Abstract
The case is set around the removal of Cyrus Mistry from the Chairmanship of Tata Sons Ltd, the holding company of the Tata Group. The case traces the origin and evolution of the Tata Group, the challenges of succession as experienced by the group and the emerging challenges of adapting to a new paradigm of its global existence. The case also explores the unique organization structure of the group, genesis of its value system, the reality of its suboptimal performance, and the challenges of nurturing organizational processes to ensure all-weather leadership for the changing times. The case brings into focus the social context of an organization and brings in the debate whether profit maximization is the only prime objective of an organization or whether profit maximization has to rank along with the social commitment of the organization.
Keywords
Prologue
On the autumn afternoon of 24 October 2016, the electronic media in India was abuzz with news of Tata Group jettisoning its Chairman Cyrus Mistry. The news had to compete for ticker space on the news channels with the political drama unfolding among the family members of Mulayam Singh Yadav in Lucknow. This preoccupation of the media forced corporate watchers wait till next morning for details of the coup at Bombay House. 1 The board of Tata Sons Ltd (TSL), the holding company of the group, had decided to remove Cyrus Mistry; it asked the previous chairman Ratan Tata to hold office till a new incumbent was found. Reasons? The reports were only speculative: possibly Mistry’s style did not go the Tata way; possibly Mistry’s handling of NTT DoCoMo had upset the stakeholders; possibly something else.
Corporate observers were shocked that a conglomerate with US$100 billion (₹6.5 trillion) market cap could be deciding its succession in such a fast-forward mode. Where were the best practices of corporate governance that the group was well-known for? 2 What differentiated the family feuds of Lucknow from the surgical strike (Times of India, 2016d) executed within the plush doors of Bombay House?
Tata Group: Genesis
The group was founded by Jamshedji Nusserwanji Tata in 1868. 3 The group’s evolution over 150 years is summarized in Table 1.
Tata Sons Ltd, the holding Company
TSL, the holding company of the group, in 2016, had 30 listed companies and nearly 100 unlisted companies in its portfolio (Times of India, 2016d). The listed companies were valued at about ₹8.3 trillion (US$125 billion) in 2016. Earlier the shareholding of TSL in individual group companies was not significant. The corporate raids carried out by Caparo Group in the mid-1980s altered the risk profile. 4 Gradually, Ratan Tata consolidated the grip of TSL on each group company. Table 2 describes the holding pattern of the prominent group companies in 2016.
The Tata Trusts
Tata Group—Chronology of Evolution
The Tata family had a history of charitable activities; each member created a new trust and endowed it with his/her shareholding in the group companies. In 2016, Tata Trusts held 66 per cent shares of TSL; Tata companies held about 10 per cent and individual members of Tata family held 3 per cent. The dividend income was supporting the philanthropic activities. The combined outlays of Tata Trusts for philanthropic activities have been significant: ₹760 million in 2005–2006; ₹2600 million in 2008–2009 and ₹7,500 million in 2015–2016. Ford Foundation had an outlay of US$133 million (₹8,910 million) for the region covering India, Nepal and Sri Lanka for the eight-year period from 2006 to 2014 (Times of India, 2016c). Table 3 shows the structure of shareholding of TSL.
Structure of Shareholding of Prominent Tata Group Companies
Tata Sons Ltd—Shareholding Pattern
Performance of Key Companies of the Group During Cyrus Mistry Era
Growth in Market Capitalization During Mistry Era (all Figures in ₹ Billion)
Tata Group’s Major Deals Under Cyrus Mistry (2013 to 2016 October)
Market Cap Meltdown between 24 and 27 October 2016
Movement of Share Prices Tata Group Companies During 20 October and 26 December 2016
Structure of the Tata Group
The group has evolved over a century of its existence. It had a three-layer hierarchy. The bottom layer consisted of the individual operating companies with boards, governance structure and operational autonomy. The middle layer was the holding company, TSL, which ensured inter-se cooperation among the operating companies through the Tata Brand Equity Programme. 5 Shareholders of TSL formed the top layer; majority were trusts and family members.
