 10 largest vendors together held 26.6 per cent share of the IT Services industry, with IBM
leading the market with 7.5 per cent share in 2007. They were operating in four broad segments – Product Support,
Consulting, Systems Integration, and Outsourcing.

The ongoing global economic crisis, triggered by the failure of the U.S. mortgage industry in late 2007, had a two-
pronged effect on the industry. In the short term, the industry was to witness a deceleration in growth to 9 per cent in
2008 largely because corporate customers were pruning their IT budgets in tune with the slowdown in the macro-
economic environment. In the long term, however, it was forecast to recover quickly and continue on the path of
growth because, in a renewed bid to become competitive, businesses worldwide were expected to farm out their IT
services to specialists on the outside.

The fundamentals of the industry were sound because of four growth drivers.

First, IT platforms were critical to companies in executing business strategy; they were also the source of
competitive advantage in acquiring and retaining customers. Second, the platforms were becoming complex, adding
not only to the costs of maintaining them but also the risks in managing them. Third, designing technology platforms
was beyond the core competence of customers who were keen to focus on their strengths. Fourth, the products and
services provided by the IT Services industry were distance agnostic. Customers in the United States or Europe
could outsource their entire IT needs to vendors located offshore in Mexico or the Philippines.

India had become a leading destination for offshore technology services. The India Advantage, as it was widely
known, had three dimensions.

The first was the assurance of high quality delivery as guaranteed by the global benchmark known as Software Y,
which had acquired SEI-CMM quality certification with approximately 80 Indian software companies (including
Infosys) certified at the highest level known as SEI-CMM Level 5.

Secondly, India offered higher cost benefits than other locations. Indian companies were known to deliver savings to
their customers of anywhere between 25 and 50 per cent of their original cost base. Finally, the most compelling
advantage of India was its abundance of skilled and English-speaking labour. The country was mobilizing 3.1
million university and college graduates including 0.5 million technical graduates annually. It was the single largest
pool accounting for 28 per cent of relevant human resources across all offshore destinations.

A large part of the demand for IT Services came from the developed world, with nearly 90 per cent originating from
the countries of North America, Western Europe and Japan. IT spending in emerging markets was growing rapidly,
however, with India and China each accounting for nearly 20 per cent of growth rates. Large corporations accounted
for about 60 per cent of global IT spending. But the IT expenditure by small and medium-sized businesses was
growing faster at 7 per cent per annum versus approximately 3 per cent by large corporations.

5
All currencies are in US$ unless otherwise stated.
6
Gartner Data Quest November 2006

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The industry was characterized by common trends among vendors. They were integrating onsite and offshore
execution capabilities in delivering seamless and scalable services. They were increasing the depth and breadth of
their offerings to provide one-stop solutions to customers. They were developing expertise in domains which were
core to their customers. They were making regular investments in people and facilities to stay current. They were
moving up the value chain by offering high-end services like integration and technology strategy while also
consolidating their presence in the lower-value-added services of business process outsourcing (BPO).

Some common trends were evident even among customers. They were reducing the number of technology services
vendors. Rather than taking an extreme position of outsourcing IT requirements either entirely or piecemeal, they
were taking a collaborative approach in which they would work with vendors to develop customized solutions.

INFOSYS – COMPANY BACKGROUND

Set up in July 1981 by seven IT professionals with a vision of becoming “a globally respected corporation providing
best-of-breed solutions and employing best-in-class professionals,”7 Infosys had a mission of “defining, designing
and delivering IT enabled business solutions” for its customers. It helped its customers achieve strategic
differentiation and operational efficiency by leveraging IT in transforming their business processes. Its customers
were global; they were in diverse industries such as financial services, media, energy, healthcare, manufacturing,
retail and logistics.

Infosys had consolidated revenues of $4.18 billion for the year ending March 2008 and a net income of $1.15
billion.8 The revenues had grown at a compound annual rate of 40.8 per cent and the net income at 42.7 per cent
during the preceding five year period.

Strategy

Infosys was realizing its mission with eight strategic goals.

