Boardroom brouhaha

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TCSThe removal of Cyrus Mistry as chairman of Tata Sons is being hotly argued, debated, deliberated and discussed across the corporate boardrooms, financial newsrooms, in government circles and many other forums nationally and globally. What triggered the decision? Surely, it is not as abrupt as it looks and is an outcome of simmering discontent.

The vital question is — is the removal linked to persona or performance? It could be the former, a personality clash after Mistry bruised egos of Ratan Tata and other loyalists on the board of Tata Sons. Different theories have been in circulation on the reasons for removal, but after the second letter issued by Tata Group spokesperson on 10 November, careful analysis points to the fact that the reasons are more attributed to Mistry’s inability to assimilate the Tatat group’s culture, in the process hurting the high and mighty of the group. The contents of the letter clearly point out that the Tata Sons Board was not happy with the arbitrary style of functioning, ignoring the higher bureaucracy of Tata Sons, trying to force his own culture with his confidantes that led to overall dissatisfaction.

As far as business decisions are concerned, RatanTata himself admits — which is on record — that when he took over as Chairman, he too had many differences with JRD and so Mistry too had a right as a Chairman to apply his mind and follow his style of functioning.

The Tatas have a strong bureaucracy and hierarchical structure which more or less works like governmental hierarchy with rigid practices. Mistry, being an outsider perhaps not exposed to that culture, possibly ignored it and did not give due weightage to it. The letter pinpoints these pain points. One of the paragraphs goes: “In fact, even the then existing structure of the group which had stood the test of a long period of nearly 100 years by the visionary founders and generations of Tatas seem to have been consciously dismantled so that now the operating companies are drifting farther away from the promoter company and their major shareholder (except for periodic presentations) through systematically reducing the effective control and influence of the promoter”.

The group has its own service called Tata Administrative Service (TAS), like the Indian Administrative service (IAS). There are quite a lot of similarities between IAS and TAS: TAS selection is very tough and attracts high quality talent; but once you get into it, the promotions up to very senior level are linked to tenure and not merit. TAS candidates are more respected in the organisation than employees recruited through other channels. One of the young entrants to TAS on the condition of anonymity lamented that his seniors are not keen to work as hard as the corporate today demands. They lack motivation due to the tenure-based promotion policy.

cyrus-mistry

No wonder, Mistry’s act of bringing in outsiders, giving them prime roles and responsibilities superseding the group bureaucracy and giving them much higher salaries and perks than regular chief executives must have caused heartburn and ripples. This undercurrent in the organisation certainly may lead to loyalists criticising and bitching against Cyrus’ style of functioning.
Although, Ratan Tata himself admitted his failure to have a flat, non-hierarchical organisation devoid of many tiers where promotions are merit based and not out of seniority, yet possibly he realized that this is a herculean task and could not accomplish it during his entire tenure.

Mistry came out openly in favour of exiting businesses Tatas had built up over the years instead of drawing up plans for revival

In reply to one of the question during the interview conducted by Christabelle Noronha, chief of group corporate affairs at Tata Sons on his retirement from the post of Chairman where he lamented that “I have not been able to create the truly open, flat, transparent organisation that I had hoped we could do”. What exactly did that mean?

Ratan Tata replied ,“What I am trying to say is that in India, regrettably, hierarchy and designations are more important to people than job content or even pay packets. When you are overseas you don’t have someone talking about a batch-mate and seniority based on year of graduation. But that’s what tends to happen in India and it’s sad because there’s an assumption here that age and seniority go hand-in-hand with merit. I had hopes that we could create a flat organisation where hierarchy was downplayed and that we could create a culture where performance was rewarded with recognition, monetarily and through the placing of the meritorious in positions of importance. Designations would have been flat in such a system.

I have found the reactions to such an idea absolutely contrary to what people want: when it suits them they say it is great, but when it comes to how it affects them, they do not want to see it happen. To that extent, I think we have failed — I have failed — in creating a flat organisation.”

Ratan Tata by Shailendra (8)

LEGACY ISSUES

Ratan Tata also recalled how his taking over as chairman form JRD Tata was met with resistance and bitterness by those who themselves aspired for the job: by Russi Mody at Tata Steel; Darbari Seth at Tata Tea and Tata Chemicals; Ajit Kerkar of Taj group (Indian Hotels) and Nani Palkhivala, a director on the boards of several Tata companies and chairman of the erstwhile Associated Cement Companies (ACC), in which the Tata group was one of the original promoters.

Mody sparred openly with Tata. Kerkar and the new chairman had different views on the management of the chain. In 1993, Mody was sacked after a messy scrap involving the appointment of senior executives. In 1997, Palkhivala quit, citing ill health. Seth retired in 1995 and Kerkar in 1997, after Ratan Tata brought in a new policy that set the retirement age for directors at 70 and senior executives at 65. He further confessed that these chairmen of individual Tata companies wielded more powers than the Tata group chairman.

