Contact Your Financial Adviser Money Making MC
8
December 2016
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TCS (The Total Investment & Insurance
Solutions)
Bengaluru-based InGovern Research Services,
which provides proxy voting advisory has recommended to vote against the
proposal to remove Cyrus P Mistry as Director from the Board of Tata
Consultancy Services Ltd (TCS). However, considering the voting power of
promoters, the proxy advisory firm advised Mr Mistry to resign from TCS Board
to protect his reputation. The Company has called for an extraordinary general
meeting (EGM) on 13 December 2016 for this purpose.
"The proposal for Mr Mistry’s removal as
a Director is because of his replacement as Chairman in Tata Sons Ltd. As per
Tata Sons, one of the primary reasons of his replacement was non-performance of
Tata companies excluding TCS and Jaguar Land Rover (JLR). Hence, since the
promoter itself accepts that the performance of TCS has been good, we do not
see any logic as to why a shareholder should vote for removal of a Director,
who was the Chairman, for performance issues," InGovern says.
In addition, there is no negative commentary
about Mr Mistry’s evaluation as the Chairman, it is assumed that he had got a
favourable rating from the Board. "However," the proxy voting
advisory says, "the (TCS) Board, in the explanatory statement to the
proposal, expresses that it agrees that removal of Mr Mistry would be in the
best interests of the company. We seek the logic as to why the Board has
recommended removal of a Director who was given a favourable rating in his
evaluation as Chairman a few months back itself. The plausible reason is that
he was a nominee of Tata Sons on Board of TCS and since he was replaced as
Chairman of Tata Sons, it is natural that he is removed from the Board of
TCS."
The Articles of Association (AoA) of TCS
gives the authority to Tata Sons to appoint and replace the Chairman of Board
of the Company. On basis of this, on 9 November 2016, Tata Sons replaced Mr
Mistry with Ishaat Hussain as Chairman of TCS. The Total Investment & Insurance Solutions
Tata Sons holds 73.26% stake in TCS and other
promoter entities hold 0.07%, resulting in total 73.33% equity stake.
"Since the proposal of removal of Mr Mistry from the Board is an ordinary
resolution, it is certain that the proposal will pass with requisite
majority," InGovern says.
However, the proxy voting advisory says it
believe his (Mr Mistry's) removal from the Board altogether is not the best
outcome for TCS. The Total
Investment & Insurance Solutions
It says, "Consider Shapoorji Pallonji
(SP) Group’s beneficial interest in TCS. SP Group, represented by Mr Mistry,
holds about 18.4% in Tata Sons, which holds 73.33% in TCS. This gives SP Group
a beneficial interest of 13.48% in TCS. If this beneficial interest had been a
direct stake in the company, it would have been the largest stake after the
promoters and much higher than the largest public shareholder LIC’s 3.21% stake
in TCS. For a director representing a beneficial stake of 13.47%, which ranks
second among all shareholders of the company, and having received a favourable
rating in his evaluation, there is no logic for his removal from the Board. On
the contrary, his beneficial stake of 13.47% would reflect his
‘skin-in-the-game’ or alignment of his interests with that of the company and
hence would be in best interests of the company." The Total Investment & Insurance Solutions
Another reason attributed to Mr Mistry's
removal is the possibility that his presence on the Board may create an
environment of constant conflict and discord on the Board. "We do not
believe this hypothesis as it has been historically proved that the
effectiveness of the Board increases when there are directors with an opposing
point of view and who are not supposedly ‘Yes-Men’ of the promoters in the
Board. On basis of these points, we recommend shareholders vote against Mr
Mistry’s removal from the Board of TCS," InGovern says. The Total Investment & Insurance
Solutions
At the same time, looking at the voting power
of promoter group, the proxy voting advisory says advises Mr Mistry to resign
before the vote. It says, "In case of TCS where the Board has not
expressed any opinions contrary to that of Tata Sons and has replaced Mr Mistry
as its Chairman and it is a certainty that the proposal for his removal will be
passed given the promoter’s 73.33% voting power, it is prudent for Mr Mistry, to
protect further damage to his reputation, to resign from the Board before the
EGM."
"With regards to the articles of
association of TCS giving the authority to Tata Sons to appoint and replace
Chairman of Board of TCS without the need to seek prior opinion of the Board,
we believe such a provision greatly restricts the powers of the Board while
giving a shareholder extra rights over that of other shareholders. Not letting
the directors – representative of all shareholders – to appoint their leader is
also an abuse of rights of the minority shareholders of the company. We
recommend shareholders raise concern that such a provision be removed from the
articles of association of TCS and the Board is given the right to appoint its
own Chairman," InGovern says. The
Total Investment & Insurance Solutions
The proxy voting advisory firm also raises
question on independence of four independent directors in the Board of TCS. At
present, there are 10 directors on the TCS Board. Mr Hussain, who replaced Mr
Mistry as Chairman and Mr Mistry are non-executive non-independent Directors,
while N Chandrasekaran is the Managing Director and Aarthi Subramanian is
executive Director of TCS.
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TCS Board (The Total Investment & Insurance
Solutions)
There are six independent Directors,
including Aman Mehta, Venkataraman Thyagarajan, Clayton M Christensen, Ron
Sommer, Vijay Kelkar and OP Bhatt. Except Mr Kelkar and Mr Bhatt, the other
independent directors have exceeded a tenure of 10 years and thus “we consider
not truly independent,” InGovern added.The
Total Investment & Insurance Solutions
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