Thursday, March 23, 2017

Tata Group versus Mistry

This article was first published in the Global Association for Risk Professionals on March 16, 2017;!/risk-intelligence/culture-governance/oversight/a1Z40000003PO1rEAG

A dispute with an ousted chairman becomes a very public case study in board governance.

On February 21, Natarajan Chandrasekaran assumed the role of chairman of Tata Sons, the holding company (promoter) for 29 companies listed on the Bombay Stock Exchange. From an initial personal capital of little over (U.S.) $300 in 1868 to an empire worth more than $125 billion today, the group accounts for 7.2% of the market capitalization of all companies listed on the Bombay exchange. It is the largest business house in India, making a mark in every major industry: steel, power, automobiles, aviation, information technology, telecommunications, financial services, consumer goods, education, health care.

In a period when lack of self-restraint, flashy lifestyles, and certain entrepreneurs’ projections of self over community have brought family-owned businesses under scrutiny for poor governance, Tata was long associated with ethics and quality. Its contributions to development of the communities where factories are located, the establishment of institutions of scientific research, education, and health care, are undeniable.

The stated mission of the Tata group is: “To improve the quality of life of the communities we serve globally, through long-term stakeholder value creation based on leadership with trust.”

Change at the Top
On October 24, 2016, in a move that surprised many, Cyrus Mistry, chairman of Tata Sons since 2012, was voted out by the board of directors and removed from his post. Mistry, whose family holds 18.4% of Tata Sons shares, had replaced Ratan N. Tata, who retired in 2012 after 21 years as chairman. A descendant of Tata group founder Jamsetji Tata and chairman emeritus of Tata Sons, Ratan came back after the removal of Mistry to serve as interim chairman to ensure stability and continuity until a new chairman was appointed.

Chandrasekaran was the CEO of Tata Consultancy Services, the largest company in the Tata stable by market capitalization, where he had spent his entire 31-year career. Recommended to be the next chairman by a selection committee, and unanimously endorsed by the board on January 12, Chandrasekaran became the first professional to take the top position at the 150-year-old parent.

The Mistry-Tata spat hurt the reputations of Tata group and Ratan Tata. There are many theories as to why it happened. One is a divergence between the group’s values and those of Mistry personally. His emphasis on profitability, hiving off or selling unprofitable businesses and reducing dividends to shareholders, is another.

Role of the Trusts
The Tata group has a complex ownership structure. Philanthropic trusts instituted and endowed by Tata family members hold 66% of Tata Sons shares. The articles of association give the trusts power to remove the chairman.

The trusts’ causes include education, health care, child nutrition, scientific research, art, culture, and rural life. The trusts’ source of income is the dividends paid by the Tata group companies to Tata Sons, which in turn pays out to the trusts. In other words, the trusts depend on the group companies to continue their charitable works. While Mistry was chairman, the dividends paid by various companies in the group were dwindling.

Values and Culture
Over its long history, the Tata group has in many instances shown that it values contributions to the society more than profits. R Gopalakrishnan, a former Tata Sons director, said in a 2013 interview:  “Yes, Tata cares about doing for society. About 2/3 of Tata’s profits go back in measures that help society. So if you notice, no Tata person can ever be a billionaire, we don't want to be one, we don't claim to be one. We don't want to be number two either. People look for deeper value than money and that is why they work for us, and our attrition rate is not bad.”

The way Mistry focused on profitability clashed with the traditional culture. Although Mistry claimed to align himself with “the values and ethics of Jamsetji Tata and the Tata Group,” the group has argued back that “Mistry and his family companies have not upheld the high standards and values set by Jamsetji Tata and his successors. Mr. Mistry has done precious little to build the goodwill of the Tata group, built through the hard work and dedication of its employees.” (Mistry retained his Irish citizenship and awarded contracts to his own family firm.)

Mistry contended that he inherited loss-making businesses from Ratan Tata, including the Rs 100,000 ($1,500) Nano car. A nod to the company’s social ethos, the Nano was a pet project of Ratan Tata, who wanted to give families dependent on two-wheel travel through rains and the hot sun the option of a cheap car.

According to Tata group, “Mr. Mistry has been a director of Tata Sons since 2006 and as such was fully involved in all the key decisions that the Tata group had taken over the years. It is unfortunate that it is only on his removal as chairman that he began making allegations and misrepresentations about business decisions he was party to for over a decade.”

Board Processes
Although the Tata Sons board of directors consists of eminent people whose actions in the interests of shareholders were never called into question, the dismissal of Mistry has become a bone of contention. Mistry called his removal “unique in corporate history,” coming with no advance notice – a matter taken up as an “any other item” on the board agenda.

