Why Tata could split chairman’s post after Cyrus Mistry episode

A division of responsibilities is increasingly seen as a possibility at Tata Sons.

 |  5-minute read |   03-11-2016
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Cyrus Mistry has been ousted as chairman of the Tata Group on charges of "repeated departures from the culture and ethos of the group", something that the Tata Sons board has not been able to explain as yet.

But even if one considers the Mistry episode to be done and dusted (which is not, considering Mistry still hold chairman’s position in most major Tata companies), prospective chairmen of the future will continue to face struggles similar to what Mistry had, where many of his decisions, taken ostensibly to mend what’s broken in the group, will face opposition from Tata Trusts, the majority shareholders in Tata Sons. 

One way in which this could be sorted is to split the position of chairman into two, and bring in an additional CEO to handle the day-to-day functions of Tata Sons.

The chairman, meanwhile, would liaison with the Tata Trusts and take inputs from the trust on the broader vision and direction of the group. The CEO, who will be involved in executing the board decisions, will also be answerable to both the board and the chairman.

The division of responsibilities between a non-executive chairman and the CEO, a practice in British companies, would suit the Tatas, who will be struggling as they go along to balance the long-term vision and principles of the group, which has a lot of emphasis on corporate giving, with the profitability and sustainability of the group companies.

In that way, Tata Group seems to be extremely unique in its structure, though it defies the logic of modern business management where ruthless decisions regarding failing businesses have to be taken quite frequently.

The Tatas, on the other hand, seem to be more comfortable with slow decision-making when it comes to dealing with stressed businesses, and more often will spare the axe on companies.

Splitting up the top position also throws the door open for an external CEO, especially with global experience, to be considered for the post.

mistrybd_110316073956.jpg Cyrus Mistry was ousted as chairman of Tata Group on charges of "repeated departures from the culture and ethos of the group".

For Tata Trusts and Ratan Tata, it would also mean that there will be less danger of one person becoming all-powerful in the group, and acting contrary to their expectations. 

Under the British system, the non-executive chairman is accountable to shareholders. His/her primary function is to support and/or discipline the CEO as required, concurs Morgen Witzel, writer, lecturer and consultant, who wrote the book Tata: The Evolution of a Corporate Brand.

An article authored by leadership expert George Bradt in Forbes in 2013 says that while the executive chairman in a company could take the lead on running the board of directors, dealing with external funding (investors and lenders), joint venture pursuits and relations, compensation practices, management development, CEO succession and strategic plan guidance, the CEO could take the lead on running the company, across its strategic,  operating and organisational process. 

British travel giant Thomas Cook, for instance, has divided the responsibilities between its chairman and CEO in this manner: 

The chairman is responsible for:

1. Promoting the highest standards of corporate governance and setting clear expectations concerning the Company’s culture, values and behaviours; requiring that all board members are exemplars in these areas.

2. Through the Nominations Committee, ensuring that the board and its committees comprise members who have the appropriate balance of skills, experience, independence and knowledge; and that appropriate succession planning is in place.

3. Developing effective working relationships with the executive directors and the CEO, in particular, providing regular support and advice while respecting executive responsibility.

4. Promoting effective relationships between all board members and encouraging all to engage constructively and openly in all meetings by drawing on their skills, experience, knowledge and, where appropriate, independence, among other responsibilities. 

The role of the CEO, on the other hand, includes, but is not limited to: 

1. Development of strategy and its implementation, following approval by the board. 

2. Development of the annual budget and its implementation, following approval by the board.

3. Regular reporting to the board of progress in respect of the strategy, the company’s performance and operational matters; and bringing to the board’s attention all matters that materially affect or are capable of materially affecting the achievement of strategy or the performance of the company.

4. Meeting with the chairman on a regular basis to keep him informed of all important matters.

Monitoring and maintaining standards of corporate governance; developing, communicating and embedding effective business and financial controls and risk identification and management processes across the group. Ensuring that across the group, all laws and regulations are complied with.

5. These examples show that the areas of responsibility need to be meticulously carved out so that all aspects of governance and strategy are effectively covered, even as the broad group vision and ethos are kept intact.

As Mistry and Tata trade allegation against one another after the former’s ouster, all eyes are on how the Tatas will fill the gap at the top, while at the same time, resolve the issue of multiple power centres within the group, posing a threat to its independent thought and action.

In the case of the Tata Group, the chairman’s role should be broadened to also maintain effective relationships not only with the members of the Tata Sons board, but also with those of Tata Trusts, the largest shareholder.

This will help it to keep a continuous line of communications open with the trusts, and remove any misunderstandings or conflicts that could occur, as in the case with Mistry.

Also read: Why Tata firing Mistry is a new low for India Inc

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Writer

MG Arun MG Arun @mgarun1

The writer is Deputy Editor, India Today.

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