The strategic decisions in each of the Tata Group companies have been orchestrated by Tata Sons as the majority shareholders. I had earlier highlighted the strategic flaws in various group companies in my article of June 2014
I had also written a follow up article on Cyrus Mistry’s missed opportunities, at a strategic level, as the Chairman of Tata Sons over the last four years. This was written ahead of the current crisis erupting at Tata Sons
Leaving aside the flaws in past strategic decisions that are responsible for some of the Tata Group companies’ current situation, the bigger issue relates to the minority shareholders in each of these companies, who have lost significant value. It is not unreasonable to say that the independent directors in each of the Tata Group companies could have minimised such losses, had they acted in a timely manner.
Looking after all shareholders
The role of independent directors is to ensure that every decision made by the company and its executive directors are in the best interest of not only the majority shareholder, but also in the best interests of the shareholders at large, including the minority shareholders that include financial institutions and retail investors. In effect, the independent directors in each of the Tata Group companies cannot ease themselves out of this responsibility.
Tata Sons has advised major group companies to remove Mistry as Chairman of their boards. Independent directors in each of the companies have acted differently; TCS and Tata Global Beverages boards have removed Mistry while Indian Hotels and Tata Chemicals have reaffirmed their support for him. Independent directors in Tata Motors have not taken sides.
With Tata Sons failing to remove Mistry as the Chairman of some of its group companies, it is now calling for an Extraordinary General Meeting (EGM) of the shareholders to eject him as a director in each of these companies.
Avoiding unfavourable circumstances
Independent directors in each of the Tata Group companies are playing a key role in this conflict. The action and sides taken by these directors are being closely watched and analysed by shareholders, investors, regulators and the financial press. The acid test would be whether they are acting in the best interest of the shareholders of their respective companies or are they taking sides creating an unfavourable situation for a group of shareholders, albeit minority shareholders.
Nusli Wadia, who used to be a close confidant of JRD Tata and groomed Ratan Tata as the Chairman of Tata Sons, is a senior independent director in Tata Motors, Tata Chemicals and Tata Steel. He backed Mistry’s remaining on the Tata Motors and Tata Chemicals boards. This is a big blow to Tata Trusts and Ratan Tata.
Tata Sons is now gunning, not only for Mistry’s removal as director in group companies but also the removal of other independent directors who supported him in the recently concluded board meetings. In addition to Nusli Wadia, other independent directors also supported Mistry in the Indian Hotels board meeting, which includes reputed industry leaders such as HDFC Chairman Deepak Parekh, former Hindustan Unilever Chairman Keki Dadiseth and Godrej group’s Nadir Godrej.
When in the spotlight
It is being reported that sources close to the Tata conflict have indicated that Nusli Wadia could go a step further and possibly write to the shareholders on several objections he had raised, as an independent director, over Ratan Tata’s foreign and Indian acquisitions. This includes Tata Steel’s investment to acquire Corus in 2007 at an exorbitant price of $12.9 billion as well as blocking Ratan Tata’s proposal for Tata Steel to invest into Tata Teleservices.
The independent directors raised these contentious issues when the spotlight was on them and their compliance with highest standards of corporate governance practices was being tested; couldn’t they have raised these issues in a timely manner when the transactions came up for discussions? Or, is it that they had raised the issues but their voices went unheard? Do independent directors generally go with the flow when it comes to strategic decisions of majority shareholders, when things are ‘hunky-dory’? Do they feel the heat when past strategic decisions go ‘pear shaped’ and the spotlight turns on them?
In the present case, it is not merely a ‘control’ battle between Tata Sons and Mistry. A number of proxy advisory firms are likely to voice their concerns to make sure the minority shareholders positions are not compromised. Recently, such advisory firms advised minority shareholders in Maruti Suzuki, in relation to the Gujarat plant case where it was perceived that the decisions of the board were primarily in the interests of the majority shareholder, Suzuki Motor Corporation of Japan. The decision was considered a related-party transaction and was eventually put up for minority shareholders’ vote. In the Tata case the issues are much more complicated, given the holding company shareholders’ conflict.
EGM of shareholders
Although Mistry has got relief in some of the group companies and continues to be the Chairman, the EGM of the shareholders, which will happen very soon, is likely to ensure his exit as a director in these companies. Since Tata Sons’ shareholding in these companies is in the 30-39 per cent range, some support from financial institutions and other shareholders may be required.
It has also been reported that Tata Group is exploring the possibility of buying out the Shapoorji Pallonji family’s shares in Tata Sons. This means the legal issues, as perceived by the Tatas, could be highly complex, and a quick solution may not be that probable! That said, it would be interesting to probe other dimensions to Mistry’s removal as a director in group companies. Could the Mistry camp contend that the Shapoorji Pallonji family, who are minority shareholders in Tata Sons, were oppressed?
Or would the Articles of Association be interpreted differently? Especially since Tata Sons is not a listed company, application of the provisions of the Companies Act relating to oppression and mismanagement will need to be considered. Legal eagles will need to thrash these out. In such situations, who controls the group companies could become a contentious issue and Mistry’s exit may not be that straightforward.