Today, each independent director is being assigned to a particular camp and their loyalty being judged not on the merits of their decisions but by who their decisions end up favouring.
Throughout history, every culture and society has had some kind of a board game that was played by its inhabitants with the earliest trace being found as far back as 4600 years ago. In current times, most board games involve tokens or counters which are placed on pre-marked spaces according to a set of rules. These pieces also move based on the pre-defined rules. Some games require skill, while others are based purely on luck or chance. Most games have a goal which the players have to achieve and as stated “early board games represented a battle between two armies, and most modern board games are still based on defeating opposing players in terms of counters, winning positions, or accrual of points.” Recent board games also require diplomacy, which involves players making deals with one another or teaming-up against the commonly defined opponent. And whenever there is teaming-up, there is always the possibility of betrayal.
What seems to be unfolding at the boards of Tata group companies appears to have all elements of board games described above. Based on the press statement of Tata Sons Ltd., there are rules set down in the Tata code of conduct and long-standing Tata traditions, values and ethos which define the functioning of all Tata group companies. There is also past practice and governance guidelines that set down what the Tata Trusts, which own almost 66% of Tata Sons, expect from the chairman of Tata Sons. There is also the convention that the parallel appointment as chairman of Tata operating companies would cease on being replaced as chairman of Tata Sons. There appear to be unwritten rules on what alterations from existing positions the chairman of Tata Sons may make before they are seen as deviations from the core ideology of its visionary founders.
In the Tata-Mistry fallout, regardless of how objective or independent any of the directors may have been, their decisions are being questioned amongst themselves and by all those watching the ongoing saga. While, the corporate governance regime in India has evolved considerably, it appears that directors may have missed noting that the Companies Act, 2013 (the Act) expects them to “act in good faith in order to promote the objects of the company for the benefit of its members as a whole and in the interests of the company, its employees, the shareholders (and) the community.” The role of independent directors and their ability to balance conflicting interest amongst stakeholders was very important. Today, each director is being assigned to a particular camp and their loyalty being judged not on the merits of their decision but by who it favours. Questions are being raised on why Nusli Wadia backs Mistry and whether Amit Chandra’s relationship to Nitin Nohria has been disclosed in keeping with the requirements under the Act.
Yet, there remains uncertainty on who the common opponent is. Consequently, there has been a tremendous loss in the goodwill of the Tata group and India Inc. as a whole. At this time, the real losers are the retail shareholders who have seen a decline in their wealth over the past three weeks. These shareholders are now being compelled to take a decision on whether to support Cyrus Mistry who some boards back or to vote as desired by Tata Sons feeling threatened by the possibility of withdrawal of the Tata brand and hence fearing a further decline in their stock value.
Upon Mistry’s removal as chairman of Tata Sons, ‘it was expected’ that he would gracefully resign from the board of other Tata companies. Since he didn’t, Mistry was removed as chairman of Tata Consultancy Services (whereTata Sons holds majority) and in a questionable manner as chairman of Tata Global Beverages. And now, Tata Sons has requisitioned extraordinary general meetings (EGMs) of some of its other group companies seeking Mistry’s removal as chairman. Tata Sons is well within the law to requisition such EGMs, but it is necessary to detail the matters for which the EGM is being called and the business proposed to be transacted at such meetings.
Under the Act, any director may be removed by an ordinary resolution before the expiry of the period of his office. However, as introduced recently for the first time, it is mandatory to give to such a director a “reasonable opportunity of being heard.” As per the Act, a “special notice” is required of any resolution to remove a director or to appoint anybody in place of the director removed at the meeting where the director is removed. While the law does not require the resolution to state the grounds for removal of the director, it is mandated that upon receipt of such a resolution for removal, a copy be sent to the director concerned and he is entitled to be heard on the resolution at the proposed meeting. The concerned director is permitted to make a representation in writing to the company and request that his response be shared with the members of the company, if the time so permits. If time doesn’t permit, then the concerned director’s response may be read out at the proposed meeting. The purpose of these requirements is clearly to bring in the elements of natural justice in relation to the removal of a director by shareholders.
