08 Nov 2016 21:13 IST

IIM-B Prof readies case on Mistry ouster

Cyrus Mistry

J Ramachandran, professor of corporate strategy, says case will focus on ownership and managerial rights

J Ramachandran, Professor of Corporate Strategy and Policy at IIM Bangalore, has embarked on his third case study on the Tata group — this time on the ouster of Cyrus Mistry as Chairman of Tata Sons. Prof Ramachandran and his co-authors had earlier written two cases on the Tata Group: the first, titled Leading the Tata Group: Ratan Tata’s Years, written in 2010 (and since revised thrice) and the second: Leading the Tata Group: Cyrus Mistry Years, written in August this year, a couple of months before his ouster!

After news broke on his ouster, Prof Ramachandran felt this move too was deserving of a case study that can be taught in B-schools. “In the case under development we plan to focus on the issues related to ownership rights and managerial rights: in a listed firm, the former does not automatically afford the latter!”

Group different from conglomerate

In the two Tata cases, Prof Ramachandran demonstrated the distinction between a business group (like the Tata Group) and a conventional conglomerate such as GE. The cases also focussed on the challenges of leading a business group. 

“The contentious ouster of Cyrus Mistry reinforces our arguments in class that a business group is not a conglomerate —  a distinction that is often missed. It is widely diversified like a conglomerate but not organised like one! For instance, the job of the Group Chairman of the Tata Group is not the same as that of the Chairman/CEO of GE because the latter (GE) is a single legal entity in which all the businesses of a diversified portfolio like (aerospace, medical, lighting) are housed; whereas the Tata Group is a “collection” of legal entities (Tata Steel, Tata Motors, Tata Chemicals are all separate companies) each with a relatively focused portfolio.”

Consequently, argues the Professor, if Chairman/CEO of GE was to be fired by the board of GE, he automatically loses control over all the businesses! Whereas in the case of Cyrus Mistry, he continues to be Chairman of the various legal entities — Tata Steel, Tata Motors, Tata Global, India Hotels — unless the boards of these companies individually “oust” him from that position. This has played out exactly as Prof Ramachandran explains in the recent board meeting chaired by Mistry, where the independent directors of IHCL backed him and expressed full confidence in Mistry’s performance.

“Even the boards of these companies cannot remove him – only the shareholders of each of the companies can do so. They can only replace him as a Chairman. Note that even the Tata Sons board only “replaced him” as Chairman and did not remove him from the Board,” he adds.

Governance advantages

Prof Ramachandran says that the Cyrus Mistry ouster further strengthens the merits and superiority of the business group as an organisational form, especially if the boards of the group companies – even one – votes to retain Mistry as Chairman. It not only puts to rest the popular belief that business groups are a dysfunctional organisational form that would/should disappear as corporate governance standards improve, it also demonstrates the robustness of the form and the inherent governance advantages of business groups, he says.

Business groups such as the Tatas benefit from a focused portfolio at the level of the affiliate companies and yet gain from large scale diversification at the level of the collective. The recent reorganisation of Google — from a single firm into a collection of companies — is a case in point. However, leading a business group is challenging; while not bereft of influence, the position of a Group Chairman does not afford the kind of formal authority a conventional conglomerate affords its CEO. Prof Ramachandran’s article, along with two co-authors KS Manikandan (IIM Tiruchi) and Anirvan Pant (IIM Calcutta), titled Why Conglomerates Thrive (outside the US) was published in the Harvard Business Review in December 2013. This article quoted the Tata group widely as an example of a successful business group.