The first goal was to increase the share of business from existing clients. The key instrument here was the Strategic
Global Sourcing group, comprising senior managers in different locations, which was mandated to identify, secure,
and manage new, large, and long-term client engagements. The second goal was to regularly expand into new
geographies worldwide. This was being achieved by establishing sales and marketing offices, representative offices
and global development centres designed to service both local and global customers. The third was to make
recurring investments in physical and technological infrastructure. This was meant to increase resource productivity.
The fourth was to train employees to progressively higher leadership positions through the Infosys Leadership
Institute, an in-house training facility at Mysore in southern India that could accommodate 4,800 employees in a
manner on par with the best hotels.

The fifth goal was to enhance its portfolio of service offerings that Infosys called “Solution Sets.” The focus here
was on emerging trends, new technologies, and customer-specific issues. The sixth was to develop deep industry
knowledge. The objective was to build on an extensive domain expertise to enter into new verticals. The seventh
was to pursue alliances and strategic acquisitions. While cultural fit was a limiting factor, the objective was to gain
bandwidth in terms of skills, experience and knowledge. The eighth and final goal was to develop Infosys as a brand
so that it could attract new customers, new employees and new stake-holders by delivering high quality service to
customers, both external and internal.

7
Infosys Annual Report 2002-2003, p 14.
8
Infosys Annual Report 2007-08, p. 13

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Structure

Infosys had organized its sales, marketing and business development teams to focus on specific geographies and
industry segments. There were four geographies (North America, Europe, India and Rest of the World) and six
industry segments (financial services, manufacturing, telecom, retail, energy & utilities, and transportation). North
America was the largest geographical area in terms of revenue and Financial Services was the largest segment.

The company also had 52 global development centres, of which 26 were located in India, 11 in North America, 9 in
the Asia-Pacific region and 6 in Europe. The largest development centres were in India in different cities. The
company’s diverse workforce of 91,200 included 70 nationalities.

Infosys used what it called a Global Delivery Model to execute solutions to customers. The model offered four
advantages. It segmented each large project into small, individual components that could be executed
simultaneously at both the client site and at the company’s development centres. It ensured flexibility to a degree
that each component could be put together at a location that was most cost effective – to be integrated with other
components at an equally cost effective location. It deployed an infrastructure that was easily scalable. It executed
projects seamlessly — around the clock, across time zones — speeding up delivery.

There were five key success factors at Infosys: an ability to integrate onsite and offshore execution capabilities; the
breadth of offerings that could provide one-stop solutions to customers; an industry-leading expertise in various
domains; an ability to attract and retain high quality technology professionals; and the financial strength to continue
to invest in human resources and physical infrastructure through business cycles.

Infosys was regularly securing a ranking among the most respected companies in surveys both in India and
worldwide. It was also getting local and global awards for corporate governance.

CORPORATE GOVERNANCE AT INFOSYS

The corporate governance philosophy at Infosys was based on seven principles:9

• Satisfy the spirit of the law and not just the letter of the law
• Be transparent. When in doubt, disclose
• Make a clear distinction between personal conveniences and corporate resources
• Communicate externally, in a truthful manner, how the company is run internally
• Comply with the laws in all countries in which we operate
• Have a simple and transparent corporate structure driven solely by business needs
• Management is the trustee of the shareholders’ capital and not the owner

Having positioned itself since launch as a global enterprise, from the beginning Infosys cultivated the necessary
mindset to move in that direction. Benchmarking its corporate governance practices with the best in the world was
among the first steps. The company was providing information to shareholders every year about how it was
complying with the recommendations on corporate governance made by the Cadbury Committee in its report
published in 1992. It was also providing a compliance report with regard to the Code of Best Practices in Corporate
Governance adopted by Confederation of Indian Industry in 1998 and also the Shri Kumar Mangalam Birla
Committee on Corporate Governance (constituted by the Securities and Exchange Board of India) in 1999. Infosys
was also updating shareholders regarding its compliance with the Blue Ribbon Committee (constituted by the
Securities and Exchange Commission of the United States) and the Euro Shareholders Corporate Governance
Guidelines.

9
Infosys Annual Report 2002-2003, p. 117.

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Murthy himself had headed a committee set up by the Securities and Exchange Board of India, the country’s official
regulator, in 2002 to recommend enhancements to the prevailing framework of corporate governance among Indian
companies.

