The fig leaf of corporate governance

The Tata Sons corporate governance disaster reminds us that after all the reforms, company boards have still to grow a backbone


A file photo of former Tata Sons chairman Cyrus Mistry (left) with now interim chairman Ratan Tata. Photo: Indranil Bhoumik/Mint
A file photo of former Tata Sons chairman Cyrus Mistry (left) with now interim chairman Ratan Tata. Photo: Indranil Bhoumik/Mint

Way back in 1976, management guru Peter Drucker wrote: “Whenever an institution malfunctions as consistently as boards of directors have in nearly every major fiasco of the last forty or fifty years, it is futile to blame men. It is the institution that malfunctions.” Four decades later, the Tata Sons corporate governance disaster reminds us once again that after all the regulatory reforms, after all the talk about the separation of ownership and control, company boards have still to grow a backbone.

This time, the disappointment is all the more because the reputation of the Tatas is at stake. The Tatas are an icon of Indian business, supposed to represent its best practices. They have been pioneers of modern industry in the country, their leaders have been larger than life and they have acquired so high a standing in the minds of the public that even l’affaire Radia did little to take the sheen off their holier-than-thou image. So, this fiasco isn’t just about the Tatas. If this is what happens in the hallowed Tata Sons boardroom, what skeletons wait to be unearthed from less genteel, more grubby, Indian company boards?

Corporate governance is, at bottom, the way power is exercised over an organization. What signals does the Tata boardroom brawl send out? The unambiguous message is that whoever controls the dominant shareholding calls the shots. In this case, the Tata Trusts are the dominant shareholder and Ratan Tata, as chairman of the Tata Trusts, has full control. Whatever power Cyrus Mistry wielded in the past four years was on sufferance. That conclusion is buttressed by Mistry’s letter, which cites an example: “once, the trust directors (Nitin Nohria and Vijay Singh) had to leave a Tata Sons board meeting in progress for almost an hour, keeping the rest of the Board waiting, in order to obtain instructions from Mr Tata”. That example and the manner of his sacking lend credence to Mistry’s claim of “alternative power centres without any accountability or formal responsibility”. In short, Mistry is saying here that after stepping down as chairman, Ratan Tata became the eminence grise of the Tata empire.

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This is not the first time an ageing patriarch refuses to go gentle into that good night, nor will it be the last. As long as the dominant shareholders back him, there’s little to be done about it. Power in a company depends upon the block of shares you control. That is capitalism. Notions of ‘shareholder democracy’ are fatuous. At best, company boards can aim for ‘democratic centralism’, the organizational holy grail of Leninist political parties. Small shareholders can opt to vote with their feet, as they have done in the past few days.

The other message is that corporate governance norms merely serve as a fig leaf to hide the brute reality of the exercise of power within a corporation and, through it, in society. It is all too easy to go through the motions, tick all the corporate governance boxes on paper and even win prizes for it, as the Satyam fraud so cynically demonstrated. But once that thin veneer of gentility is stripped away, it allows us to glimpse the way companies really work. The scales fall from our eyes.

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Of course, there are interest groups that try to act as countervailing forces. Steps have been taken by regulators over the years to address some of the more egregious abuses of power. The authorities realize that, if we are to attract global capital, it will be necessary to protect minority investors, especially larger investors who may face haircuts if they have to exit illiquid markets. Indeed, the most recent Ease of Doing Business report from the World Bank ranks India at No. 13 in the world on the ‘protecting minority investors’ yardstick, while we rank a lowly 130 on the overall index.

Corporate governance problems are endemic even in the most advanced economies, in spite of studying and debating it and coming up with a plethora of rules for it over decades. Consider the most recent instances where banks in the US have rushed to pay huge fines to the authorities so that they could avoid prosecution.

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Nevertheless, there is one big difference between corporate governance issues in developed economies and in India. In a paper published in 1997, Jayanth Varma, professor at the Indian Institute of Management Ahmedabad, pointed this out. In the US, for example, shareholdings tend to be widely dispersed and the problem lies in getting the management professionals who control the company to do what the shareholders want. India, on the contrary, is full of family-controlled companies with dominant shareholdings. Varma posed the question: “How can one, even in theory, envisage a Board that can discipline the dominant shareholders from whom the Board derives all its powers?” Twenty years later, we are still searching for answers to that fundamental question.

Manas Chakravarty looks at trends and issues in the financial markets. Comments are welcome at manas.c@livemint.com.

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