Why Tata firing Mistry is a new low for India Inc

The board of a $100-billion business should have a leadership succession plan in place before it starts sacking, not regret after the event.

 |  6-minute read |   29-10-2016
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Tata Sons dismissed its former chairman Cyrus Mistry's allegations against the Tata group as unsubstantiated and malicious even as the spat between the two got worse last week.

Mistry's parting shot, in a blistering five-page missive written after he was replaced after a boardroom decision late on Monday, accused the company of failures of governance that he said had destroyed severely shareholding value.

He also alleged inappropriate interference by Ratan Tata, the 78-year-old patriarch who hired him and has come out of retirement to run the business as its interim caretaker.

Tata Sons has had only six chairmen since it was founded in 1868, growing into a $103 billion international group spanning over businesses from cars, steel to information technology.

The Tata group, in an eight-paragraph statement on Thursday, rubbished Mistry's claims.

In the statement emailed to reporters a day after Mistry's letter was leaked to the press, Tata Sons  stated that the ousted chairman's correspondence makes unsubstantiated claims and malicious allegations. These will be responded to in an appropriate manner, the company said without elaborating. The idea behind the prehensile reply is to avert any prospects of the war of words leading to a legal battle.

The country's two largest stock exchanges demanded clarity from Tata's more than two dozen listed units in what could herald scrutiny over why investors were not told of Mistry's concerns earlier.

The Securities and Exchange Board of India (SEBI), the capital markets regulator, is looking into whether Tata Sons flouted corporate governance rules, as Mistry alleges in his letter to the board.

At least one unit, Tata Steel (TISC.NS), dismissed talk of any write-downs.

Share prices movement of all listed companies under the Tata umbrella, however, fell on Thursday.Public confrontations of this nature are rare in Indian corporate life, particularly when they involve established conglomerates and business elders like Ratan Tata, who had run the Tata group for over two decades.

Inside Tata, a company that promotes its roots and social values of the Parsi community, some workers have bristled at the board's treatment of Mistry.

Ratan Tata was an acquirer in his time at the top, overseeing deals like the $12 billion acquisition of Corus, formerly British Steel, in 2007, and the purchase of Jaguar Land Rover a year later.

Mistry accused the board of failing to give him room to move, and argued that Ratan Tata had acted as an alternative power centre, particularly in driving deals that created two airline businesses.

In its rejoinder, Tata stated that Mistry, who was appointed a director in 2006 and made executive chairman in 2012, had been fully empowered to lead the group and its companies.

He would be fully familiar with the culture, ethos, governance structure financial and operational imperatives of the Tata Group as well as various group companies the company said.

It is unfortunate that he departed from these unwritten conventions. He knew them well for he had held several positions in the group earlier and been part of the Tata culture all along, it stated.

When he had to be replaced as a consequent fallout spurred by the deep dissatisfaction and mistrust of majority of the board, all these allegations and misrepresentation of facts and figures are coming out, says the counter-missive doing the rounds.

The record, as and when made public, will prove things to the contrary, it added.

It would not be unprecedented for a managing director or chairperson to proclaim oppression - even if he was in charge, said a leading lawyer neutral to both.

To challenge the removal from the post of chairman by Cyrus would not yield any positive results assuming the Tata Sons' articles vesting veto power in Tata Trusts are not ultra vires - which would be the case if it were a private company.

This clause in the memorandum is de rigueur in almost all the articles of association of private limited companies which are strictly family affairs or at best a cozy association of friends and relatives. The battle between Indian conglomerate Tata Sons and its replaced chairman, Cyrus Mistry, is a classic illustration of how not to bring about a leadership transition.

The falling-out between Mistry and the Tatas was primarily a result of the latter's unhappiness with the former's management style and business decisions.

After all there is a grain of truth in what the freshly humiliated Mistry says. A catalogue of accusations can never be one-sided.Profit is opinion and cash in fact is a dictum these days. Hence the announcement by Mistry of a purported loss of Rs 1.18 billion cannot be treated as a holy writ.

While this is playing out at Tata Sons, it could have happened at any other family-run business in India. The ugly spat alludes to such businesses' lack of trust in outsiders.

Most of India's top conglomerates, nearly 67 per cent of all listed companies, are family-owned. They make up around 65 per cent of India's Gross Domestic Product.

Many of these groups struggle to find a balanced solution to succession issues. Only 13 per cent of family-owned businesses survive up to the third generation and four per cent make it beyond that.

They often lag in shaping future leaders. Tatas may be successful in warding off pressure from the regulators and auditors to write down the conglomerate's assets, all right.

It might be a fact too that if it comes to buying peace, Tata might as well outright buy the 18 per cent stake that the Pallonji family holds in Tata Sons. But all that is not going to help in not ending up with another satrap who won't quite fit into the Tata Trust.

Should leaders let go when the baton is passed, how much control should they continue to exercise is a big question that should arise in the minds of all these big conglomerates across the world.

Evidently, the 48-year-old Cyrus Mistry was well-versed with the Tatas' management style and functioning, crucial for any succession plan.Ownership of a family business is a job that requires certain sensible qualifications. It shouldn't be treated as a birthright.

Therefore, select owners with the same care you select key leaders of your family business. And then create the right governance agreements, policies and plans and the right discussion forums for the owners so they can discuss, decide, and manage conflicts in an effective way.In choosing Mistry as chairman four years ago, the Tata Group seems to have followed a reasonable course. However, his sudden ouster is being perceived as drastic and damaging by investors and observers alike.

The board of a $100-billion business should have a leadership succession plan in place before it starts firing, not regret after the event.

Tata Sons' surprise move to fire Mistry, thus, does not build confidence in the board or firm for thoughtful leadership. Everyone sees firing the top leader as the last resort when all other options have failed because it destroys the firm's strategic momentum and confuses the firm's stakeholders.

Ratan Tata, with his counter-missive, may have managed to curate well and carefully restore the image of the Tata Empire, but he failed to have a leadership plan in place to meet a situation like this, is the feeling everyone has got in the end.

Writer

K Srinivasan K Srinivasan @krishsri59

The author is a GST reader and writes on macroeconomics and indirect tax laws.

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