ISSUES BEFORE MURTHY

The imminent launch of the Board Review had brought up some dilemmas about the Peer Review process.

Overseeing the creation of an involved yet independent board was an exercise in the long haul. There were no short
cuts. Murthy was a career IT professional used to being evaluated and a founder CEO who upheld meritocracy
among the rank and file at Infosys. Thus, as chairman of the board of Infosys, he fostered an environment of
discussion and debate that facilitated open criticism among board members. He wondered whether he should
continue on the same track of informality rather than follow the rigid format of an annual review and feedback. But
formal structures and systems were the only way of institutionalizing the Peer Review and ensuring that the
processes outlived the people.

The need to ensure the continuity of processes and procedures had acquired a sense of urgency because Murthy was
due to demit his office and leave Infosys in mid-2011 on reaching the mandatory retirement age of 65 years. Having
founded Infosys in 1981, Murthy had served as chairman and CEO for over 20 years until 2002. He had become
executive chairman of the board and chief mentor in 2002. On reaching the age of superannuation, he had retired
from employment with Infosys in August 2006 and taken over as chairman and chief mentor in a non-executive role.
He was now responsible for mentoring the company’s core management team, enhancing the company’s thought
leadership and dealing with industry issues in addition to maximizing the effectiveness of the Infosys board.

Murthy had developed a Board Review Questionnaire (see Exhibit 3) which had three components. The first was a
set of 12 questions on board performance for which each director had to provide a rating on a five-point scale: 5
(Very Good); 4 (Good); 3 (Average); 2 (Fair); and 1(Poor). The second component was an individual assessment of
areas for improvement in the conduct of the board. The third was a set of recommendations that an individual
director could propose for improving board effectiveness. The scores were summarized and presented to the
common board, together with the comparative score for the preceding year, at a board meeting scheduled before the
annual shareholder meeting (see Exhibit 4).

The yearly process of evaluation of the Infosys board would comprise an assessment of how the board as a whole
was functioning and how it could keep improving its efficiency; a peer evaluation by each board member of the
other members of the board; and a self-evaluation by each board member.

Board Review took less time — perhaps 15 to 20 minutes — for a director to provide as compared to the 2 to 2.5
hours it took to provide the Peer Review. Evaluating the performance of the board as a whole was common among
the boards of some of the NASDAQ listed companies. It seemed less controversial, and certainly made fewer
demands on directors, because the target of the review — the collective board — was an anonymous entity. Peer
Review, on the other hand, forced board directors to take positions on specific individuals over whom they would
rather not, under normal circumstances, sit in judgment. Unlike Board Review, Peer Review introduced a strain —
even when confidentiality was guaranteed — in the normally collegial atmosphere of the boardroom where
everyone, with the exception of the chairman, was on the same level.

Peer Review had been prevalent for seven years at Infosys. It was enough time for the board members to feel a sense
of comfort with the process. There was now the matter of seeing it through to its logical conclusion. What would
that be? Murthy was adamant that it would not be linked to compensation.

Peer Review could perhaps be used to make the process of re-nomination of directors more substantive and
evidence-based. But that would mean opening up Peer Review to wider scrutiny, even if internally. It would erode
the element of confidentiality which seemed to be a key success factor so far.

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Said Murthy:

The dilemmas with performance evaluation at the board level are more fundamental. Board function is all
about governance; it is about mitigating risks, critiquing company strategy, and generally ensuring that the
company’s future is safe. The work is qualitative. The call is subjective. It is all perception- based. Their
interpretation is also by no means certain. Supposing the rating this year is 5 as compared to 4 last year.
What does it mean in tangible terms? I am not sure. I am also not sure if Peer Review has had any impact
on financial performance of Infosys. Why? It is because we have not linked it to measurable results. Has
the governance been better? Yes. I would say that the feedback mechanism has helped us maintain
corporate governance standards at a certain level. But is maintenance all?

