Tata group scuffle: a red flag for minority shareholders
The Cyrus Mistry episode is a red flag for minority shareholders of the group. The group's performance in its fiduciary duty merits intense scrutiny
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A minority shareholder thrives in companies where his trust is valued, upheld and translated into long-term business performance.
The management and the board are the fiduciary trustees who ensure that the company is governed well enough to deliver sustainable shareholder value.
While the management runs the company and delivers business performance, the board oversees it and delivers on corporate governance.
The board is expected to balance the interest of promoters and minority shareholders.
The independence of directors within the board is central to protection of minority shareholder interest.
This is how our company law and regulatory structure have been constructed in letter and spirit.
But, the recent incidents in the Tata group have brought into sharp focus the role of independent directors in upholding the spirit of corporate governance.
In the early-1990s, the Tata group was led by J.R.D. Tata and the companies were run by towering personalities of that time—Russi Mody, Ajit Kerkar, Darbari Seth and Sumant Moolgaonkar.
The year 1991 saw the anointment of Ratan Tata as successor to J.R.D. Tata.
The group then felt that these individuals, who had virtually built their respective companies during the most difficult of times, needed to retire as they were getting too old.
The age limit was brought in as a criteria for retiring some of the best and professional business leaders of that time.
The performance of their companies and the kind of leadership they had provided to these companies were not considered reason enough to give any of them more time at the helm of affairs.
Nor was their succession considered important enough to involve each of them in making that decision.
The promoter board, in this instance Tata Sons, took on that right and decided the way forward for each of these companies.
Interestingly, the ownership of the promoters were distinctly in minority in most companies and they did not own majority shares even in a single company.
But, at that time, we did not have a structured corporate governance code, and the role of independent directors was not as well-defined as in the present. They came much later.
Boards then were largely acquiescent to the promoters’ will and minority shareholders did not even know their legitimate rights well enough.
Those were times when asking for more dividend and bonus shares was all the minority shareholders did. Cut to the present.
The Tata group enjoys majority shareholding only in a handful of new-age companies like TCS and is in minority in most of the older companies, which are facing troubled times.
It is in this context that one must view the Tata Sons boardroom tussle as a minority shareholder.
The Tata Sons boardroom drama brought to the fore a phrase that has been liberally used during recent weeks. “Trust deficit” was that favourite phrase.
Minority shareholders of the group’s listed companies are at a crossroads where they need to seriously introspect whether the period between 1991 and 2016 has raised the trust deficit between them and the group.
This is all the more remarkable given that the group was known to be greatly trusted by shareholders in the era when there was no corporate governance code, and it was run by professionals with little intervention from the promoters.
The minority shareholder has serious reasons to fault the boards of group companies and there is a pattern that has brought their interest to grief.
The pattern can broadly be recognised along four areas: leadership succession, professional accountability, corporate disclosures and accounting conservatism.
Take Indian Hotels Co. Ltd (IHCL), a company that has suffered from poor leadership right through the post-Kerkar era.
The best placed people to succeed Kerkar were those groomed by him.
All of them were identified with him and had to leave.
Imagine, letting go of the best talent pool in the industry for reasons hardly professional. For 25 years, the shareholders stayed oblivious of what was going wrong with the company.
They did not even know enough about the blundering overseas acquisitions, the need to write down reserves almost completely and the fact that it had largely missed the opportunity to grow within India. Global chains like Accor and home-grown ITC hotels have taken full advantage of the domestic opportunity even as IHCL was grappling with its overseas problems, a creation of its own.
Anyone who knew IHCL in the Kerkar era would vouch for how it dominated the Indian hotel business.
Today, it has been reduced to a pale shadow. But that is only a part of the tragedy.
The four areas mentioned stand out as strong reasons for minority shareholders to question themselves and by extension the Tatas.
The Cyrus Mistry episode is a red flag for minority shareholders of the group.
The group’s performance in its fiduciary duty merits intense scrutiny. It abruptly removed a leader it had chosen; it has not clearly explained why.
It has not provided a detailed response to his substantive allegations.
To a minority shareholder, these are red flags to be taken serious note of. It is time for the minority to ask the management the right questions and not rest till they get satisfactory answers. Or else, the trust deficit will not be bridged.
Shyam Sekhar is chief ideator, ithought.