Corporate Legacy: Fallen Hero?

Ratan Tata, considered the face of India Inc. as de facto head of the country’s largest business conglomerate, has de facto admitted over the last four months, that his well-thought-out decision of choosing Cyrus P. Mistry as his successor at Tata Sons was wrong. The unceremonious ouster of Mistry, Tata Sons serving chairman, on 24 October has led to a fierce boardroom battle and unprecedented war of words. It has now become obvious that things were not all that clean at the Tata Group, which, until a few months ago, was known for its good corporate governance.

In the whole drama, Ratan Tata has failed to explain what was wrong with Mistry. However, a reverse analysis of his over two decade-old reign at the country’s largest business group as chairman and chairman emeritus proves that he had taken several erroneous decisions in the past. It is the culmination of such errors that has led to the latest boardroom battle, denting the reputation of India’s 150 year-old corporate flag bearer.

In this context, one of the most relevant questions that any Indian would like to ask is; Is Ratan Tata still an icon in the Indian business spectrum?
Independent observations of the Tata-Mistry tussle, which led to a series of boardroom fights at several group companies, hostile shareholder meetings, legal proceedings and finally the appointment of a “harmless” outside professional as the head of Tata Sons, indicate that the reputation of India’s most important business conglomerate and its 78-year-old patriarch have now been shredded.

BW Businessworld posed the same question to many — B-school faculty members, corporate lawyers, business students, and large and small investors. Most of the respondents viewed Mistry’s sacking as a serious challenge to good corporate governance. They were also equivocal that corporate governance was seriously compromised when the Tata Sons board expelled a serving chairman in such a hurry and without proper explanation.

And, of course, Mistry’s claims, including a possible write down of $18 billion due to unviable projects and contracts that were initiated during his predecessor’s time also points fingers at Ratan Tata’s diluted stand on shareholder interests, unless it is proven a false claim.

Tata Versus Mistry
One of the main charges against Mistry was poor performance since his takeover in 2012. However, a factual analysis on the performance of Tata’s group companies and the group as a whole, does not tally with this charge. On the contrary, it indicates to more serious performance issues at group companies during the pre-Mistry regime.

In the late 1980s, as CEO of NELCO, Tata, wasn’t very successful. He lost out to competition such as Onida, Videocon and BPL. He seems to have repeated the same experience in three of the Tata group’s most prestigious businesses — automotive, steel and mobile telecom.

In the automotive business, Mahindra & Mahindra, once a much smaller rival to Tata Motors, raced ahead in terms of domestic sales in the last decade. Similarly, in steel, Tata Steel continuously under-performed in the stock market compared to new entrant Jindal Steel between 2006 and 2013. In the telecom business, Tata-Docomo couldn’t even make its presence felt in the market and lost out to the later entrant Idea Cellular in the last 10 years.

Although TCS’s exemplary growth and the performance of newly acquired car maker JLR helped add sheen to the regimes of both Tata and Mistry, the Corus acquisition and Nano kept the respective companies bleeding all along.

Neverthless, it was during Mistry’s regime that TCS’s net profit jumped the highest at 75 per cent. Between 2013 and 2016, the IT company’s revenue also grew 72 per cent. At 60 per cent, its stock price too gave the best returns, much higher compared to Tata Motors and Tata Steel, during the same period.

Though Tata Motors too delivered the highest revenue, thanks to its JLR business, its profit growth hasn’t kept pace with its revenue growth in the previous four years due to poor performance at its Indian operations and the lower sales of JLR in the Chinese market. Tata Motor’s revenue had grown about 46 per cent between 2013 and 2016, while its net profit was up only 11.4 per cent during this period mainly due to the bleeding small car project.

Tata Steel remained the worst performer among the key entities during Mistry’s period on the back of its highly impacted operations in the UK due to a sharp fall in global commodity prices and cheap Chinese imports. But, analysts still regard Mistry’s efforts to sell its UK steel mills, the long product business, as part of a sound turnaround strategy.

Split Wide Open
Internal tussles at the large Tata empire are not anything unusual. The history of Tata’s own bitter tussles with Russi Mody of Tata Steel and Darbari Seth of Tata Chemicals after he became chairman of the group in 1992 and another serious fight with his once-favourite Ajit Kerkar at Indian Hotels, which led to the later’s ouster, are well known.

But, the magnitude of those tussles were much less compared to Mistry’s ouster and the following developments including a fierce war of words between the two and their lobbies — the allies and critics, including key independent directors — making the split wide open. While the earlier tussles were limited to the respective group entities, the latest one impacted the entire group.

This latest boardroom war was also quite unusual in nature as it was the first time in the history of the Tata Group that an already retired chairman, though he remained the chairman emeritus of the group, blocked the freedom of a serving chairman, as alleged by Mistry, and lobbied for his ouster from all group companies, all of a sudden. Also, it took place despite the remuneration committee of the holding company approving Mistry’s performance in its latest review only six months ago.

Poor Corporate Governance
“Broad failures of corporate governance emerge from Mr Mistry’s claims. Mr Tata, who has no children and was the first Tata to have a non-family member succeed him, appears to have found a way to get more and more important decisions sent to the board,” The Economist reports. “Here, his allies apparently agreed to do his bidding, including Mr Mistry’s sacking. A cheap car project that Mr Tata had launched, for example, would have been ended had it not been for his intervention, and it continued making losses. Most seriously, Mr Mistry has suggested that the company has avoided taking write-downs required by accounting rules, of a whopping $18 billion, notably in the steel business. The firms involved say that their numbers are correct.”

V.K. Unni, professor, public policy and management group at IIM Calcutta says, “It appears that there is certainly a serious corporate governance issue. If the promoter tries to influence the board, including the independent directors, to protect his/their personal interest at the cost of the most critical shareholders interest, it is a matter of serious concern, especially when it happens in the Tata Group, which was until now the rare beacon of good governance.”

Now, it is the responsibility of the new chairman of Tata Sons, N. Chandrasekaran, to find the truth behind the allegations and counter-allegations. And, if he fails to bring out the truth, it will again put Ratan Tata in poor light and not Chandra-sekaran as it will be undoubtedly proven that the latter was a mere proxy of the Tatas.

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