The damage is done. How will the Tata board heal the rift?

Morgen Witzel

‘Shareholders force chairman out of office’. At first glance, it’s not much of a headline. Chairpersons and CEOs are sacked every day around the world, very often at the insistence of activist shareholders who disagree with the strategic choices the company has made. But when the ‘company’ is Tata Sons, the shareholder is its former chairman Ratan Tata (as head of the charitable trusts that own a majority stake in the company), and the man sacked is his successor, Cyrus Mistry, the development takes on different overtones.

Mistry’s removal raises some very interesting issues. First, there is the governance question. The modern orthodoxy is that of the separation of ownership and control: That is, shareholders should step back from the day-to-day running of the business and let the professional management team get on with it. The management team knows best; they are in possession of all the facts, and it is up to them to make the right decision.

In practice, it does not work like that; at least not all the time. Shareholders take a keen interest in what executives do with the capital that they, the shareholders, have invested. If I lend you my car, I will want to know that you are treating it well and maintaining it properly, and that you will return it to me in as good a condition as when I first handed it over. Much the same applies in investment markets (except, of course, ideally the shareholder wants the car to be rather bigger and faster than it was when he handed it over; in other words, shareholder value creation).

Shareholders, and not just activist ones like Carl Icahn, take a keen interest in what boards are doing and what strategies they pursue, and nominate directors to boards to look after their interests. If shareholders don’t like what the executives are doing, they have several options. They can make their unhappiness known; they can try to command enough votes on the board to block strategies they disapprove of; and finally, if the relationship between the executives and shareholders breaks down completely, the latter has the option to remove the former from power.

That is clearly what has happened at Tata. The exact nature of the breakdown and its causes are still the subject of (massive) speculation. That damage is now done; the question is how does Tata’s board heal the rift? The board cannot ignore the shareholders; they own the firm’s capital. Their wishes must be respected. Similarly, the shareholders cannot micro-manage. There is an urgent need for the trust relationship between executives and shareholders to be restored. While we do not know who the new chairman of Tata Sons will be, we can say one thing with absolute correctness: The new chairman must be someone the shareholders can trust, or otherwise in a few years – or few months – we shall be doing the same thing all over again.

Rather than asking which senior executives – inside or outside the group – are qualified to take Mistry’s job, we should be asking: Which senior executive is likely to have the trust of the board and the shareholders? In whom will they repose their faith? This does not, and should not, mean just a safe pair of hands. What is required now is someone who shares a vision with the board and the shareholders about how to take the company forward, and then has the drive to do just that.

Mistry was supposed to be that person. But times change, and strategic situations change too. The board decided Mistry as no longer the man for the times. But who is?

The second question, of particular interest to myself as a student of the Tata brand, is the issue of reputation. Indian commentators are clearly, and rightly, concerned about the effect that a protracted interregnum will have on the company’s reputation in India. Overseas, the position is a little different. Here in Europe, people are wondering more about the impact on Tata’s strategy. What will happen to the negotiations over the future of Tata Steel Europe? What impact might there be on new investment at Jaguar Land Rover? Coming at a time when the Brexit vote has already resulted in great confusion about the economic future, the change at the helm of the UK’s largest manufacturing employer is creating even greater uncertainty.

Ratan Tata has been named as interim chairman of Tata Sons
Image: Adnan Abidi / Reuters

Markets don’t like uncertainty. Neither, for that matter, do suppliers and employees, who face uncertain futures. In my view, the absolute first priority for the group is to issue some strong signals providing reassurance and telling stakeholders that their own position is safe. To some extent, the appointment of Ratan Tata as interim chairman will help. Even four years after his retirement, he remains far better known outside India than Mistry. The return of Tata, a passionate internationalist and architect of the group’s global expansion policy, will reassure overseas investors and other stakeholders of continued commitment.

That’s a good start. So too is the commitment to finding a new leader within four months. That puts a term on the uncertainty, and gives stakeholders something to look forward to, just as the crews of ships spotting land on the horizon know they will soon reach port. But they will be wary. They will be looking for a leader who will stay the course. Mistry’s four years in post, a matter of moments in Tata terms, seems vastly long in the context of European markets, where the average executive chairman or CEO stays in post for less than two years. Time is relative. Even so, markets will want to know that the new chairman can quickly put this interruption behind them and start moving the group forward again.

And markets and other stakeholders too will want to know the new leader has a good relationship with shareholders and the board. They too will realise that without the right fit between executives and owners, the same problem will arise again. The appointment of a new leader is likely to be scrutinised far more heavily in Europe than was that of Mistry, which mostly passed without comment. The new leader of the Tata group will have to measure up, not just in India, but internationally as well.

[Morgen Witzel is a UK-based management historian and academician, who has authored the book, Tata: The Evolution of a Corporate Brand, published by Penguin (India) in 2010]