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3
January 2017
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Tata Sons (The Total Investment & Insurance
Solutions)
In a casino, the house always wins. It is
apparently the same with corporate managements. The sacking of Cyrus Mistry as
the chairman of Tata Sons, and the intrigues and machinations that followed,
show us that good governance cannot be ensured with mere legislation and that
the independence of directors in listed companies is a myth. The Total Investment & Insurance Solutions
In the first week of 2017, Tata Sons would
have all but won. A few defamation cases will drag on in courts. Tata Sons has
already issued a victorious advertisement on 28th December, thanking
shareholders of Tata companies for helping it throw out Nusli Wadia (one of its
oldest directors and someone who probably had refused JRD Tata’s offer to make
him head of Tata Sons) and Cyrus Mistry from key group companies. The Total Investment & Insurance
Solutions
At the time of going to print, Tata Sons was
on the verge of delivering the final blow to its former chairman. It has served
him a legal notice, accusing him of “breach of confidentiality and making
sensitive documents, minutes of board meetings and financial information
public” and “reckless failure” in discharging his “fiduciary, legal and
contractual duties.” It has also called an urgent board meeting on 4th January
which, say sources, may use the excuse of leaking sensitive documents to eject
Mr Mistry from the board of directors. If that happens, the single largest
shareholder of Tata Sons (Shapoorji Pallonji group holds 18.5% stake) would
have lost all representation in the group, not merely the holding
company. The Total Investment
& Insurance Solutions
Interestingly, it is not as though Mr Mistry
leaked these ‘confidential and sensitive documents’ to the media; they happen
to be a part of his petition before the national company law tribunal (NCLT).
The same NCLT which responded to his petition by asking why he had been silent
until his ouster on 24th October and did not grant him any interim relief
saying that he had “filed no evidence so far backing his allegations of
oppression of minority shareholders and other charges levelled against Tata
Sons and Ratan Tata.” The Total
Investment & Insurance Solutions
The NCLT bench, which plans to decide Mr
Mistry’s petition expeditiously, also remarked that this is “not just about the
reputation of the Tata Group but the reputation of the country is at stake.”
This is true. The sordid saga played out at Tata Sons and the absence of
adequate justification for the humiliation heaped on Mr Mistry has damaged the
credibility of corporate India. There is never a discussion on the Tata-Mistry
saga without a snigger or a lament that goes: “If this can happen at India’s
most ethical group, imagine what happens at other companies.”
But Ratan Tata knows, from previous fights
with larger-than-life satraps like Russi Modi, Darbari Seth and Ajit Kerkar,
that public memory is short. Media memory can be easily erased or suppressed
with expensive public relations (PR), the power of group advertising budgets
and sponsorships. Tata trusts’ donations to charities and NGOs also work to win
over activists. The Tata-Mistry war will soon drop out of media headlines; but one
hopes that some of the issues that it has raised will not vanish as quickly,
especially the debate on the role of independent directors in ensuring good
governance.
One of the bright spots in the whole mess is
that some corporate leaders emerged taller. Deepak Parekh, Keki Dadiseth, Nusli
Wadia, Nadir Godrej and Analjit Singh stood their ground and went against Tata
Sons to stand by Mr Mistry. They did this knowing full well that their stand
may cost them, personally in terms of a strained relationship, or business and
other benefits flowing from this large corporate group to the companies they
are associated with. The Total
Investment & Insurance Solutions
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Tata Sons (The Total Investment & Insurance
Solutions)
At the other end of the spectrum, Nitin
Nohria, dean of Harvard Business School, has embarrassed himself, and the
prestigious institution he heads, by acting as a hatchet man for Ratan Tata.
The minutes of the meeting, which are part of Mr Mistry’s submission to the
NCLT, also expose how Mr Nohria’s brother-in-law Amit Chandra of Bain Capital,
along with leading industrialists Ajay Piramal and Venu Srinivasan, who had
joined the Tata Sons board only in August (and attended only one, introductory
board meeting before 24th October), appear to have played a well-orchestrated
role in the removal of Mr Mistry, with Mr Chandra being particularly
aggressive. The Total Investment
& Insurance Solutions
The reason for Nusli Wadia’s removal is even
flimsier. His decision to support Cyrus Mistry seems to have enraged Ratan Tata
who ensured that Tata Sons requisitioned extraordinary general meetings (EGMs)
in quick succession to ensure his exit from the group. This raises serious
questions about the true ‘independence’ of directors who have onerous
responsibilities cast on them by the law.
Ironically, the Tata group has had issues
with truly independent directors even earlier. In the 1990s, the late SS
Tinaikar, a firebrand former municipal commissioner who was on the board of
Voltas Limited, had dared to question some shady decisions of its then chairman
AH Tobaccowala. When he did not get proper support from Ratan Tata (even though
Mr Tata wanted Mr Tobaccowala ousted too), he went public about the goings-on
at Voltas at a press conference. Soon enough, the powerful Mr Tobaccowala
isolated him on the board and he was forced to resign. No company ever invited
him to be a director again. The Total
Investment & Insurance Solutions
There have been extensive changes since the
1990s, at least on paper. Today, the Companies Act 2013 and regulations of the
Securities and Exchange Board of India (SEBI) have made independent directors
responsible for ensuring good governance. They have also cut the benefits and
remuneration they can earn from companies, in order to preserve their
‘independence’. But Mr Wadia’s example shows that the law provides no
protection to independent directors against recalcitrant or vindictive
management. Mr Wadia has correctly said, “What is at stake is not whether I am
removed or not, but the fate of the very institution of independent director
that has been created in law and by SEBI to safeguard the interests of all
stakeholders. If independent directors can be removed at the whim and fancy of
a promoter, then their role will be reduced to that of ‘yes men’.” He goes on
to say that the ability of a promoter to remove an independent director through
the brute force of its shareholding, by an ordinary resolution on which it can
vote, is a serious and major dichotomy and the contradiction needs to be, and
must be addressed, urgently.
The SEBI and MCA (ministry of corporate
affairs) cannot remain silent on this issue. They could well decide that since
‘promoters’ have the right to choose their board of directors, they should also
be allowed to remove those in whom they have lost confidence. Whether this
should be done through a special resolution, with the promoters prevented from
voting, is an issue that can be debated. But it is safe to bet that corporate
India will strongly, but covertly, resist any regulation/statutory amendment
that prevents them from removing an independent director. The Total Investment & Insurance
Solutions
In that case, the very concept of
‘independent directors’ must be scrapped and the SEBI regulations and Companies
Act amended accordingly. It is unfair to cast onerous responsibilities on
independent directors, if their independence is not protected by law. And, if
they are not independent, it is wrong to fool ordinary investors into believing
that they are capable of questioning management and ensuring good governance
and ethical behaviour. The Total
Investment & Insurance Solutions
Another important issue emerging from the
Tata imbroglio is how much of the board proceedings are recorded, documented and
minuted. We learn from Mr Mistry and Mr Wadia that they had red-flagged several
serious issues at Tata Steel, Tata Motors, Indian Hotels and Tata Tele and Tata
Power. However, it is not clear how much of these were documented or simply
debated orally. The answer to this will be crucial to Mr Mistry’s case before
the NCLT as well as Mr Wadia’s legal action. Unfortunately, independent
directors still do not insist on a formal recording of issues that are likely
to upset promoters. This makes their efficacy as independent monitors of
management, as envisaged under the Companies Act and SEBI regulations, rather
questionable. The Total Investment
& Insurance Solutions
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