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EXHIBIT 1: PEER REVIEW QUESTIONNAIRE

A PEER REVIEW Director Director Director Director

1 2 3 …
# Note for Directors: Please rate each of your peers on each attribute as follows:
3 =Very Satisfactory; 2 =Satisfactory; 1 =Fair
1 How would you assess his/her performance on the
board?
2 How do you assess his/her intensity and
effectiveness of contributions during the board
meetings?
3 How do you assess the effectiveness of his/her
contributions in off-line discussions (outside board
meetings) and outside activities?
4 How do you assess his/her understanding of his/her
role and responsibilities as a board member?
5 How do you evaluate his/her understanding of the
strategic issues and challenges confronting the
company?
6 How do you assess his/her knowledge and
understanding of the competitive environment in
which the company has to operate and of the
changes happening in this environment?
7 How would you evaluate his/her level of information
about the company’s current issues and about the
topics on the Board agenda?
8 How do you assess his/her level of information on
the latest trends and developments regarding
corporate governance?
B SELF- REVIEW
Are there any measures/initiatives that would help •
you improve your own performance as a Board •
member? •

Source: Company files.

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EXHIBIT 2: PEER REVIEW FEEDBACK FORM

A Name of the Director: …… Score

Criteria Your Average Highest Board
Score
1 How would you assess the performance of your colleagues on
the board?
2 How do you assess his/her intensity and effectiveness of
contributions during the board meetings?
3 How do you assess the effectiveness of his/her contributions in
off-line discussions (outside board meetings) and outside
activities?
4 How do you assess his/her understanding of his/her role and
responsibilities as a board member?
5 How do you evaluate his/her understanding of the strategic
issues and challenges confronting the company?
6 How do you assess his/her knowledge and understanding of the
competitive environment in which the company has to operate
and of the changes happening in this environment?
7 How would you evaluate his/her level of information about the
company’s current issues and about the topics on the board
agenda?
8 How do you assess his/her level of information on the latest
trends and developments regarding corporate governance?

Source: Company files.

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EXHIBIT 3: BOARD REVIEW QUESTIONNAIRE

A Assessment Criteria Score

# Note for Directors:
Please score as follows on each criterion: 5=Very Good; 4=Good; 3=Average; 2=Fair;
1=Poor
i How do you appreciate the performance of the board as a whole?
ii How do you evaluate the common understanding that the different board members have of
the role and responsibilities of the board?
iii What is your rating on whether the board as a whole is devoting enough time and attention
to the company’s long-term strategic issues?
iv What is your rating on whether the board discussions are well informed?
v What is your rating on whether the board discussions address the most relevant issues for
the company?
vi How would you rate the information provided to the board on issues such as
finances/budgets, products, management performance and other important matters?
vii How would you assess the way the different board committees are fulfilling their respective
functions?
viii How do you evaluate the work of the board in discussing and endorsing the company’s
strategy?
ix How do you evaluate the work of the board in dealing with succession planning?
x How do you evaluate the work of the board in monitoring management performance?
xi How do you evaluate the work of the board in monitoring risk assessment and risk
management?
xii How do you evaluate the performance of the board in discharging its fiduciary duties (the
compliance aspect)?
B Areas for Improvement
In what areas can improvements be made to improve the effectiveness of the board?
•
•
•
C Recommendations
Are there overall measures/initiatives you would you recommend to improve the efficiency
of the board?
•
•
•

Source: Company files.

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EXHIBIT 4: BOARD REVIEW FEEDBACK FORM

A Assessment Criteria Score

Average for Average for
current year previous year
i How do you appreciate the performance of the board as a whole?
ii How do you evaluate the common understanding that the different
board members have of the role and responsibilities of the board?
iii What is your rating on whether the board as a whole is devoting
enough time and attention to the company’s long-term strategic
issues?
iv What is your rating on whether the board discussions are well
informed?
v What is your rating on whether the board discussions address the
most relevant issues for the company?
vi How would you rate the information provided to the board on
issues such as finances/budgets, products, management
performance and other important matters?
vii How would you assess the way the different board committees
are fulfilling their respective functions?
viii How do you evaluate the work of the board in discussing and
endorsing the company’s strategy?
ix How do you evaluate the work of the board in dealing with
succession planning?
x How do you evaluate the work of the board in monitoring
management performance?
xi How do you evaluate the work of the board in monitoring risk
assessment and risk management?
xii How do you evaluate the performance of the board in discharging
its fiduciary duties (the compliance aspect)?

Source: Company files.

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