The Tata way: How to remain at the top Retrofit
Might is right is an adage as old as the Aravalli Hills. On Monday, Cyrus Mistry, picked by Ratan Tata as his successor as head of the diversified Tata Group, found to his chagrin that when you have to dig deep, you have to have a big enough shovel. The shovel was with Ratan Tata, who in a strategic pincer outmanoeuvred Mr Mistry and used it to vanquish him. My way or the highway — was the neon sign Mr Tata through his proxies — a reconstituted board that brought in Ajay Piramal and Venu Srinivasan as recently as late August — held out for Mr Mistry. Clearly, Mr Mistry’s vision was out of sync with Mr Tata’s, and that did the Pallonji Mistry scion in. In what was eerily similar to the other big boardroom brawl in corporate India of 2004 vintage, when Ambani took on Ambani, the elder brother ousting the younger one, Bombay House saw blood on the floor. That Ratan Tata had done the necessary legal due diligence was visible when the legal opinions of three eminences were flaunted by board members. The real kicker was the amendment to the articles of association of Tata Trusts early 2013, soon after Mr Mistry was elevated to Tata Sons’ chairmanship. This was a precautionary measure to protect the interests of the largest shareholder in Tata Sons, the Tata Trusts, that are headed by Ratan Tata for life. This was the gamechanger in the final analysis as the trusts felt Mr Mistry was moving away from the underlying credo and charter of the Tatas.
Of these trusts, the two powerful ones — Sir Dorabji Tata Trust (27.98) per cent and Sir Ratan Tata Trust (not this Ratan Tata, but another of an earlier vintage), with 23.56 per cent — form the bulk of the shareholding. There are others like Sarvajanik Seva Trust, RD Tata Trust, Tata Social Welfare Trust, Tata Education Trust and JRD Tata Trust, which along with the two premier trusts combine to a total 66 per cent of Tata Sons’ shareholding. These trusts have named Ratan Tata chairman for life and, more important, the Tata Sons board has given sweeping powers to two Tata Trusts to appoint any future chairman of the $100-billion Tata Group. Once the articles of association were amended, the two primary trusts could unilaterally appoint through a search panel the next chairman of Tata Sons.
This crucial covenant was brought in to protect the majority interests of the Tatas in Tata Sons. Remember that in December 2012, Mr Mistry was chosen chairman and he came in through the revolving door with his 18.5 per cent shareholding, that was vested with his family via Sterling Investment Corporation, Cyrus Investments and Shapoorji Pallonji.
In an extraordinary general meeting (EGM) held recently, the Tata Sons board changed the composition and structure of any future selection committee that will appoint a chairman of Tata Sons. Under the new amended article, the five-member selection committee will consist of three persons nominated by the two trusts, who may or may not be directors of the holding company. Earlier, as in the committee that chose Mr Mistry, the two trusts had the power to nominate only two members.
The trustees of the two trusts will also act jointly to identify the three members. The amendment said: “If a unanimous decision is not reached, the majority decision of the trustees of both trusts will be taken together.”
Further, it went on to say: “The chairman of the committee will be selected by the Sir Dorabji Tata Trust and the Sir Ratan Tata Trust from amongst nominees by the trusts.” It didn’t end there, as Tatas decided to ring-fence their interests. So, to lower the volume of adversarial voices, the amended articles read: “The quorum for a meeting of the selection committee will be the presence of a majority of members nominated jointly by the Sir Dorabji Tata Trust and Sir Ratan Tata Trust.” The quorum requirement in the earlier committee was the presence of all committee members. What the Tatas were doing was building a moat around themselves to face an eventuality of the kind that came with
Singur was a setback, as was the failure of the Nano. The Niira Radia scandal submerged one and all, except him. Ratan Tata’s larger-than-life image as an industrialist suffered no reputational damage.
Mr Mistry’s focus on exiting non-core businesses and even hawk Voltas.
Most vitally, the sting was in the tail. “The same process shall be followed for the removal of the incumbent chairman.” This facility was not there with the earlier selection committee. Ergo, the trusts now had the power to initiate removal of a Tata chairman. Which is exactly what they did on Monday. Ratan Tata’s legacy and shadow are vast, his achievements go beyond the pale. He turned a loose confederation of companies into a diversified conglomerate with a focus on profitability. He dismantled the zamindars and led from the front with a bold acquisitive strategy, where he added mass to the empire. There were failures and flaws too, wrong calls and seemingly bad punts as well, but he personally always emerged unscathed, such was the power of his persona.
Singur was a personal setback, as was the failure of the Nano. The Niira Radia scandal submerged one and all, except him. Ratan Tata’s larger-than-life image as an industrialist suffered no reputational damage. I remember him telling me once that he was surprised to find that the Birlas, through investment companies, held more shareholding in certain Tata companies. That is when he started using the mandated creeping acquisition rules to bump up shareholding in these companies. For him, Tata meant first among equals at all times and that is why he personally rewrote the script and the world map to become a transnational. The same mindset may have convinced him to strike at Mr Mistry, so that the Tatas’ DNA wasn’t altered or diluted in any way.