This structure gave the group a unique feature. The bottom layer (‘for-profit’ entities) generated wealth. The top layer (‘not-for-profit’ entities) carried out philanthropic activities. The middle layer, the holding company, connected the two transmitting wealth in one direction and control in the other.
Historically, ‘not-for-profit’ entities emerged to address the concerns of weaker segments who could not compete with the rest in the competitive environment of the capitalistic society. Many ‘not-for-profit’ entities have been failing to sustain themselves due to inherent operational inadequacies. Based on studies of such cases, Drayton and Budinich 6 postulated that ‘not-for-profit’ entities should align with ‘for-profit’ entities and create ‘hybrid value chains’ to be effective in delivering their objectives. Is the Tata Group an example to the hybrid value chain? Has this genealogy of the group made it distinct in terms of objectives, guiding philosophy, ethos and relative priorities?
Mistry’s Tryst with Tata Group
Mistry’s family, Shapoorji Pallonji Group, was associated with Tata family in business since 1930. It held 18.5 per cent of TSL. Cyrus Mistry came into the group as a director of Tata Elxsi Ltd in 1990. Before that he was the Managing Director of Shapoorji Pallonji & Company. In 2006, he was inducted to the board of Tata Power Co Ltd and TSL. He was made the chairman of the group on 28 December 2012 through an elaborate search process. Ratan Tata continued to head the Tata Trusts. The challenges before Mistry, in 2012, were to (a) manage the transition of the group in its globalized, post-merger, scenarios towards consolidation and (b) manage the infancy stage of the Tata Nano project and similar other under-performing assets of the group.
Analysis of Triggers
What were the factors that led to the removal of Cyrus Mistry?
Was it that Mistry could not contribute for the effective performance of the group? Performance indicators of the leading companies of the group, during Mistry’s tenure, are shown in Table 4. The growth in market capitalization of the group, during 2012 to 2016, has surpassed the Nifty Index as well as the market capitalization growth of Reliance Group during the same period (Table 5).
In terms of growth in market capitalization, TCS has been leading others. Performance of group companies have never been uniformly good—neither during Mistry’s tenure nor before. So, poor operating performance could not be a factor warranting Mistry’s ouster.
As chairman of the group, Mistry needed to carry all stakeholders with him. Has he been successful? The following facts may throw some light.
Mistry and Tata families have been associated in business since the 1930s. They were related through marriages too. Hence, establishing rapport and gaining trust should have been far easier for Mistry than for someone else.
Cyrus Mistry joined the group in 1990 as a director of Tata Elxsi. As a lateral entrant, his rapport and acceptability among the employees of the group could be limited. Is it possible that he has not been adequately groomed in the ethos of the Tata Group?
When Mistry took charge in 2012, the major task cut out for him was the post-merger, post-globalization consolidation of the Group. Was he able to garner support of all stakeholders towards this?
Mistry felt the Corus Steel deal to be messy 7 and sought to resolve it through disinvestment. (Curiously, Ratan Tata on coming back as Group Chairman announced a 10-year commitment of 1 billion pound investment to save thousands of jobs in the UK steel industry; for this, he has been hailed as the saviour of the UK steel industry). 8
Mistry sought to disinvest shares in Taj Boston Hotel 9 and Oriental Express. 10
Mistry decided to sell the urea business 11 of Tata Chemicals Ltd
In acquiring the holdings of NTT DoCoMo, Mistry clinged to the RBI norms, despite the existence of an agreement to NTT DoCoMo against any loss in its investment. 12
The deals of Corus Steel, Taj Boston, NTT DoCoMo and so on were prestigious and dear to Ratan Tata. Since Ratan Tata represented almost 80 per cent of TSL, Mistry could not avoid his concurrence. Did he do that? Mistry’s decisions amounted to undoing all the initiatives of Ratan Tata.
Any attempt at structural changes was bound to be resisted by existing system and people. Mistry was handicapped by the following:
He was an outsider; his internal support base was minimal. He lacked backing of the shareholders In a crisis, the opponents would pool to protect their turfs. The ethos and philosophy of the group dictated equity and social justice to override business and commerce. Apparently, Mistry had his priorities in the reverse order.
