Tata Sons is a private limited company that
controls Tata Group companies. This is a 148 years old $100 billion
conglomerate with large number of private limited companies and 29 listed
companies. In some large listed Group companies the promoter (Tata Sons and
others) holds less than 50 per cent voting rights (e.g. Tata Motors 32.45% and
Tata Steel 31.55%). Sir Dorabji Tata Trust and Sir Ratan Tata Trust along with
some other Tata Trusts hold 66% stake in Tata Sons. Mistry's family, the
Shapoorji and Pallonji Group, owns 18.5% stake in the company. Sir Dorabji Tata
Trust and Sir Ratan Tata Trust have powers to appoint or remove a chairman of
Tata Sons with their own three-member quorum of the selection panel. Ratan Tata
chairs those two trusts.
Abrupt removal of Cyrus Mistry from the
position of the chairman of Tata Sons, on October 24, 2016, was an unusual
event. In India or elsewhere the board of directors (hereafter board) seldom
sacks the CEO so abruptly. Ratan Tata, who is the patriarch of the family that
founded the Tata group, has come back as interim chairman. Earlier he served as
chairman for two decades. Tata Sons saga is not about clash for power. It is
not about ego clash between two individuals. It is about managing complexities
in corporate governance.
Tata group has 4.1 million shareholders.
Shareholders and other stakeholders have a right to know why Mr. Mistry is
removed. Unfortunately, Tata Sons has not communicated clearly the reasons for
his removal. Good corporate governance requires high level of transparency.
Shareholders and stakeholders have a right to get adequate information on
important decisions and group’s operating policy. Maintaining right level of
transparency is a challenge in corporate governance. It is often difficult to
assess how much to disclose publicly so that the group/company is not hurt while
shareholders and stakeholders receive adequate information.
From the narratives in media it appears
that Mr. Mistry was handling things differently from the way things were
handled by Mr. Tata. This difference in approach frustrated Mr. Tata and it has
lead to the removal of Mr. Mistry. A CEO who cannot get along with the
controlling shareholder cannot survive. Therefore, true professionalization of
a family business is difficult unless the family takes a hands-off approach and
gives ‘free hand’ to the CEO. It is not easy. Succession planning, in general,
is a challenge in a family business. For smooth transition, the family
governance should be good and a successor from within the family should be
identified early and he should be groomed over years. The problem magnifies if
none within the family is available to take up the baton. It is difficult to
get an outsider who will be in tune with values, ethos and business approach of
the family. Mr. Mistry is not exactly an outsider. He is related to the Tata
family through marriage and his family has significant shareholding in Tata
Sons. He is a director in Tata Sons since 2006 and was groomed for a year, yet Mr.
Tata developed the conviction that Mr. Mistry was not in tune with the values,
ethos and business approach of the Tata group.
With hindsight some strategic choices made
by the Tata group appears to be wrong. It might be that some of those choices
were driven by Mr. Tata’s aspirations and passion, rather than by sound
economic rationale. It is not uncommon that in a company where there is
concentration of shareholding, corporate strategy and business strategies are
driven by the personal aspiration of the controlling shareholder. Quite often,
after long deliberations, the board rationalises the strategic choices of the
controlling shareholder. This hurts the interest of non-controlling
shareholders, particularly if the controlling shareholder focuses on empire
building rather than on value creation.
On November 4, 2016 all the seven
independent directors of India Hotels Company Limited (IHCL), in which the
promoter holds 38.65 per cent shares, reposed full confidence in the leadership
of Mr. Mistry. They praised the steps taken by him in providing strategic
direction and leadership to the company. They communicated their views to the
Bombay Stock Exchange (BSE). If, boards of other companies, in which the Tata
Sons holds less than 50 per cent voting rights, act similarly, the relationship
between those operating companies and Tata Sons shall be redefined. It is
difficult to assess whether this will benefit or hurt the non-controlling
shareholders of operating companies.
As the events will unfold in coming days,
we shall develop better understanding of how the group will operate in future.