In the Tata group magazine, Mistry said in an interview, “We have organisations which have strong hierarchical structures, and processes that actually mirror those structures. If we have to be agile in today’s environment, we need to think of other organisational structures…Care should be taken to have the right composition of teams in such embedded network structures, which can collaborate and break through hierarchical processes where needed.

“We have to start taking bolder steps because true value in today’s environment will not only be created from incremental innovation, but the bolder and bigger strides that we take.”
It is obvious he entered into a forbidden zone too early without realising the backlash that would follow, which Ratan Tata despite his strong wish could not achieve in his tenure.

Ratan Tata was not in direct command after his superannuation and was not privy to day-to-day activities of the group companies. So his information would surly be based on the feedback of his loyalists, who were perhaps feeling dwarfed. Further, there might have been instances where Mistry must have differed with Ratan Tata’s style and strategy for a particular business or a company. Mistry chose to be in the driving seat on all the top companies which were earlier being chaired by other directors of the Tata Sons, in his wisdom to drive from the front as he had to face one of the worst global slowdowns but it possibly proved to be his nemesis, as the Directors of Tata Sons felt neglected and inconsequential.

This is clearly being reflected in the letter highlighting these pain points. It says, “Insiders in Bombay House who have been with the group for many years silently and helplessly watched the conscious departure from old, proven and successful structures within the group and the induction of very senior executives from outside the group with little or no experience of running large companies and being paid amounts reportedly running to several crores for purely functional positions at the very top.”

The grudge of the top bureaucracy further comes out in yet another para of the letter “Tata Sons has historically exercised control over its group companies through its shareholding and commonality of senior Directors (apart from the Chairman) which had acted as a binding force in the group for many years and which has enhanced the credibility and creditworthiness of the group companies. We now have an unacceptable new structure where the Chairman alone is the only common Director across several companies and this situation could not be allowed to go on”.

Undoubtedly, Cyrus also faulted in clarity of vision: where does he want to steer the group to? His words and actions do differ and shows clear ambiguity in the functioning and strategy. As he said, “A significant number of our companies are particularly sensitive to the contextual environment in which we operate, and they are impacted to a greater extent by cyclical factors. Tata companies that are closer to the consumer, such as Titan and Voltas, tend to have less volatility and often have a smoother earnings graph. Our strategy at the group level is to get closer to consumers, to anticipate their needs. We will try and balance our portfolio to ensure that at an aggregate level we are more insulated from business cycles.

“From a nurturing perspective, the Tata brand, developed over 15 decades, adds huge value to our companies. This also makes exits more difficult as the Tata group has a deeper commitment to stakeholders and the brand cannot be transferred.

“We should not be afraid of taking tough decisions for the right reasons, with compassion.”
On the other hand, as Cyrus’ last four years were the worst period for the commodity cycle, so he came out openly in exiting out of many important businesses built by Tata over the years. This certainly comes out as the great weakness and shortcoming of Mistry. He clearly failed to show his strong side by revival of any company rather than always blaming the past legacy, which would possibly be the biggest point of difference.

The bottom line

Tata Sons have condemned Mistry’s performance, saying that dividends received by Tata Sons which own 66 percent equity has continuously declined from 1,000 crore in 2012-13 to 780 crore in 2015-16, which include 100 crore advance dividend for next year. While dividend income declined, expenses on staff increased from 84 crore to 180 crore and other expenses increased from 220 crore in 2012-13 to 290 crore in 2015. Impairment provisions increased from 200 crore in 2012-13 to 2,400 crore in 2015-16 indicating inability to stem falling values and turn around the ‘hot spots’ referred to by Mistry.

On his part, Mistry refutes the allegations of poor performance. Based on the data published, he claimed improved performance and criticised some of the business decisions taken by Ratan Tata vociferously.

Mistry took the helm of the group, which has 29 listed companies and collective revenue of $100 billion in December 2012 after Ratan Tata retired. The top seven companies account for more than 80 percent of group revenue and market capitalisation. The data of these companies is considered here to review Mistry’ performance. He himself, in reaction to criticism of his performance as the reason for his removal, has clarified to the Tata group that despite economic recession under his leadership, Tata companies performed better than their peers and reported decent profits.
TCS, the group’s cash cow during 2013-16, recorded a jump of 72.3 percent in net profit from 13,836 crore to 23,928 crore. Tata Elxsi’s net profit rose 388.9 percent, from 32 crore to 154 crore, closely followed by Tata Capital Housing which recorded a surge of 303.9 per cent in net profit from 28 crore to 113 crore in the same period. Tata Motors reported a rise of 68.3 percent in assets, from 10,3345 crore to 17,3903 crore. Similarly, TCS reported a rise of 66 percent in assets.

