Monday, December 12, 2016

Managing complexities in corporate governance

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.



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