Ouster of Cyrus Mistry as Tata Sons Chairman – Controversy and Lessions


What is Tata Sons and why is it important?

Tata Sons is the holding company of the Tata group of companies. The chairman of the board of Tata Sons is also typically the chairman of the operating companies of the Tata group. As the promoter of Tata-operating companies such as Tata Steel and Tata Motors, Tata Sons decides how much capital to allocate to each of these firms.

So, why did the board sack Mistry?

That part of the affair is still a mystery. Ratan Tata, chairman of Tata Trusts, has not commented so far. There are murmurs of conflict of interest and poor performance.
Still, V.R. Mehta, trustee of the Sir Dorabji Tata Trust, told NDTV in an interview that the Tata Trusts were “concerned about falling revenue (since Mistry took over)—funds for charitable work were drying up”. The Trusts were also unhappy about the fact that the performance of Tata Sons was increasingly dependent on just two companies—Jaguar Land Rover (JLR) and Tata Consultancy Services (TCS).

What is Tata Trusts and how is it involved?

Sir Dorabji Tata Trust, Sir Ratan Tata Trust and a bunch of other trusts endowed by the members of the Tata family are collectively known as the Tata Trusts. This trust owns two-thirds of Tata Sons.
While little is known (beyond Mehta’s statement why Mistry was removed), it has been established who was the prime mover behind Mistry’s sacking.

In a statement on Monday, a Tata Sons and Tata Trusts spokesperson said that “…on the recommendations of the principal shareholders decided that it may be appropriate to consider a change for the long term interest of Tata Sons and Tata group.”

What are the facts about this poor performance and conflict of interest?

Poor performance is a relative term and it is difficult to capture performance of a behemoth by a single yardstick.
Still, consider this: In the four fiscal years from 2013 to 2016, essentially Mistry’s regime, the average dividend received by Tata Sons was Rs6,855 crore, a number boosted by the one-off TCS dividend. Adjusted for that (assuming the same dividend for fiscal 2014 and 2015), the average dividend was Rs5,018 crore. In the four years preceding that, the average dividend received was Rs2,730 crore.
However, note that in seven of the last nine years, TCS and JLR contributed at least 70% (and in one year it was as high as 148%) of dividends received by Tata Sons.

What does Mistry have to say about his performance?

Mistry has defended his tenure by saying he inherited a lot of problems. He has questioned the decisions of his predecessor on the entry into aviation, the aggressive bidding for Tata Power’s Mundra power project, the decision to continue with the Nano car, etc.

He has said that he couldn’t function freely given Ratan Tata’s interference. (Remember, the special powers of the Tata Trusts).

In an email to the directors of Tata Sons, he said that two members of the nomination and remuneration committee of the board—which had recently lauded and commended his performance—voted for his removal.

So, Mistry isn’t to blame?

Well, analysts are also raising questions on whether Mistry couldn’t have handled the group’s spat with Tata DoCoMo better. Some insiders also said that he was aloof and could have communicated more.

Is that all?

No. Perhaps the two biggest bombshells in his email are these.
The Tata group is staring at a Rs1.18 trillion writedown. That is two-thirds of the group’s net worth of Rs1.74 trillion.
He has also pointed out instances of corporate governance violation in the group.

Will the government/courts intervene?

It is possible that the MCA will look into these allegations. Already, exchanges and capital market regulator Securities and Exchange Board of India are asking group companies about these allegations of breaches of law.

The National Company Law Tribunal (NCLT) has directed ousted chairman of Tata Sons, Cyrus Mistry and his investment firms to provide material evidence to prove their allegations related to mismanagement and oppression of minority shareholders by Tata Sons, Ratan Tata and the directors of the holding company of the diversified conglomerate.
                  Lessons to learn from Tata-Mistry controversy
The controversy at Bombay House seems to be about vision. It can be said that in this case it is about a vision beyond the horizon which is beyond the obvious; a vision far away from numbers and words; a vision that symbolizes trust. Cyrus Mistry may have a perfect 20/20 vision, but had fallen short of what was demanded by the board. However critical, vision is a very subjective ingredient. It is always a challenge to measure it. 
Trust is something on which the TATA Group survives. Trust has always been a rare commodity in the world and the Tata Group understands that very well. They have invested and cashed in on it. They have not only created a brand out of it but it's almost like their raw material. That is why even Tanishq and Titan became leading brands in their business verticals in a short period of time. It is this abstract virtue that cannot be quantified and can be used and misused. Naturally, the TATA board wants to preserve this. This key ingredient is what has set the group apart from its competitors in every sphere since inception and it is one without which it cannot survive. 

Keeping commitments in an age of strong regulations, complicated agreements and government overreach, Tata DoCoMo deal has tested the Trust quotient of the House of Tata. Similarly the long term vision that led to the acquisition of Corus and other global corporations by the group seems to clash with the more shareholder and short term quarterly numbers friendly regime that came after Ratan Tata. Jury is out on this subject and likely to remain so for some time to come. 

The cross border deals executed by Ratan Tata were more than just ordinary financial deals. A good section of the businesses saw them as financially flawed even at the time they were announced. But, it may also be seen as differential or contrarian thinking. . And Tata's have a way of sticking to things and turning them profitable; almost audaciously. Cyrus Mistry had a huge challenge taking up this assignment. His actions on resale of steel assets in UK and handling of the DoCoMo may also seem like avoidance of challenges and hiding behind law to escape commitments. 

Longer the vision tougher the play; there are no short cuts in this. Playing a game of golf one may visualize all the 18 holes. I think Cyrus got limited to the 18 holes. Tiger paid a huge price for this limited vision. One needs to always try and see beyond. In the position of Chair of Tata Sons this was clearly a necessity. 

Mistry was good perhaps very good, but he fell short of Ratan Tata's yardstick. The dichotomy is that Mistry did not trust the choices made by Ratan Tata and he also lost trust in his own choice. But what is clearly surprising is that Tata's who are legendary employers by any standards, who are known to handle HR issues most humanely could not find a better exit for their own chairman. 

Friday, 23rd Dec 2016, 10:59:50 AM

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