Thus, as things stand today the boards of the Tata operating companies who have been requisitioned by Tata Sons to call an EGM are required within twenty one days of receipt of such requisition to call a meeting for considering the removal of Cyrus Mistry as chairman of these companies. Such meeting must be held within forty five days from the date of receipt of the requisition. This window clearly gives Mistry time to prepare a detailed written representation which the boards may share with their respective shareholders. It also gives time to both Tata and Mistry camps to muster-up support from the institutional and retail investors in support of the resolutions, as it requires to be passed by those present and voting at such EGM.
This will clearly be a test of shareholder activism in India as traditionally institutional investors seldom take an activist position and have typically voted along with the promoter or the largest shareholder. The spotlight will be on government-owned insurance companies that hold significant stake in these public companies and on LIC in particular which holds a significant double digit equity stake in Tata Steel, Tata Power and Tata Global Beverages. They are also shareholders in Tata Motors, Indian Hotels and TCS. It is believed that officials of all insurance companies will take a final decision only after consultation with the government. But simultaneously, officials are reported to have said that since each company is governed by its own board, they will not intervene with the collective wisdom of the board, which may go in Mistry’s favor.
It should however be noted that if Mistry is indeed removed it is a serious matter since the Act restricts his re-appointment as a director on the board of the company’s from which he is removed. If Mistry is removed, then another cause of concern may be the en-masse exit of other directors from the board of the various listed companies owing to the shareholders having overlooked their statement in support of Mistry and hence having cast doubts on the credibility of the board as a whole.
But today, Mistry is not the only one Tata Sons is gunning for. The removal of Nusli Wadia has also been sought. Wadia, is believed to wield considerable clout within the Parsi community and is a veteran of corporate battles and is unlikely to take his removal lightly. He finds support from Nasser Munjee, an independent director of both Tata Chemicals and Tata Motors and also a trustee of Sir Ratan Tata Trust. Munjee, also a Parsi, is believed to have asked Mistry hard questions and independently found no transgressions of ethics or leadership in Mistry’s performance. Another leading Parsi supporting Mistry is Keki Dadiseth, independent director and also a trustee of Sir Ratan Tata Trust. Dadiseth is also a director of Piramal Healthcare Limited, run by Ajay Piramal who is also a Tata Trustee. Will Munjee and Dadiseth’s support for Mistry mean that they will be the next one’s to be axed? Do they risk being removed as trustee of Sir Ratan Tata Trust? If so, will that not call into questioning the governance standards of public charitable trusts?
Munjee has gone on record to say that the independent directors are trying to avoid conflict, but at some level it now seems unavoidable. Incidentally, others Directors backing Mistry include Deepak Parekh, Nadir Godrej, Ireena Vittal and Vibha Paul Rishi and now reportedly also Analjit Singh and Darius Pandole; will all of them also be removed? Where will this end?
The battle ground for this board game has now moved from the boardroom to the EGMs and will eventually land in a courtroom. Cyrus Mistry is unlikely to take lightly the allegations of Tata Sons that he has consciously dismantled the vision of the Tata founders and the highest standards of ethics and value systems that the subsequent leaders have strived to uphold. Mistry’s response questioning the “dubious investment decisions” of Ratan Tata is likely to hurt the stellar reputation of the grand old man. But by fighting this battle in full media glare and taking out full page newspaper statements, the Tatas are being compared to another Indian business house that often resorted to the practice of pleading its case through the press. All this is surely adding insult to injury on both sides. As said, “reputation once broken may possibly be repaired, but the world will always keep their eyes on the spot where the crack was.”
Satvik Varma is a graduate of Harvard Law School, currently practicing as a corporate commercial lawyer in New Delhi.