On the other hand, Tata insiders have said that Mistry was given the opportunity to step down voluntarily.

The dispute has become a case study in corporate governance processes and discrepancies between form and substance. The Tata group may have not technically flouted any article of law, yet the entire affair does not “smell” right.

What can be said is that while Tata group companies individually are recognized for good governance and transparency, the organization at group level turns out to be quite opaque.

Wednesday, March 1, 2017

SMEs: Don’t push succession under the carpet

This article was first published in on February 27, 2017; Co-author: Kavil Ramachandran

Ninety percent of the businesses in India are family owned. About 30% of the family businesses listed on the Indian bourses got listed post liberalization in 1991. The first generation founder would still be actively involved in most of these companies considering the average age at which entrepreneurs start a firm to be 40 and the average retirement age for founder promoters to be 75.

Yet, most of them would now be ready to hang their boots and see the company passed on successfully to the next generation. In the pre-liberalization era, passing the baton to the next generation was mostly taken for granted and there was little resistance from the successor too as there were limited opportunities outside. The family business not only acted as an internal job market for the extended family but also kept many generations together.

However, succession is the most important challenge for small and medium sized enterprises (SMEs) today. Some of the larger businesses have explored various models like bringing in a non-family Chief Executive Officer, merger of the company with another company while retaining substantial stake in the merged business, etc. when they found that the successors were either not worthy of succeeding or did not share the same vision and temperament as the founders. Similar opportunities are available for the SMEs as well now a days to deal with the challenges of succession.

Some of the factors that influence the decision of the scions of business families to join or not to join the family business are:

Formal Education: With more and more people receiving formal education, those who may not be interested in the family business are deciding to move away from it and do something else in which they may have acquired a skill through education and training.

Emerging Opportunities: People get influenced by what others are doing and the opportunities available elsewhere, either within the country or outside. There is ample information available regarding the opportunities. The eco system and the environment have had an impact on the decisions of the individuals.

Access to capital: Development of the financial markets has enabled easier access to funds to people, enabling them to do different things. Also, in the cases where the business established by the first generation has done well, the gen-next is able to get seed capital from the family.

Changing mindsets of the families: With more exposure and liberalized mind sets, many of the families believe in giving the next generation the horizon of opportunities. If the decision is to not join the family business, that is acceptable. The families no longer want to burden the young minds with the thought that they have to succeed the family business. They want to give the next generation the free rope to pursue their own calling.

Dodla Sunil Reddy, promoter and Managing Director of Dodla Dairy Ltd, a medium sized company valued at around Rs 11 billion, says “if both my daughters do not want to join the family business, I would be fine with their decision and would even support them in their decision to do something of their own”.

With smaller family sizes and the next gen deciding to pursue their own calling, many of the smaller businesses do not have a successor in sight. In certain cases, even if the family is not supportive of the decision, the younger generation has snatched away the freedom to pursue their own dream. The family is usually upset, yet, if the youngsters are not allowed the freedom to take their own decisions and are forced to join the family business, it may ultimately result in doom for the business due to frustration and disinterest of the heir in running the business.

Therefore, it is important for the SMEs to explore alternative models that allow smaller businesses to list, get valued, get visibility and most importantly, ensure continuity of the business.

One such option is SME trading platform of the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) launched in March 2012. The costs of listing are minimal and the cost of compliance is low compared to that of being listed on the main exchange. There are regulations in place to ensure liquidity in the SME market.

Listing would provide the smaller family businesses with equity financing to grow and innovate. They would get greater credibility and visibility that would help them on-board talent that can take the company to greater heights. The investors would also be able to identify and invest in emerging, high-growth companies and participate in the valuation of companies.

It provides the promoters with an opportunity to bring in professionally qualified people to run the business, yet, remain an owner. It is likely that by the business would ultimately grow into a medium and then a large enterprise, luring the future generations to be more actively involved in running the family business.

Similarly, is a platform for SMEs where entrepreneurs can​ buy and sell businesses online. Apart from just buying and selling, the platform also enables Mergers and Acquisitions (M&A),​Joint Ventures, Equity stake sale (to raise funds), Partnership and Leasing. The founders Haripriya​ ​Bhagat and Bhavin Bhagat say that currently most of their clients belong in the range of Rs1crore – Rs25​ ​crores​as traditional investment bankers do not find this segment attractive enough.

These options are available for the smaller family businesses in the event of the next generation members not willing or able to join the family business. However, the best thing for the family businesses would be if the next gen members have the desire to change the family business with the changing times; take it to greater heights with the help of right lessons from the family and new age technology.

Most businesses recognize that succession is a challenge. But very few actually prepare for it. It is time that the first generation prioritizes it rather than pushing it under the carpet!