Tata Steel’s asset quality increased by 12.8 percent in the interim period. Some other group companies like Tata Power and Tata Tele reported a marginal increase in their assets. Automobile major Tata Motors reported sales of 280,097 crore in financial year 2016, a surge of 44.6 percent from the sales figures of 193,698 crore in FY 2013. Similarly, the software arm, Tata Consultancy Services, reported an increase of 72.5 percent in sales turnover during the period FY13 to FY16.

Similarly, if we look at the share prices end of trading on 26 October 26 this year, Tata Motors saw its share price rise to 526.9 from Rs 310.05. Similarly, TCS’ share value rose to 2,383 from 1,267.5. Tata Communications and Tata Chemicals also gave good returns to shareholders when Mistry was leading the group. During Mistry’s tenure, valuation of the Tata group also increased by 14.9% per annum in rupee terms as against the BSE Sensex annual increase of 10.4% over the same period. Tata Sons net worth has increased from approximately 26,000 crore to 42,000 crore after considering the impairments. If we look at these figures graphically, they give a quick bird’s eyeview of the performance under various heads during the Mistry’s tenure:

It appears that once the fault lines developed at the top level in the organisation, this created two informal factions of the group: company management under Mistry’s direct control versus Tata Sons. On Mistry’s side were outsiders, independent directors elected and appointed by him. Against this, possibly, directors from Tata Sons found themselves in a minority. Such a sentiment is expressed in the 10 November letter, wherein he is blamed to be taking over the companies from the backdoor.

The angry group must have been further exasperated when Mistry started indicting the earlier Board and chairman for troubles of the present. Some of his criticisms were tantamount to mocking the competence of the erstwhile chairman and the Board. His criticism of three big moves — the Mundra Ultra Mega Power Plant, entry into the aviation sector, continuing with Project Nano — was in poor taste. Rather than criticising the erstwhile management, it would have been best to take up these issues at appropriate level. Further, not honouring the DoCoMo Agreement certainly is totally against the ethos of the Tata group, which gets 59 percent of its revenue share from global sources.
However, the larger question remains: Do these reasons warrant summary dismissal of Mistry?

CHANGING EQUATIONS

When he decided to retire, Ratan Tata was asked by an interview: “In the years ahead, do you see yourself remaining a mentor to Cyrus Mistry and other leaders of the Tata Group, or will you be consciously keeping your counsel to yourself?”

Tata replied: I want to make one thing clear: I have given most of my life to the Tata group and if there is anything anyone wants of me in terms of advice, counsel, etc, I am happy to give it. At the same time, I am very conscious that I don’t want to have my shadow hanging over the group, a ghost walking the corridors, someone giving unsolicited suggestions or expressing an unsolicited viewpoint.

“In the circumstances, I don’t consider myself in the coming years to be playing the role of mentor to Cyrus, nor do I yearn for a post-retirement designation of mentor. I would like to make a clean break. I will be available if called upon in any way to help. At the same time, to be called upon in isolation leads to funny situations where you are not fully informed, you are not fully involved, and your opinion is, to that extent, not as good as it would have been if you were fully involved and committed. Despite all this, if I were called upon, the involvement from my side would be on the basis that this is personal. It would not be a functional duty and it would be on issues that I would decide whether I wanted to get involved with.I could never do anything to hurt the group. This is where my life has been and I want to see it succeed further. I want to see Cyrus and his team succeed.”

Mistry worked with Ratan Tata for one year as executive chairman and further for next four years as chairman. It was during this time that Ratan Tata’s dream project came through: the starting of Air Asia and Vistara. Mistry was reluctant to enter into the business considering the state of this industry in India and globally, which has come out during his allegations made against Ratan Tata after his sacking.

On 6 December 2014, Ratan Tata delivered a speech at Symbiosis, Pune which went viral on the net as a motivational speech:

“Don’t take life seriously. Life is not meant to be taken seriously, as we are really temporary here. We are like a prepaid card with limited validity. If we are lucky, we may last another 50 years. And 50 years is just 2,500 weekends. Do we really need to get so worked up? …It’s okay, bunk a few classes, score low in a couple of papers, take leave from work, fall in love, fight a little with your spouse… It’s ok… We are people, not programmed devices.

“Don’t be serious, enjoy life as it comes. “Don’t just have career or academic goals. Set goals to give you a balanced, successful life. Balanced means ensuring your health, relationships, mental peace are all in good order. There is no point of getting a promotion on the day of your breakup. There is no fun in driving a car if your back hurts. Shopping is not enjoyable if your mind is full of tensions.”
Despite this urging of a work-life balance, there must have been more that meets the eyes that prompted Tata to give up his quiet retired life. Perhaps it was painful to see departures from the philosophy, ethos and legacy that virtually forced him into such unprecedented action. Tata Sons is the most respected corporate group. Brand Tata earlier got hit when his name appeared in Niira
Radia controversy. The fight between the two tycoons will eventually hurt the brand.

As such, it would be good if the controversy ends gracefully. As they say, “All’s well that ends well.”

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