The tragic battle between Ratan Tata and Cyrus Mistry is destroying the soul of Tata Sons day by day. Whether Ratan Tata wins out, as is likely given that he controls the Tata Trusts, which institutional investors will need to keep on side to protect their own investments, or Cyrus is able to more effectively express the moral (and operational) high ground that he appears to hold, the final denouement will be the closing down of Tata Sons.
That was my immediate thought when the dirt first hit the headlines. I shared the idea (separately) with two friends, one a senior Tata director and the other the CEO of an unlisted Tata company, and both looked at me quizzically. Clearly, the thought had never entered their minds—Tata Sons has been a given, a rock of Gibraltar, in everybody’s lives so nobody could conceive of corporate India without it being around.
The truth is that even without the current trauma over control, the holding company structure is commercially inefficient for investors in Tata Sons. Dividends from, say, TCS are taxed first when they are paid and then a second time when Tata Sons distributes to its investors. This is further complicated by the fact that some Tata companies also hold shares in Tata Sons, so some part of any dividends they distribute would come back to them after paying tax twice—hardly a sensible use of corporate cash.
Secondly, Tata Sons does not permit minority shareholders, even if large ones, any say in the management. Quite obviously, the Pallonji Mistry family believes it was patently unfair that Cyrus was unceremoniously ousted as Chairman. However, since Tata Sons is unlisted, Sebi investor protection norms do not apply, and the only alternative they have is to sell their holdings—a tall order at the best of times and, likely, impossible in the current environment.
And, most importantly, the structure is operationally inefficient for individual Tata companies. For instance, say the CEO and management of a company believe they should follow a particular strategic path or take a specific decision, whether of investment, divestment or whatever; all they have to do is convince their own board of directors and chairman. However, in the case of a Tata company, they have to not only convince their own board and chairman, but also that of Tata Sons. Historically—i.e., pre-2012—this didn’t matter too much because both boards and chairmen were cut from the same cloth and any disagreements could generally be quite readily resolved—or so it seemed. Of course, even then decision-making was slowed down.
The generic point is that multiple layers of control reduce efficiency; they also make it difficult to articulate clear lines of accountability. Further, given the complexity of decision-making, it is likely that many good ideas germinating in the units never see the light of day because the owners (of the idea) are too intimidated by the multiple gauntlets they would have to run to get the idea off the ground. Contrariwise, but equally importantly, ideas that are birthed at the top of the structure often get pushed into the market without adequate risk analysis on the ground if only because the ground is so far away from the decision.
Another weakness that was manifest quite liberally in the Tatas, is the tendency to shift CEOs between group companies. With no aspersions being cast on any individual, and recognising that professional CEOs can (and often do) shift successfully between industries, the best CEO for a, say, resources company is likely to be found in the competitive space in which it operates, and only fortuitously in, say, the FMCG company of the group. And while most Tata CEOs doubtless acquitted themselves quite well, the parochial structure, ab initio, limits the market from which companies choose top management talent.
More power to the Tata group and, it must be said, to Ratan Tata, who was able to globalise and scale the business despite these structural limitations.
However, come 2012 and the flaws in the framework, multiplied by the oldest problem in succession planning, have come home to roost and are rapidly destroying what was India’s strongest brand. It is hard to see how the brand can survive this sad battle. What is more important, though, is to ensure that the companies do.
To my mind, the only solution is to break up Tata Sons, by (perhaps) distributing its assets pro rata amongst its shareholders. There would doubtless be significant tax incidence and the lawyers will (as usual) make out like bandits, but it is the quickest and, in my view, most effective, way to put the issue to rest in permanent peace.
Tata Trusts can launch an asset management company (that could hold a combination of listed and unlisted equities, which may include non-Tata stocks; bonds; alternative investments; etc) separate from the charitable trust; and each Tata company could focus exclusively on its business, funding itself and sinking or swimming (or soaring) based on its own merits.
The author is CEO, Mecklai Financial. Views are personal