Home / Companies / People /  Is Tata Sons right in seeking Nusli Wadia’s expulsion?

Mumbai: As the fight between Tata Sons Ltd and its ousted chairman Cyrus Mistry escalates, Tata Sons’s move to seek removal of Nusli Wadia, one of its oldest associates and an independent director from the boards of its operating companies, has triggered a debate on whether seeking expulsion of an independent director by promoters for a reason other than an alleged fraud or misconduct undermines the very sanctity of the post.

In a research note titled Removal of Independent Directors: A Sword of Damocles, proxy advisory firm Institutional Investor Advisory Services (IiAS) said the move raises several questions: Are the differences personality-driven? Do promoters have right to seek removal of an independent director? Does such a precedent exist in the Indian market?

A formal announcement by Tata Sons explaining the rationale for Wadia’s removal will form the basis of IiAS’s voting recommendation to the shareholders, it said.

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“From the corporate governance point of view, it’s a conundrum as to how do independent directors function independently if they can be removed by the promoter shareholder," said Shriram Subramanian, founder and managing director at proxy advisor InGovern Research.

An independent director on one of the Tata Group companies, who requested anonymity, said the note shared by Tatas on the reason seeking Wadia’s expulsion said “he did not serve the interest of the group".

“As an independent director, I take serious objection to a statement like that. If he served the interest of the group at the expense of the company, it’s not right," said the independent director. Wadia, he added, is not taking it easy and is building a strong defence for the voting day. “God only knows how much dirty linen will be washed in public as his association with Tatas is 40 years old." Wadia could not be reached for comment.

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To be sure, incidence of independent directors exercising rights and taking a stand different from the promoter director is a rarity.

In the stormy board discussions in the past fortnight, independent directors on three among half a dozen firms— Tata Chemicals Ltd, Tata Motors Ltd and Indian Hotels Co. Ltd—reposed faith in the management and voted in favour of a resolution that supports Mistry. Independent directors with Tata Motors on 14 November refused to be drawn into the Tata-Mistry spat, saying the company board was collectively responsible for all decisions relating to strategy and operations. Springing a surprise on Mistry, the board of directors of Tata Global Beverages Ltd on Tuesday voted in favour of a resolution that sought Mistry’s removal as chairman. He continues to be on the board as a director. The stand taken by independent directors on the Tata Steel board is not clear. On 11 November, Tata Consultancy Services Ltd too removed Mistry as chairman, replacing him with Ishaat Hussain.

The three-week-old acrimony will take a decisive turn as shareholders of Tata Motors, Tata Chemicals, Indian Hotels and Tata Steel vote in favour of or against Mistry’s removal as director in the next 45 days. Among others, Mistry’s fate will largely rest on the way institutional investors vote at the special shareholders’ meeting. Therefore, recommendations by proxy firms will be crucial.

ALSO READ | Tata-Mistry spat a litmus test for corporate governance

“Singling him (Wadia) out adds fuel to the rumours that the differences are personality driven, rather than issue-based," IiAS said.

Directors of Tata Chemicals, which includes Nusli Wadia, issued a unanimous statement backing Cyrus Mistry, after which Tata Sons moved resolutions to unseat Wadia from boards of various companies.

While promoters are well within their legal rights to seek removal of a director, IiAS said Tatas’ move is an unprecedented one. Such moves, it said, are typically initiated by minority shareholders following alleged fraud or mismanagement by the said director, like in the recent cases of S. Kumars Nationwide and Ricoh India.

In Wadia’s case, none of the above mentioned scenarios are applicable. Tata Sons holds more than 10% stake in each of the three companies.

By articulating their stance to back Mistry, independent directors in Tata Chemicals and Indian Hotels have made their positions clear on the issue, said the report.

“Tata Sons may be reacting to Wadia because they feel a sense of betrayal, but the logic must not be extended to all independent directors," it said, adding “As a principle, such diversity of opinion should be promoted and not stifled."

IiAS in its report advocates that independent directors be given the freedom to exercise their own judgement without any fear of retribution as the institution of independent directors is a key construct of a company’s corporate governance framework. Independent directors have a fiduciary responsibility towards minority shareholders and are expected to act independently, irrespective of directives of controlling shareholders.

Allowing controlling shareholders to remove independent directors from the board undermines the integrity of the entire process and the institution of independent directors itself unless there’s a case of an alleged misconduct or fraud or the director is a disruptive force on the board, IiAS said. As it is, independent directors have rarely been found to be “independent". “Hanging the Damocles Sword of eviction over their heads will be counter-productive," it said.

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