Tatas in murky waters

THE saga of the Tatas versus Cyrus Mistry is getting murkier and murkier. The entry of Nusli Wadia into the fray has created more complexities with a defamation suit adding to the mix. The entire corporate world appears to have taken sides in this latter day ‘Game of Thrones’. Some are clearly in favour of Mistry — Adi Godrej, for instance, used a television interview to commend Cyrus for doing a good job.  HDFC  chairman Deepak Parekh maintained he was puzzled by Mistry’s ouster given his impressive performance. Others have declared their loyalty to Ratan Tata.

With all the latest developments, it is evident that the Tatas are in for a long legal battle. Mistry has decided to drop the idea of seeking support from every Tata company’s general body meeting and, instead, declared his intention of moving the courts. The mud-slinging will thus continue, obviously to the dismay of the Tata establishment. As in such cases, many issues that companies like to keep buried in boardroom debates are now bound to come into the public eye.

The ugly controversy must have worried many family-run and owned companies in this country which may face similar challenges in future. While Mistry is  not exactly a family member, he is very much an insider and part of the extended Tata family as a Parsi and also being related by marriage to the Tatas. Plus, his own family company, Shapoorji Pallonji, has a small, but significant shareholding in the Tata group. The fact that an insider, or a virtual family member, can oppose the status quo is likely to be unnerving for many family-led concerns.

The analogy may not be considered apt since the Tatas have not been considered a family business since the numerous companies have been headed by professionals for decades. Even so, there has always been a Tata at the helm of the group, till recently. The very fact that Mistry’s approach was not to the liking of the Tata Trusts which have a substantial — 66 per cent — shareholding in the group, indicates that it is more of a family rather than a professional culture which has permeated from the top of the organisation.

The problem being faced by the Tatas is not unique in this country. A chief executive  trying to steer a company to meet the challenges of a new competitive world order faces resistance from the old guard in the organisation. This is an issue being faced by many of the older corporates in this country as the next generation of owners takes over. The so-called Bombay Club of industrial houses which includes the Birlas, Goenkas, Singhanias, Bajajs and the Tatas were those who benefited greatly from the earlier licence raj system of government. With liberalisation, some of these companies are finding it difficult to operate in the new competitive climate. The Birlas which divided the original empire of GD Birla into many parts are doing well in areas where the new generation has been able to chart a new path. The Goenkas too have been shifting gears to ensure that a more professional approach is brought into the management of group companies. The division of some of these industrial houses to meet the needs of the next generation has led to a  better focus on professional management in some entities, but not in all.

The crucial aspect of ethical corporate governance, however, which has now become increasingly important, has not been given much attention in the past by these older established large houses. No wonder then that companies which rate high on parameters of corporate governance are largely those set up in the post-liberalisation phase of the Indian economy like Infosys and HCL. Good corporate governance, according to one rating agency, Crisil, is reflected in fair and transparent interactions between a company’s management, its board of directors, shareholder and other stakeholders. It describes the list of corporate failures due shortcomings in corporate governance practices. These include accounting frauds in collusion with statutory auditors, insider trading and lack of independence of the board with members having financial linkages with the companies.

The fact is that most Indian corporates suffer from many of these infirmities. The first issue regarding accounting frauds led to the enormous scam at Satyam computers. The lack of independence of board members is another critical aspect in most companies, as the so-called independent directors owe their position often to the largesse of the owners. This makes it difficult for them to consider proposals objectively at the board level. The absence of transparency in information has left shareholders and other stakeholders in the dark in most corporates about major decision making. In the case of the Tatas, there are few shareholders who have enough information on the reasons for Mistry’s ouster to question it at length. 

Good corporate governance is now even being considered by young well-qualified persons while hunting for job opportunities. It is illuminating to have a look at the companies considered desirable employers. The most preferred employer in the country and the world right now is Google but, interestingly, some smaller financial services players and IT companies are also on top of the wish list of the youth. The only Bombay Club member in the top 10 is Godrej Consumer Products. As for Tatas, the hotels division of  the group is the lone representative in the top 50 of the best employers list. Even public sector giants like NTPC and IOC, who come in the top 50, seem to be preferable to all other companies in the Tata stable.

It is thus high time that the corporate world sheds its opacity and becomes more transparent, as this will also help their profitability and growth prospects. Better corporate governance means adhering to ethical standards in all aspects of business operations. The past approach of presuming that ethics and business do not go together needs to be put aside so that companies can be run for the good of everyone and yet retain profitability. The Tatas famously have had an ethics adviser, but it has not prevented them from floundering in the area of good corporate governance. Others need to take heed from their recent experience and start moving quickly towards a more ethical and productive way of doing business.