While Tata Sons is an unlisted company and therefore accountable to a limited set of stakeholders, its actions affect the entire Tata group of companies, and in a sense the whole of corporate India, making it imperative for Tata Sons to disclose more than it has, proxy advisory firms said. In replacing Cyrus Mistry, the Tata Sons board has asserted its rights and exercised its privilege of appointing and sacking its CEO, but the board has failed to recognise their need to communicate. This absence of clear communication has prompted excessive speculation, they said.
“The Tata group, given its stature and its century-old presence, is responsible and accountable to a much wider set of stakeholders. It is time that the Tata group takes cognizance of this and begins to proactively communicate,” Institutional Investor Advisory Services India Limited (IiAS) has said. “The abruptness of developments at the Tata group has left stakeholders bewildered.”
Raising three issues, IiAS said, “the first is the legality of the process, the second the decision itself, and finally, what happens now that Cyrus Mistry has been ousted? For investors, while the third is more fundamental, for the group the first two also matter.”
J N Gupta, managing director of Stakeholders Empowerment Services (SES), said that governance issues raised by Mistry if true, will not only impact the shareholders but will also hit the Tata brand. He said Mistry’s letter has raised important questions on the independence of the independent directors and their conduct on all the boards of Tata firms. “Sebi may have to examine the allegations of insider trading in his (Cyrus Mistry’s) letter. Governance at present is lip service be it in India or the US. Independent directors typically take up such roles for monetary compensation. And independence is a character that the law cannot infuse. Law can only infuse fear,” said Gupta.
Tata Sons has stated that “the tenure of the former Chairman was marked by repeated departures from the culture and ethos of the group.” But, it is not enough to say that there were departures. Tata Sons needs to explain what these transgressions were and what are their implications, especially for the listed companies, IiAS said.
How will the dual power structure work, going forward? Independent of whether the Tata Sons’ Articles of Association (AoA) “were modified, changing the rules of engagement between the Trusts, the Board of Tata Sons, the Chairman, and the operating companies,” with Ratan Tata remaining Chairperson of the Tata Trusts and Cyrus Mistry chairing Tata Sons, there was a dual power structure. Such duality blurs the lines of accountability and creates confusion in the rank and file. Going forward, the group needs to communicate how it proposes to handle the disconnect between the two roles (of leading the trusts and Tata Sons).
The group must put in places well-articulated roles, responsibilities, and rights, for the structure to work seamlessly. The Tata group must recognize its engagement rules have now changed In making an almost cursory statement that the Chairperson of Tata Sons has been ‘replaced’, and a generic response to Cyrus Mistry’s email leak, the Tata group is taking an extremely narrow and legal view of Tata Sons – as an unlisted company – with only a limited set of shareholders needing to know. But, developments including the leaked Cyrus Mistry letter, may have put events beyond their control. How the group flies through this turbulence, will determine the way the group is perceived and its terms of engagement with its stakeholders, IiAS said.
Another issue raised by the proxy firms is performance metrics for the Chairperson of Tata Sons. One of the reasons cited for Cyrus Mistry’s departure was non-performance. However, shareholders remain unclear on what were the performance metrics and the timeline to achieve those that the group has set-out. Cyrus Mistry’s attempts at reducing debt and getting rid of bleeding parts of the business appear to be rather obvious and practical decisions, given the debt overhang. This is reflected in the increased market capitalization. “If this strategic re-orientation is not acceptable to the Tata Trusts and Tata Sons, then the Tata’s must clearly articulate the deliverables of the Chairperson and the timelines within which the goals are to be achieved. This will not only help Cyrus Mistry’s successor, and prevent incidents of sudden departure in the future, but also provide guidance for investors in the listed Tata group companies,” IiAS said.
Will Cyrus Mistry continue as Chairman of Tata companies?
The Chairman of Tata Sons is the de facto Chairman of the major listed Tata group companies. The Tata group needs to articulate if Cyrus Mistry will continue as Chairperson of Tata Motors, Tata Steel, Indian Hotels, TCS and other Tata companies, and if not, the market will have to be explained how these transitions will happen. The boards of Tata companies will have to meet separately to initiate the process of removing Mistry. This will be a time-consuming process. How will Tata Sons tackle this issue remains a question mark.