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Institutional EYE

Commentary on Corporate Governance Issues

Tata Group: Time to reboot

Cyrus Mistry’s resignation must not be seen as an end in itself – instead it must be read as a new beginning to clean up some of the issues that plague the governance structures across the group, address the operational aspects (or hotspots), and establish a succession plan that is enduring.

Following Cyrus Mistry’s resignation from the remaining six listed Tata Group companies, the Tata Group needs to address the issues that this conflict has raised. In doing so, it must also find an appropriate strategy to calm the discord – going to the courts will be detrimental for both sides.

The public disclosures made by both sides – as explanations, rebuttals, and representations – have been disconcerting for investors. More so, because the disclosures have raised some legitimate questions on how the Tata group functions within its internal structures. To continue to command the trust of its stakeholders, IiAS believes the Tata group must ensure the following:

1. There will a balanced power structure at Tata Sons’ board Currently, the directors representing the Tata Trusts hold veto power on decisions presented to the Tata Sons board – which shifts the balance of power in their favour. While the Tata Trusts are indeed owners of Tata Sons and the operating companies (through Tata Sons), having veto powers negates the need for an independent board. As a good governance practice, these veto rights must be cancelled and decisions must be driven by equally empowered directors. This will ensure balanced decision-making, which will be in the larger interest of all stakeholders of the group.

2. There will not be an overhaul of the group’s strategic direction Investors have been favourable to the Tata group’s current strategic orientation of focusing on returns, letting go of bleeding parts of the businesses, reducing debt, and unwinding the cross holdings. Some of the operating companies have yet a long way to traverse on that agenda – and some of the imminent decisions will require ruthless focus. Investors need to be reassured that there will not be any surprises or roll-backs of the current strategic orientation. If the new leadership at Tata Sons has a different point of view, then Tata Sons or the individual operating companies need to communicate the new strategic direction to stakeholders well ahead of making material decisions.

3. There will be focused effort to manage the corporate culture Corporate culture is essential to good corporate governance. The communication from Cyrus Mistry, in which he refers to himself and GEC members [as] ‘outsiders’ vs. tenured employees that were ‘insiders’, or where he refers to some within the Tata group calling the Group Executive Council a ‘super board’, suggests that there is an internal battle in accepting new employees at senior ranks, and that existing cliques are very strong. Though having loyal employees is good, having internal power structures that thwart new agendas can be detrimental to the long-term interest. More critically, it may have dangerous repercussions for the company: recent governance breakdown – in Wells Fargo, Volkswagen, and Toshiba – have been largely attributed to a weak corporate culture.

4. There will be disclosures on the performance metrics of the Chairperson of Tata Sons

The Tata Trusts seem to be looking for leaders that share the vision of Jamshetji Tata and his two sons, which is set out in the Trust Deeds. Given that over a century has passed since Jamshetji Tata passed away, and that times have changed, that may be a tall ask. Even if the group does find that rare individual to succeed Cyrus Mistry, Tata Sons must clearly define the performance metrics for the role of its Chairperson and the time frame within which these must be accomplished. This will help develop a framework for the identification and evaluation of the successor, as well as bring clarity to stakeholders across operating companies on the group’s strategies.

5. While Tata Sons will continue to exert its influence over operating companies’ boards, the boards themselves will have independent Chairpersons to balance the different agendas

The Tata group needs to address possible areas of conflict and clearly set the terms of engagement between the three tiers (Tata Trusts, Tata Sons, and the operating companies) of the group. They need to put in place an operating structure that outlives individuals.

To ensure that the operating companies adhere to the culture and ethos of the Tata group, IiAS believes Tata Sons will need to exercise influence over operating companies. For this, IiAS recommends that Tata Sons and maybe even the Trusts nominate directors to the board of operating companies. To balance between the philanthropic agendas of the Tata group against the need for investor returns, and the cash flow pressures of investing in new businesses across the group, the operating companies must have an Independent Chairpersons and professional CEO’s (the Tata companies already have professional CEOs).

6. Boards in operating companies will have stronger independent directors

IiAS believes independent directors of the listed companies should have provided comprehensive guidance to shareholders on whether Cyrus Mistry must remain director on their boards. However, only three of the seven boards provided this clarity: four board remained silent. In remaining silent, the boards failed their fiduciary responsibility towards minority shareholders. While TCS’ board supported Tata Sons’ resolution to remove Cyrus Mistry as a director, Independent Directors of Tata Chemicals Limited (TCL) and Indian Hotels Company Limited (IHCL) reaffirmed their faith in the Cyrus Mistry. But, in doing so, these independent directors failed to visualize the long-term implications of such a support. The independent directors of IHCL and TCL should have addressed the obviously looming question: what would be the future operational relationship of both these companies with Tata Sons, the principal shareholder, if Cyrus Mistry remained on the board?

Tata Sons claims that Nusli Wadia is able to “galvanize” other independent directors. Embedded in that argument is the perspective that other independent directors can ‘be galvanized’. If indeed so, the Tata companies need to focus on strengthening not just the boards not just in terms of the number of independent directors (see Table 1 below), but also in terms of the quality of the independent representation.

The Tata group, which until now, was one of the most predictable groups in India, has shaken investor confidence with this tug-of-war. If the Tata group is to survive for another century, the current episode must be seen as a call to urgently fix the group’s structural vulnerabilities. This is in the long-term interest of the group and all its stakeholders.

Notes: 1. Does not include Cyrus Mistry as a director. 2. Includes Nusli Wadia as director in Tata Motors Limited, Tata Chemicals Limited, and Tata Steel Limited, since he continues to remain director as on the date of this report. 3. Tata Chemicals board composition does not include Bhaskar Bhat as a non-executive director since he has resigned and is yet to be reappointed. 4. The Tata Power Company Limited’s board composition includes S. Padmanabhan as non-executive director. He was appointed as an additional director on 16 December 2016. 5. IiAS classification of independent directors factors in tenure for inception of directorship – therefore, for independent directors that have completed 10 years on the same board, IiAS has reclassified them as being non-independent.

Disclaimer: The Tata group, through Tata Investment Corporation Limited, holds equity in IiAS.

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