How did Mistry compare with Jack Welch of General Electric who recklessly went on a reform spree in the early 1980s? 13 Jack Welch had the backing of the board and the shareholders all along. When Ratan Tata assumed office in 1991, he too had gone ahead with reckless reforms—retiring many stalwarts, 14 bringing in the Tata Brand Equity Programme and so on. Ratan Tata had certain inherent advantages: he was simultaneously head of TSL and Tata Trusts; he had grown up within the group and so on. Cyrus Mistry possibly missed the support and confidence of Tata Trusts for a variety of reasons.
There were indications to infer that the bonhomie that existed between Ratan Tata and Cyrus Mistry at the time of the latter’s induction into the group had cooled off over the years (Live Mint, 2016a, p. 6).
The deal acquiring the solar power division of Welspun by Tata Power Ltd was cleared by Mistry without consulting Tata Trusts.
The decision to explore sale of the Corus Steel division was taken by Mistry without consulting Tata Trusts.
In August 2016, Ajay Piramal, Chairman of Piramal Enterprises, and Venu Srinivasan of TVS Motors were inducted into the board of Tata Sons Ltd; this was initiated by Ratan Tata and Mistry was not in the know of it.
During the centenary celebrations of Shapoorji Pallonji Group, Ratan Tata was not seen when most of Indian industry’s who’s who were present.
In the buyback clause of the JV agreement with NTT DoCoMo, there was a put option on the price of share repurchase. When NTT DoCoMo decided to exit and the group was to repurchase the shares, Mistry declined to honour the clause of put option, because the market price was below the put option price and RBI regulations did not permit payouts at a higher price. Ratan Tata’s camp followers argued that the group should have negotiated for a via media rather than get into a legalistic stand; this legalistic stand was later demolished in an international arbitration.
Another perspective was the different styles 15 of Cyrus Mistry and Ratan Tata in leading the group. Ratan Tata had a vision of making the group a global conglomerate in a short span of time. The deals he made were forays with this objective; by the time he remitted office the Group had exceeded the top line of $100 billion and he exhorted the group towards $500 billion by the year 2021. Cyrus Mistry had a different perspective and style. He was not enamoured by the goal $500 billion by 2021; he was more concerned about the bottom line of each company and the group. To him, Nano project or the Corus Steel or Taj Boston did not make any sense if they did not yield a threshold rate of return. Coexistence of these two perspectives in parallel, one as head of Tata Trusts and the other as head of TSL, explained the genesis of conflict to a large extent.
Internecine War
After removing Mistry from TSL, attempts were initiated to remove him from all group companies. Boards of TCS and Tata Global Beverages resolved to remove Mistry immediately; in Tata Chemicals and Indian Hotels Company, the resolutions faced resistance from some of the independent directors. The next move was to convene Extraordinary General Body Meeting (EGM) of the shareholders of these companies and change the independent directors to achieve the goal.
In some group companies, the group holding was not significant (see Table 2). In such cases, the group needed support of institutional shareholders (like LIC) or it needed to augment its holding to complete the game. Contingency plans in this direction were contemplated (Economic Times, 2016g). As this process needed time, a horizon of two years was considered inevitable to dislodge Mistry completely from the group.
What were Mistry’s options? He could fight the decision if he enjoyed majority shareholder support. The existing shareholding pattern did not warrant this choice. In conflicts between promoters, institutional shareholders were unlikely to take sides. Some independent directors defended Mistry probably because they felt the action was unjustified or for other reasons. Support of independent directors was a transient phenomenon. For instance, Nusli Wadia, who had objected to Mistry’s removal, was removed from the board of Tata Motors in the EGM held in December 2016 (Economic Times, 2016f). All independent directors who supported Mistry were slated to be removed. Nusli Wadia chose to file a civil suit against Tata Group for defamation. The second option to Mistry was to quit gracefully. By 20 December 2016, he decided to quit the group, but he also chose to file a suit against TSL for the ‘overall benefit’ of the group. 16
Immediate Impacts
The group’s brand image had taken severe beating in the minds of shareholders, investors, corporate observers and society at large. Sub-prime handling of succession management was specifically noted by corporate observers and professionals. Focus of each Tata company had shifted to managing the uncertainty over the internecine war. Vendors, business associates and shareholders were deeply concerned how the crisis would roll out and how each would be impacted. The fall in the market cap of group companies is shown in Tables 7a and 7b.
