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Time To Draw Up A Better Corporate Governance Code For India : Learnings From Tata

Cyrus Mistry can claim to be a lame duck chairman or he can be appropriately credited with the increase in the net worth of the group. Not both

Photo Credit : PTI


One of the fatal flaws in our understanding of public life is that the majority is always tyrannical towards the minority. Even the Constitution of India assumes that the minority needs to be protected from the assumed tyranny of the majority. Hence it goes on spelling protection to the minorities from all possible tyranny of the majority. Well, that was in our formative years post-independence. The founding fathers probably had to walk the extra mile to assure our minority brothers and sisters of a constitutional framework that would protect them from all fears – unfounded or otherwise - in the aftermath of the developments post-partition.

But this legacy of “protecting the minorities” continues in all walks of life. And that includes corporate India where once again it is presumed that the minority shareholders would need to be protected from the assumed tyranny of the majority. This fundamental assumption has shaped our idea of corporate governance. And in this entire debate, there is no rethink as to any possible tyranny of the minority against the majority.

Interestingly, Mistry in his communication dated October 25, 2016 comments precisely on this point of breakdown of the corporate governance model. He adds: “To come back to the amendments in the Articles of Association, as feared, the inappropriate implementation created a flux in the decision-making process. I have often presented to the trustees, before and after Tata Sons board meetings. This created alternative power centres without any accountability or formal responsibility, invalidating the very governance role of the Tata Sons Board and the Chairman. The Trust nominated directors, who I would assume would use their own independent judgment and discharge their fiduciary duties, were reduced to mere postmen.” Mere Postmen? Is Mistry suggesting that the independent directors in Tata Sons are ineffective? Remember Tata Sons has always had men of great eminence in its board and some are leading corporate captains. Put pithily, Mistry is suggesting a complete breakdown of corporate governance within Tata Sons. Strangely, all these are issues arise only post his ouster not otherwise.

But what about his own performance? Data available in public domain suggests that dividends paid by Tata group companies to Tata Sons for the year ending 2013 [excluding TCS] dropped from Rs 1,038 crore to Rs 671 crore in 2016. That implies a negative CAGR of 14 per cent. While one is not sure to what extent Mistry and the other Board members are responsible for this, how much of this was contributed by the “legacy issues” [which Mistry claimed to have a potential write down of Rs 118,000 crore] is a billion dollar question. But either ways the fact remains that Mistry cannot be held solely responsible for success or for failure. It is precisely this that Mistry attempts to do – to appropriate success and distance himself from possible failures.

In this connection Mistry claims that he could not perform fully and remained a lame duck chairman. In his letter to the Board of Tata Sons he says: “I hope you do realise the predicament that I found myself in. Being pushed into the position of a “lame duck” chairman, my desire was to create an institutional framework for effective future governance of the group. I believe I had to be true to myself and the best interests of the organisation.”

Well, if he was indeed a “lame duck” chairman, how does he then take credit for the successes? For instance, in the very same letter he adds “While I would be lying if I said I am not disappointed, I have a sense of pride and dignity intact in the efforts I have taken to professionalise and institutionalise, regardless of the outcome of effort, I now witness.”

Fascinating. In other words, the “lame duck” chairman of the group had enormous elbow room to “professionalise” and “institutionalise.” And that is not all. The “Lame duck” chairman of the group also claims “Despite all of the above, during my term, the operating cash flows of the group have grown at 31 per cent compounded per annum. The Tata Group valuation from 2013 to 2016 increased by 14.9 per cent per annum in rupee terms as against the BSE Sensex annual increase of 10.4 per cent over the same period. The Tata Sons net worth has increased from approximately Rs 26,000 crore to Rs 42,000 crore, after considering the impairments. This has significantly strengthened our balance sheet, enhancing our ability to absorb further shocks from restructuring in the companies.”

Yet, the moot point remains. If the net worth increased from Rs 26,000 crore to Rs 42,000 crore, is it because Mistry was a lame duck chairman? Or can he claim credit for the increased net worth even as he claims he was reduced to being a lame duck chairman? Or was his claim of being a lame duck chairman false?

Another captivating issue is that if the net worth stands at Rs 42,000 crore “after considering the impairments” – what is it that he talks of when he says “A realistic assessment of the fair value these businesses could potentially result in a write down over time of about Rs 118,000 crore” in the very same letter dated 25th October 2016. So is this potential write down a bogey to scare investors or is it hidden successfully for potential investors? As the cliché goes – the nation wants to know.

In short, Mistry can claim to be a lame duck chairman or he can be appropriately credited with the increase in the net worth of the group. Not both. Likewise, he can claim credit for the turnaround or blame Tata for legacy issues with a potential write down of a sum of Rs 118,000 crore, not both.

Another contentious area in the functioning of the Group has been the acquisition of Corus. Mistry as chairman of both Tata Sons and Tata Steel could not turn around Tata Steel - Europe. Consequently, he had only an exit plan and this led to the distress sale of the long products business to Greybull for 1 pound. While one can always be wise in hindsight, facts available in public domain suggest that the new buyer is turning around these assets far better than the Tatas. They also claimed that it was in profit for the past couple of months and expect it to trade profitably for the remaining year. Can this be viewed as Mistry’s lack of long term vision? Or will it sit as just another item in the “legacy issues” bucket? Forget the acquisition by Ratan Tata - the success of the plant under a new management inescapably raises questions of the managerial ability of the Tatas under Mistry to man the European Steel business.

Now come to the issue raised at the outset - of corporate governance. How do majority stakeholders deal with managers who claim to be part of the successes while simultaneously claim to be lame ducks otherwise? Is it not the tyranny of the minority on the majority? How should the majority deal with the extant situation other than by sacking him? Is it not the loss of trust of the owners on their appointed manager? Questions that remain unanswered. It is time we revisit the corporate governance code and redraw a better model. The Tata-Mistry imbroglio has exposed the soft underbelly of the same.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

M.R. Venkatesh

The author is a chartered accountant who addresses business concerns relating to Economic Policies, International Trade and Business Strategies, since 1993 as partner of GSV Associates, Chartered Accountants, Chennai. He is also a commentator on International Trade and Economic Affairs. He is a regular contributor to various prestigious publications in India.

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