On a sultry afternoon on September 2, 1997, there was a dramatic boardroom change. At the board meeting of Indian Hotels Company Ltd, the powerful chief of that company (IHCL), Ajit Baburao Kerkar, was ousted with Ratan Tata being elected as the chairman. Soon, Tata’s confidant RK Krishna Kumar was brought in as the new managing director of IHCL.
Circa 2016. On November 4, independent directors of Indian Hotels led by HDFC chairman Deepak Parekh, former Hindustan Unilever chairman Keki Dadiseth, Nadir Godrej of the Godrej Group and three others met hours before the board meeting and “unanimously expressed their full confidence in the chairman Cyrus Mistry, and praised the steps taken by him in providing strategic direction and leadership to the company”, less than a fortnight after Mistry was asked to step down as the chairman of Tata Sons, an unlisted company.
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Mistry refused but had to go as six out of the eight directors voted for his removal, triggering an acrimonious battle in the $103-billion group. As both camps — led by Ratan Tata and Cyrus — weigh their next moves, there is deep unease among shareholders, institutional investors and analysts. Their worries centre around questions relating to whether the Tata group was adhering to established corporate governance norms and whether the group was making ethical and fair decisions.
Six leading independent directors led by Parekh and Dadiseth have vouched for Mistry’s performance and vision, but Ratan Tata, interim chairman of Tata Sons, and Tata Trusts which hold 66 per cent stake in Tata Sons don’t reckon that Mistry has it in him to vault the group to the top. Ratan Tata, in his letter to employees last week, said the decision to change the leadership “was a well-considered and serious one for its board members…. and the board believes was absolutely necessary for the future success of the Tata Group”.
Who is right? Tata or the independent directors? The entire episode leading to Mistry’s ouster and the events thereafter have only raised more questions on standards of corporate governance and the role of independent directors. “There are very few instances where individual directors have dissented against a board decision or abstained from voting on a board resolution. Apart from this, independent directors in India rarely take the help of a third party to arrive at a decision on a board proposal,” says Shriram Subramanian, founder and managing director of proxy advisory firm InGovern.
“The decision of Indian Hotels independent directors is good for the company and corporate governance. Independent directors should leave their loyalties behind while taking decisions. They should take decisions for the betterment of the company,” according to Sandeep Parekh, founder, Finsec Law Advisors. Ratan Tata who had fought many battles to unify the conglomerate when he took control in the early 90s may differ.
Subramanian said, in the case of Tata Sons, the decision of the board to replace Cyrus Mistry as its chairman, the independent directors could have collectively approached a third party for consultation before arriving at a decision on the issue. “In the case of delisting of London-listed Essar Energy, the independent directors had opposed the delisting because they thought the move was not in the interest of shareholders. But in India, you will rarely find such instances of independent directors taking a stance against the board,” says Subramanian.
Financial institutions led by LIC and mutual funds are major shareholders in listed companies but have rarely exerted their influence when it comes to enforcing governance norms. While shareholders and institutional investors have started playing an active role in enforcing corporate governance, they need to take their participation to the next level where they can propose their own resolution, Subramanian says.
According to JN Gupta, managing director at Stakeholders Empowerment Services, the Tata-Mistry spat has once again opened up a debate on how a shareholder could interfere and influence the decision of the board. Companies and boards should go beyond the letter and take decisions in the right spirit as well. “Governance at present is lip service… be it in India or the US. Independence is a character that the law cannot infuse, law can only infuse fear,” Gupta says.
Not everyone agrees though. “In the last 16 years since the Securities and Exchange Board of India (Sebi) incorporated the corporate governance norms, the governance standards have improved a lot. Merely because there have been a few aberrations, it cannot be generalised to indicate that standards of governance are poor,” says Pratip Kar, former executive director of Sebi, during whose tenure corporate governance in India first became part of the listing agreement.
“I think, without doubt, standards have risen significantly. It has been recognised by global investors as an area where India has shown marked improvement. Some of this improvement is a response to spectacular past failures in governance, and some of it is due to the initiatives taken by Sebi, e.g, through listing agreements,” says the CEO of a mutual fund. “Credit must also go to the Ministry of Corporate Affairs for strengthening governance through the Companies Act. In parallel, the boards of major companies have been revamped and repositioned,” he says.
What led to the exit of Mistry? 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), says Institutional Investors Advisory Services (IiAS).
Will Cyrus Mistry continue as chairman of Tata firms? The Indian Hotels board meeting indicates it’s not easy to dislodge him from the chairmanship. The chairman of Tata Sons was the de facto chairman of the major listed Tata group companies so far. “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,” IiAS said.
How will Tata Sons tackle this issue remains a question mark. Experts say people have been commenting on the Tata-Mistry issue based on limited factual information. “I would not like to comment on the matter. My strong belief having known the group for at least three decades is that it has very strong corporate governance and has maintained high standard of governance throughout its 150 years of history and even now,” Kar says. The dust raised by Mistry’s exit is unlikely to settle anytime soon. And it may be too early to pass any judgment on who’s right and who’s wrong.