Mostly, when companies underperform, they either obfuscate or simply cloak the bad news in jargon. Indeed, denying the truth even in the face of hard facts is something most companies in India and abroad have honed to a fine art. It is what they pay their spinmeisters for, and what they train their senior managers to do.
Witness, for instance, the garble in the statement of the notorious Jeffrey Skilling who insisted he was “immensely proud" of what he had accomplished at Enron well after the company had become a part of the rogue’s gallery of companies that lied to shareholders and regulators.
More recently, there was BP CEO Tony Hayward’s comment after the company’s oil spill disaster that claimed 11 lives even as it spewed million of gallons of toxic oil into the Gulf of Mexico, in May 2010: “I think the environmental impact of this disaster is likely to have been very, very modest."
At home, when one of India’s largest steel companies defaulted on interest payments on its non-convertible debentures (NCDs), it attributed this to “cash flow mismatches"!
With Tata Motors’ share in the domestic market for commercial vehicles and passenger vehicles declining significantly over the last five years, Chandrasekaran didn’t mince words in accepting the responsibility for the weak performance stating, “Overall, delays in new product launches as well as lack of adequate responsiveness to the competitive environment and an unsustainable cost structure have contributed to this performance."
It was a far cry from then chairman Cyrus Mistry’s buoyant message in the previous year’s annual report. “We are all becoming used to unpredictable and dynamic market environments, learning to manage by anticipating customer needs, leveraging strong processes and building competitive product portfolios and networks ," said Mistry whose much longer message was devoid of any such introspection.
Significantly, Chandrasekaran’s unusually tough talk set the tone and managing director Guenter Butschek, who has been at the helm of the embattled Indian car maker for nearly 18 months now dealt a similarly honest prognosis of the company’s travails: “As a matter of fact, it was not only the market volatility which affected our performance, but mainly our sluggishness in reading the market in time, as we were effectively late to respond."
It would have been easy for Chandrasekaran and Butschek to blame the company’s insipid performance on market conditions, in particular the impact of demonetisation and the Supreme Court ruling on BS4 transition.
By focusing instead on factors within their control and committing to “a stretched plan in FY17/18, thereby compensating on our poor performance in FY16/17," they avoided the classic alibi of most corporate leaders, which is to blame the environment. It is a perfectly understandable response.
We are all conditioned to duck responsibility for our condition and psychologists say blaming others is a primal impulse. But what is understandable in people, creates complications when it comes to companies.
For a paper, Poor Performance and the Value of Corporate Honesty, published in the Journal of Corporate Finance, Stephen Ferris, Don Chance, and James Cicon reviewed 150 corporate announcements from 1993 through 2009 when the company reported poor performance.
Their findings point to why Chandrasekaran’s statement is so unusual and laudable. Two-thirds of the announcements attributed the poor performance to external forces. Even when companies admitted mistakes, they used phrases like “accounting errors," and “manager mistakes."
So far, so good. But here’s the twist in the plot. The refusal to face up to the truth comes with a price tag. The authors reported that those companies which accepted responsibility saw their share price stabilize over the next several months, while those that blamed others continued to experience falling share prices.
The words of the newly anointed chairman of the Tata group may well mark the first steps to Tata Motors’ return from hell. The truth will make us free, though first it will make us unhappy. By choosing to look inwards, Chandrasekaran hasn’t just rejected the usual CEO spiel. He has also taken responsibility for the company’s future performance.
Sundeep Khanna is a consulting editor at Mint and oversees the newsroom’s corporate coverage. The Corporate Outsider will look at current issues and trends in the corporate sector every week.
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