At the end of December 2016, it appeared that Tata Trusts through Ratan Tata would reassert their authority over the destiny of the group though there would be immense costs in terms of legal battles; in terms of rebuilding the brand image of the group; in smoothening the disturbed cords among the employees, shareholders and customers.
Shape of Things to Come
In 2016, Tata Group stood out as the most illustrious, most diversified and largest business house of India. Throughout its evolution of more than a century, it has been a pioneer and role model for all entrepreneurs and businessmen of India. The recent crisis could be seen as yet another stage in its evolution.
All through the history of the group, it was headed by a member of the promoter family. Choice of Cyrus Mistry implied a minor relaxation in this practice: Mistry’s family was the second family owner and long-time associate of the main family. For the 150-year-old, $100-plus billion business house, despite being the most diversified, global and professionally managed group in India, it was ironical that the choice of its top leader was restricted to the narrow confines of community and family relationships.
Were the induction of Mistry as head of TSL and Ratan Tata as head of Tata Trusts paving the way for segregation of management and ownership? Since Cyrus Mistry could not really be delinked from ownership, his induction could be perceived as a baby step in that direction. The group needed to learn to differentiate between ownership and management in more professional ways than done in the past.
Historically, all chairpersons of the group continued to hold office till death. Ratan Tata was the first head of the group to relinquish office voluntarily. Would the group consider fixed tenure for its chairperson in future? Would it be desirable?
For the Tata Group to emerge as a global and professional business conglomerate, it would have to evolve innovative and indigenous governance structures. Some of the following could be pointers:
Segregate ownership and management as seen between head of Tata Trusts and head of TSL and establish a set of healthy consultative processes between the two. Create healthy conventions for the choice of the chairperson of the holding company from among professional managers. Does he/she have to be a family member
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from the investor groups? Can this position be reserved for managers from within the group? Should he/she be given a life-long tenure or a fixed tenure (say 5 years or 10 years)? Create healthy conventions on the interactions between the holding company and the operating companies. Is it necessary for the chairperson of the holding company to be the chairperson of all the operating companies? Can the chairperson of the holding company be helped and supported by a Council/Presidium of CEOs of the operating companies in formulating group strategies and policies? Can the group chairperson be ‘First among Equals’ within the CEOs of the operating companies?
While creating governance practices, it would be worthwhile to benchmark with the practices followed by large groups/conglomerates across the globe—MNCs, Chaebols of South Korea, Keiretsus of Japan (Hindu Business Line, 2017) and so on.
Epilogue
The last quarter of 2016 was tumultuous for the Tata Group. It saw the unprecedented sight of its top employee being jettisoned, series of board meetings and extraordinary general body meetings being held hurriedly, independent directors being sent home, allegations and counter-allegations at the top level, legal suits and defamation cases. All in all, the group was in the news almost daily, definitely not for the best reasons.
In February 2017, N. Chandrasekaran, CEO of TCS, was anointed chairman of the group setting aside the speculations that only a member of the Tata family could aspire for the position. Few months later, TSL was converted into a private limited company notwithstanding objections from Cyrus Mistry (Business Standard, 2018). Still later counsel of TSL deposed 18 before NCLAT (National Company Law Appellate Tribunal) that Tata Trusts would like to buy out Shapoorji Pallonji (SP)] stake in TSL in the overall interest of the group. He further pleaded that SP as a minority shareholder should be facilitated an exit route by directions of NCLAT. As a sequel to the allegations made by Mistry, Central Bureau of Investigation (CBI) put R. Venkataraman, Managing Trustee of Tata Trusts and Tony Fernandes, global chief of Air Asia under investigations. 19 War of mud-slinging continued unabated.
Did this catharsis signify the cleansing of garbage accumulated over a long time or did this signify the growth pangs of a group shrouded in ‘satisfactory underperformance’ 20 trying to break out into the new dawn of the twenty-first century?
Declaration of Conflicting Interests
The author declared no potential conflicts of interest with respect to the research, authorship and/or publication of this case.
Funding
The author received no financial support for the research, authorship and/or publication of this case.