While Ratan Tata was allegedly unhappy with Mistry’s handling of government and regulatory affairs, the larger investing community did not have a problem with the former chairman’s conservative approach.
It is not easy being Cyrus these days. Just ask Cyrus Mistry, the former chairman of the $100 billion Tata empire with nearly half a million employees across 100 countries, who was unceremoniously sacked on Monday by the Tata Sons board. Mistry, who was chosen by Ratan Tata himself as his successor in December 2012, has publicly reacted to his sacking by saying he was “shocked beyond words”, describing the board proceedings as invalid and illegal.
“I have to say the Board of Directors has not covered itself with glory. To replace the Chairman without so much as a word of explanation and without affording him an opportunity to defend himself must be unique in the annals of corporate history”, Mistry said in his statement.
There is no doubt that the manner of Mistry’s sacking will harm the Tata Group’s brand and reputation as a conglomerate which claimed to care for values such as “ethics, transparency and good governance”. The way Mistry was removed smacks of the intrigue and arbitrary actions one often sees in the feuds that occur in family-run business houses, such as the one witnessed among the Ambanis ten years ago.
The board meeting which replaced Mistry did not even formally list his removal as a specific item on the agenda. Apparently, it was taken up at the end as “other items” to be considered by the board. The boards of reputed global conglomerates don’t work like this and this flies in the face of the Tata Group’s claim of promoting “transparency in governance” as an unique value. After sacking Mistry, Ratan Tata immediately ensured that his lawyers file a number of caveats in the courts to deal with any unilateral legal action – a court stay on his removal – that might be taken by Cyrus Mistry who has some leverage because his father, Shaporji Pallonji Mistry, owns 18.5% of Tata Sons. Mistry, however, has released a statement that he is not planning any legal action yet. He continues to be on the board of several Tata companies as a director and it will be keenly watched as to what happens to his position in those companies.
Ratan Tata has taken over as interim chairman and has promised to find a successor for Mistry in four months. The manner of Cyrus’s sacking will certainly have a bearing on the decision by a reputed global professional to join the group as chairman.
Behind the curtains
The substantive reasons for Mistry’s sacking are still not very clear though there are enough rumours doing the rounds to suggest that communication between Ratan Tata and Cyrus Mistry seemed to have broken down in recent months. It is clear now that Mistry existed as chairman of Tata Sons at Ratan Tata’s pleasure. Ratan Tata controls 65% of the shares of the holding company, Tata Sons, through several trusts which operate under the umbrella of Tata Trusts. Ratan is the chairman of Tata Trusts, which controls the majority share in Tata Sons under which the $100 billion-plus businesses of the group operate. Historically the Chairman of Tata Trust would automatically be the Chairman of Tata Sons. However, with the appointment of Mistry as chairman of Tata Sons only, Ratan Tata broke with tradition. Here, one can draw and interesting parallel with the Congress party which too has a tradition of the party president also taking charge as prime minister when in power. Whenever different persons have held the two positions, however, there have have been tensions and a general lack of stability.
This may have indeed been the real problem with the Tata Group over the last four years since Mistry took charge. The Tata Trust chairman, Ratan Tata, had curtailed Cyrus’s powers by altering the articles of association. Sources now seem to suggest that Cyrus was forced to seek the board’s permission for any expenditure above a certain threshold. He was also legally mandated to seek the board’s permission for remunerative packages, including stock options, offered to senior staff. Obviously, when Ratan Tata was chairman of Tata Sons, he was all powerful and the board signed off on whatever he wanted. Under Cyrus Mistry, however, board members were not obliged to endorse all his ideas.
So, Mistry’s elbow room to take policy decisions was progressively getting curtained. Reports suggest that Ratan Tata was also unhappy with Mistry’s handling of government and regulatory affairs, both in India and abroad. As chairman he had failed to be an effective ambassador of the Tata Group, is another charge levelled against Cyrus, post facto. For instance he could not effectively negotiate with the British government to save the UK operations of Corus Steel, which turned out to be one of Ratan Tata’s worst business decisions.
According to Bloomberg, Mistry was saddled with a debt of $30 billion, largely caused by Ratan Tata’s grand vision to expand globally by borrowing money. So from the day Mistry took charge, he predictably got bogged down with the task of completely restructuring the Tata Group by disposing off the assets which were bleeding various group companies. Domestic and global portfolio investors fully endorsed this strategy because Mistry improved shareholder value by selling non profitable assets and instead focusing on profit-generating businesses. To be fair to Mistry, this is exactly what most diversified conglomerates did after the 2008 global meltdown resulted in a secular slowdown in growth and revenues of both economies and companies. The commodity down-cycle made this worse for commodity companies. This broader macro picture must be kept in mind while judging Mistry’s performance. Companies which mindlessly expanded during the global economic boom (2002 to 2008) suffered a backlash and were forced to scale back after 2009 in order to protect shareholder value. This is exactly what Mistry was attempting.
However, Ratan Tata may have disagreed with this strategy as it amounted to a partial rolling back of his own grand vision of consolidating the Tata Group into a truly global conglomerate. The Economist has pointed out during the four years under Cyrus Mistry most Tata companies had registered a negative economic value add, which means their earnings before interest and tax were less than the cost of capital. For instance, for every Rs.100 of the capital employed the average interest paid was about Rs.8.5 but the earnings were less than that.
This data hides one important aspect. Namely, that all the debt was accumulated before Cyrus Mistry took charge in December 2012. The debt were taken by Tata Steel, Tata Power, Tata Teleservices, Indian Hotels etc and these businesses bled badly after the 2008 global recession. So Mistry was focusing on reducing the massive debt levels ($30 billion) of the group. Since 2012, the debt levels have reduced considerably in real terms and the group’s networth increased 60% during the four years of Cyrus’s term. Of course, TCS had a big contribution to this. The 18-listed Tata Group companies also gave much higher shareholder returns than the broader Sensex during this period. So the larger investing community was not complaining at all about Cyrus’s conservative approach. This is precisely the reason why investors will demand to know the real reasons for Mistry’s sudden sacking.
No doubt, the Tatas will have to answer a lot of questions the days to come. This also includes questions from important government institutions such as LIC which are significant shareholders. By writing to the prime minister, presumably because of this indirect government stake, Ratan Tata has also given a lever to the Centre to influence its decision making in the future. This is not a healthy development.