The ouster of Cyrus Mistry as chairman of the Tata Group’s holding company, Tata Sons, was not the end of a saga of a botched up corporate firing but the beginning of a fierce battle for control, and of egos, between the interim chairman Ratan Tata and Mistry.
Following the October 24 Tata Sons boardroom coup that removed Mistry as chairman after four years on the job, the 50-year-old seems to have decided to fight. Instead of tamely resigning as chairman of a clutch of Tata companies as he was expected to do, Mistry is hanging in there, making his continuation or removal the agenda for these companies in the coming weeks.
But in this fierce and debilitating battle that will surely take a toll on the performance of Tata companies, have the rights and interests of their shareholders been safeguarded? Have fair and ethical standards of corporate governance been adhered to? After all, most of the big Tata icons – Tata Consultancy Services, Tata Steel, Tata Motors, Tata Chemicals, and Indian Hotels – are listed companies that have a wide spectrum of investors, including a substantial body of small shareholders.
On the battleground, the first round went to Mistry, who surprised both corporate watchers, and perhaps even Ratan Tata and the Tata Sons board.
Following his sudden ouster, several Tata companies’ boards met in quick succession and passed resolutions endorsing Mistry’s leadership, with independent directors taking the lead.
For instance, on November 4, six independent directors of Indian Hotels, the holding company for the Taj Hotels chain, came out with a thumping resolution supporting Mistry and “lauding his contribution for the last four years”. These included corporate veterans like HDFC chairman Deepak Parekh, and old Tata loyalists like Keki Dadiseth and Nadir Godrej.
A few days later, on November 11, the four independent directors of Tata Chemicals – Naseer Munjee, YSR Thorat, Vibha Paul Rishi and Nusli Wadia – spearheaded a board resolution that reposed faith in Mistry. The statement said that the board stood by the evaluation of the chairman in 2015 and 2016 by which he had been reappointed.
Thereafter, the Tata Motors board met on November 15 and supported the former chairman without naming him. Speaking on behalf of the other independent directors, Naseer Munjee summed up the mood: “We are behaving like independent directors. We have been accused of being in the Cyrus camp, but we aren’t in any camp. As independent directors we can’t. We are just worried about the company.”
Much of the reporting on the Mistry-Tata battle has missed out on the significance this boardroom battle has with regard to the issue of corporate governance.
Stung by the poor record of Indian companies, and the continuous exposure to fraud by opaque, family-run businesses, stock market regulator Securities Exchange Board of India, or SEBI, made the appointment of independent directors mandatory as part of the listing agreement – the point at which these businesses raise public funds through dilution of equity.
In 2004, the Securities Exchange Board of India introduced clause 49 in the listing agreement. This further strengthened the provisions of the independent director, and many of these provisions then became part of the amended Companies Act in 2013.
The provisions require publicly-listed companies to appoint independent directors constituting atleast one-third of the board if headed by a non-executive chairman or half the board if headed by an executive chairman.
Section 149 (6) of The Companies Act defines an independent director as one who is “a person of integrity and possesses relevant expertise and experience”, and one who is not a promoter of the company, is not related to the promoters or directors of the company and does not have financial dealings with the company or derives pecuniary benefits.
Clause 49 also made it mandatory for companies to file a compliance report every quarter. As an Ernst & Young commentary on the issue said, “The corporate governance structure hinges on the Independent Directors, who are supposed to bring objectivity to the oversight function of the board and improve its effectiveness.”
The way the Tata companies and their boards voted on Mistry showed a significant trend. Where the promoters’ shareholding of Tata Sons and others was in the majority, as in the case of Tata Consultancy Services (73.3%) and Tata Global Beverages that operates the Starbucks chain (over 70%), Mistry was ousted in a jiffy. In Tata Consultancy Services, he was replaced by Ishaat Hussain who became interim chairman without even a board meeting. In Tata Global Beverages, Mistry was formally voted out on November 15 by seven out of 10 directors.
But in companies where Tata Sons is a minority promoter shareholder, attempts to dislodge Mistry have backfired. For instance, in Indian Hotels, where six independent directors of a total of eight board members stood for Mistry, Tata Sons has 39% equity while overseas investors control 42%. In the other three big Tata companies where the boards supported Mistry, the promoters’ holding is 32% in Tata Steel, 33% in Tata Motors and 30% or thereabouts in Tata Chemicals.
What the independent directors seemed to be saying in these boardrooms is that Mistry has done a good job and does not need to be removed. They all seem to be acting on behalf of the other voiceless shareholders, and in the long-term interest of these companies.
But is the chief promoter of these companies, Tata Sons, and its interim chairman Ratan Tata, listening? Quite the contrary.
Brushing aside the observations of the independent directors in companies where it does not have majority shareholding, Tata Sons hit back within hours of the board resolutions being passed. In notices sent to each of the companies where the boards backed Mistry, Tata Sons has asked for convening Extraordinary General Meetings of shareholders to consider a resolution to remove Mistry. The Extraordinary General Meetings for Indian Hotels is on December 20, Tata Motors on December 22 and Tata Steel on December 23.
Tata Sons has gone one step further. It has also introduced resolutions for consideration by the Tata Chemicals and Tata Steel Extraordinary General Meetings to remove Nusli Wadia as an independent director. The Tata Sons notice accuses Wadia of acting in concert with Mistry and galvanising other independent directors to act against the interests of the two companies. This move seems to be a warning signal that critical or dissident independent directors will not be tolerated.
Nusli Wadia, with decades of service to these companies and to the Tata Group, is now suddenly unwelcome. Is his ouster by Tata Sons being sought because he worked against the company, or is it because he did not toe the Ratan Tata line?
In his defence Nusli Wadi has said his only fiduciary duty is towards the companies and not to Tata Sons, the principal shareholder. In his characteristic style, the industrialist has sent a legal notice threatening criminal and legal action against Tata Sons for “defamation and lowering his image in public by making baseless charges”.
The big question now is: will other independent directors who have not supported Tata Sons on Cyrus Mistry meet the same fate?
By side-stepping the views of the independent directors and going after some of them, Tata Sons, the holding company for the $103 billion Tata empire, is eroding an institution essential for good corporate governance and transparency.
“The role of the independent director has taken a hit,” said Anil Harish, partner of the law firm DM Harish & Co which specialises in corporate law. “As it is the role of the independent director is limited. They cannot interfere with the promoter directors’ growth policies or commercial judgment. However, if they took a call on Cyrus Mistry it should have been better handled.”
Talking of the future, Harish added: “Looking forward, independent directors should be appointed by an external body like the government or an industry body like Assocham [The Associated Chambers of Commerce and Industry of India], and not by the board.”
On the Tata Group website, someone has perhaps forgotten to remove an e-book on the Tata Code of Conduct with a foreword by a smiling Cyrus Mistry. Defining integrity, one of the five core values of the group, the Code says: “We will be fair, honest, transparent and ethical in our conduct; everything we do must stand the test of public scrutiny.”
Whether Tata Sons has violated the principles of corporate governance with respect to independent directors is yet to be legally decided, but the moral high ground the Tata group has always taken seems to be severely dented with the boardroom manoeuvres of recent days.