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.
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