On 24th October, when the board of Tata Sons decided to sack its chairman Cyrus Mistry, even those in senior regulatory positions speculated that the extreme action may have been a move to protect the group’s reputation. They expected to hear of some serious transgression, like insider trading or worse, which required damage control action to protect the Tata reputation.
Nothing of that sort emerged. Instead, it is now clear that the powerful board of India’s most reputed corporate group, ganged up behind a retired chairman to strike a blow below the belt that it simply cannot justify, days after the incident. If anything, Mr Mistry’s restrained letter to the directors of Tata Sons calls into question the governance standards of the Tatas themselves. The distasteful episode exposes how easily ‘independent directors’ can be pressed into service to back questionable decisions that serve individuals rather than the company or its shareholders.
Facts available in the public domain, so far, make it clear that Mr Mistry did not deserve the humiliation heaped on him. Even the claims about Mr Mistry’s poor performance are being openly disputed both, by Tata Sons’ internal records (the remuneration committee’s evaluation) and by a few directors of group companies. What is worse, the Tata group is compounding its folly by unleashing a campaign of selective leaks and innuendoes through the media. Let’s look at a few issues at stake here.
Cyrus Mistry was bad for the Tata Trusts because they received lower dividends: VR Mehta, a trustee with Dorabji Tata Trust, told the media that dividend income from Tata Sons had allegedly dried up under Mr Mistry affecting the group’s charitable initiatives. The facts are rather different.
In fact, Mr Mistry and his family, the Shapoorji Pallonji group (SP group) who hold the single largest block of Tata Sons’ shares with an 18.5% stake, whose value is variously estimated at anywhere between Rs80,000 crore and Rs90,000 crore, would be most directly affected by low dividend payouts. And, yet, after Mr Mistry took over as chairman in 2014, he wrote to the CEOs of all group companies not to engage with the Shapoorji Pallonji group for construction contracts, in order to avoid any conflict of interest. According to media reports, this entailed a sacrifice of Rs1,000 crore. Further, long-time directors of Tata Sons, if they dare to speak out, will concede that low dividends, and the lack of a dividend policy, have been discussed during Ratan Tata’s tenure and, in fact, were raised by Pallonji Mistry. It is strange that the Trusts did not have a problem with dividend payouts earlier; nor is there any evidence that they had demanded a higher payout. For the record, Ratan Tata’s personal holding in Tata Sons is just 0.83%.
Hired ‘Independent’ Directors: An issue that will require rigorous academic exploration is the role of independent directors and nominated directors on the boards of unlisted holding companies like Tata Sons. In this case, 67% of the shareholding is controlled by private trusts who report to one individual—Ratan Tata. Through this structure, the Trusts control a $100-billion business empire comprising diverse listed entities, but are not accountable to their shareholders.
In August 2016, just two months before the boardroom coup, Tata Sons inducted three unusual people on its board—two prominent industrialists—Ajay Piramal and Venu Srinivasan—and Amit Chandra of Bain Capital. None of them has spoken out on why they supported such a monumental decision to eject the Tata Sons chairman, at their second board meeting, that too without giving him a hearing. They simply weren’t there long enough to know the internal working of Tata Sons, its decision-making processes, internal politics and its implications on the listed group companies. How do these three worthies reconcile their actions with any norms of good governance or fair play? Shouldn't their actions worry top executives of their own companies about the possibility of similarly ignominious exits?
Then there is Nitin Nohria, dean of the venerated Harvard Business School, who, going by Mr Mistry’s letter, seems to have been Mr Tata’s hatchet man on the board. It is he who met Mr Mistry, along with Ratan Tata, a few minutes before the infamous board meeting, to deliver an ultimatum.
Mr Nohria has attracted immediate comparisons with yet another celebrated Harvard academic, Krishna G Palepu, and his ignominious role on the board of scam-hit Satyam Computers. Interestingly, in a laudatory piece on Ratan Tata’s philanthropy KP Nayar (
The Telegraph, 2nd November) points out that Mr Tata gifted “$50 million to Harvard Business School from the Sir Dorabji Tata Trust and the Tata Education and Development Trust” and that this “is the largest from an international donor in the School’s 108-year history.” Did this generosity influence Mr Nohria’s judgement?
Of the Tata Sons directors, only Ishaat Hussain and Farida Khambata, who abstained from the vote to oust Mr Mistry come out looking good. A committee, comprising Ratan Tata, Venu Srinivasan, Amit Chandra, Ronen Sen and Lord Kumar Bhattacharya, will select the new chairman of Tata Sons. This, in all likelihood, means that Mr Tata gets his person in, and remains the power behind the throne. This must worry shareholders of all listed companies and proponents of good governance; but we will come to that later.
Mockery of Retirement and Governance Policy: Another display of poor governance is the manner in which the Tata Sons’ board junked the group’s retirement policy (that required executive positions to be relinquished at 70) with alacrity, to facilitate the return of 78-year-old Ratan Tata to an executive position. Meanwhile, the Tata Trusts, which control Tata Sons, provide a post-retirement berth for many trusted executives. Noshir A Soonawala (once a powerful finance director), vets every decision of Tata Sons and he is not a board member. RK Krishna Kumar, former chief of Indian Hotels, is unable to give up his ‘active interest’ in all aspects of the running of Indian Hotels, say insiders. Then there is R Venkataramanan, managing trustee on every Tata Trust and a former executive assistant of Ratan Tata; he is the most powerful persons in Tata Sons as the eyes and ears of the chairman. Significantly, he is director of the now-controversial Air Asia and holds 1.5% of the capital with Tata Sons and Air Asia Investments Limited as the only other shareholders with a 49%stake each.
What does all this mean for shareholders of the listed Tata companies? Mr Mistry has no plans to make it easy for Mr Tata by walking away. Since he remains executive chairman of all the major companies, such as Tata Motors, Tata Steel, TCS, Indian Hotels, Tata Global Beverages and Tata Power, they will see turbulent times as Tata Sons launches a drive to get him off all these boards.
Since Mr Tata has brought back many of his loyalists to the Tata Sons’ chairman’s office, top management in each entity will struggle to decide whether they owe loyalty to their shareholders or follow the diktat of Tata Sons. It is also a safe bet that the next chairman of Tata Sons (if they find one in four months) will be even more of a ‘lame duck’ than Mr Mistry and a rubber stamp for Mr Tata. Neither situation is good for investors of the listed Tata companies.
Mr Mistry, in his letter to the Tata Sons’ board, has outlined the tough decisions that are needed across the group in steel, telecom, automobiles and hotels. As the proxy advisory firm IiAS points out, “Cyrus Mistry’s attempts at reducing debt and getting rid of bleeding parts of the business appear to be rather obvious and practical decisions, given the debt overhang. This is reflected in the increased market capitalization.”
It is all very well for Mr Tata to write about the ‘Tata culture and value system’, but investors look for that value system to translate into dividends and stock price appreciation over the long term. If the Tata Trusts can justify throwing out a shareholder-chairman without adequate justification, why should Mr Tata not be held to a similar test by public shareholders and investment institutions?
Is there any body who have the guts and courage to hold RNT accountable for all this mess in the Group during his tenure?
It is only because of TCS that the Group, Tata Sons and Tata Trusts are boasting and enjoying high valuation, high dividends, strong debt rating at the Group level.
Last such turmoil was when Tata Steel Director Homy Mody was ousted some 25 years ago.
Now time will tell the difference and the direction for the stability to Tata Companies.
It is a matter of deep worry for all stakeholders, bankers, shareholders, executives and staff