Mumbai: Even as the crisis at Tata group deepens the role and responsibility of independent directors (IDs) have come to the forefront as they take varied stance in different operating companies, dividing the board and adding to the drama facing the $103 billion group.
In a note released on Monday, titled ‘Tata-Mistry: Shareholders vs board, battle for supremacy’, proxy advisory firm Stakeholders Empowerment Services (SES) prods the independent directors to explain to the stakeholders their divergent views to remove all doubts about the subsequent events that have unfolded since the boardroom coup on 24 October.
It also questions the manner in which Mistry was removed from his position as a chairman from the TCS board. In a notification to the exchanges, on 10 November, TCS informed the decision to appoint Ishat Hussain as chairman on the Board of TCS in place of Mistry. “SES does not agree that powers of Board or decisions of Board can be changed by shareholders in this manner.”
Among other things, the report highlights the conflicting stand of some of the independent directors. For instance, Keki Dadiseth, an independent director at Indian Hotels Co. Ltd (IHCL) who applauded the performance of Mistry, is also a trustee of Sir Ratan Tata Trust (SRTT). SRTT is one of the two principal Tata Trusts which control two thirds in Tata Sons, it is also a shareholder in IHCL. “It seems like (Mr). Keki Dadiseth has taken two different stands, one where he supports (Mr) Mistry, other where he was also involved in decision making process for replacing (Mr) Mistry as a Trustee of SRTT. Same is true for Narsee Munjee.”said the report. SES said unless they come out and state the reason for their diverse views, doubts would remain.
On the issue of removal of Nusli Wadia, SES pointed out that while legally Tata Sons has every right to seek removal of any director on board, be it independent director, executive director or otherwise, “the issue is whether such an act is ethically right and would pass the benchmark of good governance”.
SES said it believed the independent directors and all other directors on the board should be driven by interest of the shareholders. Directors (including IDs) do not have the mandate or right to adjudicate and pronounce right or wrong, it said. A divided board, said SES, is not in the interest of the stakeholders and the foundation of collective responsibility cannot survive in a divided board. “A divided board is like a vehicle with driver at both ends, each trying to move in his own direction. Division at board level unlike dissent, which reflects a healthy board, is counterproductive and destroys shareholder value.”
“It is in real sense a testing time for them,” said the report, alluding to independent directors. It questions the basis on which the independent directors of Indian Hotels and Tata Chemicals Ltd decided to back Mistry. “Do they know the truth? If yes, please tell the same to all investors? If not, can they adjudicate based on letters of two sides and decide? Does their job involve adjudication? Are they competent for adjudication?” questioned the report. In one way, according to SES, they are guilty of the same hurried decision, which Mistry is complaining of. “Adjudication is a process and one cannot decide without serious application of mind taking into account all factors. Have IDs done that?” the report asked further.
SES, the report pointed out, has been of the view that the action of removing Mistry on an immediate basis was disproportionate to the cause attributed for the decision. “Assuming it was based on non-performance, it is difficult to believe that non-performance could be an overnight development which assumed such an enormity that immediate action was required,” it said.
Indian corporates materially differ from the rest of the developed countries, especially those in the US and the UK, in their ownership structure. In India, almost all companies have a dominant shareholder called promoter. In the US and the UK, holding/ownership is generally dispersed and no one is a promoter, pointed out SES. “By equating dominant shareholders at par with minority shareholders, the law has created mismatch of risks and rights. This leads to non-transparent control mechanisms,” it said.