Effect on corporate governance
On October 24, 2016, Tata Sons issued a press release stating that Cyrus Mistry, Chairman of the Tata Group was asked to step down as Chairman of Tata Sons. The philanthropic Tata Trusts including Sir Dorabji Tata Trust and Sir Ratan Tata Trust, among others, control about 66% of Tata Sons. Tata Sons is the group holding company created by the sons of the founder, Jamsetji Tata and effectively controls the sprawling Tata Group. Cyrus Mistry was chosen by Ratan Tata (who controls the Tata Trusts) in 2011 as his successor to manage the Tata group of enterprises.
The media was soon full of accusations by both Ratan Tata about Cyrus Mistry’s mismanagement and by Mistry, about various lapses of Tata. Both took recourse to the media and law in presenting their story. Three months later, Mistry was removed from boards of all Tata companies that he was heading, and the Tata Sons have since appointed a new Chairman, N. Chandrasekharan to manage the Tata Group.
As a promoter, Tata Sons served notices to the various Tata companies for the removal of Mistry from their boards. There were mixed responses in the voting patterns of the different Boards of Directors (BOD). The directors on the boards of The Indian Hotels Company (IHCL) and Tata Motors Limited supported Mistry while those on the boards of Tata Global Beverages Limited and Tata Consultancy Services Limited (TCS) voted to remove Mistry as Chairman. It appeared that Mistry was backed where Tata Sons were a minority promoter. Independent Directors in these boardrooms appeared to convey that Mistry’s performance was satisfactory and his removal was not necessary.
Corporate Governance
A crucial element highlighted in this case, was that of corporate governance and the role of the BOD of the Tata companies. TCS, IHCL, Tata Steel Limited, Tata Motors Limited are all publicly listed companies with a large number of investors and a number of shareholders with smaller stakes. Some of the critical questions raised about the situation were:
· Was it correct for the interests of the Tata Trusts to dominate over all others?
· Have the rights and interests of all shareholders been taken care of?
· Have fair and ethical standards of corporate governance been adhered to?
Where the BOD supported Mistry, Tata Sons sent out notices for the convening of Extraordinary General Meetings (EGM) of shareholders to consider a resolution to remove Mistry. It has won all these resolutions, with majority of the shareholders accepting them. Tata Sons also removed Nusli Wadia, Independent Director in two Tata companies for supporting Mistry.
The appointment of independent directors is mandatory for public listings as per Securities Exchange Board of India (SEBI). The provisions state that publicly-listed companies should appoint independent directors constituting at least one-third of the board if headed by a non-executive chairman or, half the board if headed by an executive chairman. Thus independent directors would bring in objectivity to oversights in the functioning of the BOD and improve effectiveness.
By side-stepping the views of independent directors and removing one for supporting Mistry, Tata Sons, the holding company for the $103 billion Tata Empire, seem to have violated a primary tenet of corporate governance and transparency. The role of the independent director is thus undermined as promoters of other companies could also remove them if they did not support them.
From another angle, in companies where the BOD voted Mistry out, nothing on record seems to suggest that the directors had previously raised concerns over Mistry’s performance as Chairman. This removal appears to based on the influence of Tata Sons as opposed to a qualitative assessment of Mistry’s performance. The independent directors under the Companies Act and SEBI listing regulations have an important role in ensuring good board governance and these seem to have been ignored.
Another issue that was raised is the role of Tata Sons in trying to exercise control over public limited companies like Tata Motors Limited and Tata Steel Limited. In these companies, Tata Sons actually doesn’t own all the shares but majority of them are held by a number of investment entities. So, there are multiple shareholders. The role of Tata Sons seems to be that of one that exercises oversight on behalf of a conglomerate which set up many of these companies. This questions the idea of governance when a body which is not really a shareholder exercises powerful influence on public listed companies.
Tata Sons also pointed out that under their corporate governance guidelines, once a Tata employee steps down from the BOD of Tata companies, he ceases to be a Tata employee. Thus, once Mistry was removed as Chairman of Tata Sons, he ceased to be a Tata employee. So by refusing to resign from the BODs of the different companies he was violating these guidelines.
Meanwhile, Mistry also sent an email to the BOD of Tata Sons and Tata Trusts, levelling a number of allegations against the Tata group and his predecessor, Ratan Tata ranging from fraudulent transactions, unethical practices and conflicts of interest. Why was Mistry silent and wait before raising all these issues only after his expulsion from the group? There are no past records suggesting his discontentment regarding these issues in previous board and committee meetings. This is another sign of poor corporate governance. Another issue that arises is whether it is correct for Mistry to publicize confidential information related to different Tata companies, which he had access to only because he was a Chairman.
There are multiple issues that make the case bewildering for a person trying to analyse it objectively. All of these are now legal issues with Mistry, Wadia, Tata Sons and other Tata companies filing suits and counter suits on various aspect. SEBI and other agencies are now reviewing some of these issues. In short, this is an entire case study in itself in corporate governance and practices and Indian companies have a lot to achieve in this field as it indicates more promoter-led governance, less corporate governance.
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