Vote against Cyrus Mistry removal, ISS tells TCS minority shareholders

Mumbai: Global proxy advisory firm Institutional Shareholders Services Inc. (ISS) has recommended the minority shareholders of Tata Consultancy Services Ltd (TCS) to vote against the resolution that seeks the removal of Cyrus P. Mistry as director from the board as neither Tata Sons Ltd as the proponent nor the TCS board has provided the shareholders with “compelling reasons”, it said in its advisory.

The minority shareholders, it added, are more concerned about Mistry’s impact at the company level rather than at the group level. TCS has outperformed its peers in terms of earnings per share (EPS) and sales over the last four years, it said. The proxy firm believes the internal upheaval, atypical at Indian listed companies, indicates “there are real issues beyond the conflict inside Tata Sons, involving the relationship between operating companies and the holding company or the alleged influence of Ratan Tata in the shadows at both”.

ISS also questioned the resolution to seek removal of Nusli Wadia, an independent director at three Tata companies. “Why would a long tenured director like Wadia suddenly act ‘prejudicially’ or why has tenure become a problem in the last month? Why is it that operating company boards didn’t seek Mistry’s removal from their companies before, or raised issues to Tata Sons, if they thought Mistry was a bad influence on the board?” it asked.

Also read: Cyrus Mistry ouster: LIC, other DIIs likely to abstain from Tata EGM voting

TCS, India’s largest software services company, on the request of its principal shareholder Tata Sons, is seeking the removal of Mistry in an extraordinary general meeting (EGM) to be held on 13 December. The EGM is the outcome of the five-week-long spat between Mistry and Tata Sons, with the former refusing to step down as a director from the operating company. Mistry’s tenure as the chairman of Tata group was cut short abruptly by the Tata Sons board on 24 October.

Tata Sons controls 73% in TCS. Therefore, “the outcome of the proposal is likely a foregone conclusion”, and the controlling shareholders’ proposal is supported by TCS’s board, said ISS, adding that neither Tata Sons as the proponent nor the board of TCS has provided unaffiliated shareholders—who may be primarily concerned with Mistry’s impact at the company level rather than at the group level—with compelling evidence that the proposal to remove him will be beneficial for TCS, or that his continued presence on the board is expected to have a material negative effect on board governance or future performance.

Additionally, support for Mistry from several independent directors at different companies seems to indicate Mistry was operating on the basis of a “healthy distance from undue pressure. On this basis, support for the proposal is not considered warranted,” it added.

The proponent of the resolution, said Rockville, a US-based firm, needs to justify the proposal, which is dealt with on a case by case basis and with the goal to maximize shareholder value at the target company. Under its approach, it would typically analyse issues at each company, it said.

“We consider issues beyond the company in our evaluation: if a multiple-company CEO is destroying shareholder value at 9 of 10 companies that he/she manages, it could be argued that he was lucky at the tenth company and perhaps removal would be a wise course of action,” said ISS.

Similarly, if actions at other companies severely call into question the integrity of a director, removal from an unrelated company’s board might be warranted. “The key is that there should be a link between external events and shareholder value at the company under analysis,” it said, pointing out that the board’s support for a shareholder proposal doesn’t automatically turn the proposal into an acceptable one, in the absence of a clear disclosure and understanding of the factors influencing the board’s decision.

Also read: Tata vs Mistry: What’s next

To evaluate TCS’s performance, ISS selected a group of large Indian IT outsourcing companies, namely Infosys, Wipro and HCL Technologies, as peer group. These companies have a market capitalization that is between a quarter and half of that of TCS. It used 23 October, the day before the announcement of Mistry’s removal as chairman of Tata Sons, as the unaffected date.

For the period beginning in Mistry’s appointment as chairman of TCS (28 December 2012) until the unaffected date, TCS’s TSR (total shareholder return) of 106.8% was slightly above peer median of 94.9%. In terms of operating performance, the company exceeded all peers, with a 20%, 3-year CAGR (compounded annual growth rate) in sales and EPS (excluding extraordinary items). “In summary, TCS has exhibited very good relative performance over the past four years,” said ISS.

ISS’s recommendations are in contrast to that of Institutional Investor Advisory Services (IiAS), a Mumbai-based proxy advisory firm. On 30 November, IiAS advised shareholders to vote in favour of Mistry’s removal as his continuation on the board may lead to “unnecessary friction between the operating companies and Tata Sons”.

SES, another proxy advisory firm, also recommended voting in favour of Mistry’s removal. “SES in its analysis has found that the performance of the Company has been agnostic to different persons occupying the post of the Chairman. TCS appears to be a company having matured well settled processes and system and a competent work force and management team. Therefore, removal of Mr. Mistry as a director is not likely to impact performance of the Company. However, as observed in other Tata companies, there is a high probability that continuation of Mr. Mistry might lead to ‘Divided Board’ which is a value destroyer for sure,” the firm said in a 5 December note.