After a lull, during which former Tata Group Chairman Cyrus Mistry seemed to be winning the war of public opinion, Tata Sons has struck back sharply. First, they removed Mistry as chairman of Tata Consultancy Services (TCS) and made Ishaat Hussain its interim chairman until a new one is found. This was followed by a move to call an extraordinary general meeting (EGM) of shareholders to remove Mistry from the chairmanship of Indian Hotels. Finally, an extremely detailed release, bristling with financial and other figures, was sent out to the press seeking to explain how Mistry had underperformed in his almost four years as chairman of Tata Sons. Among other things, the letter pointed out that overall group performance, barring JLR and TCS, had deteriorated under Mistry and also that some of the legacy hotspots had significantly done worse after he took over. It also charged him as moving too slowly to fix the problems of the group. (The Mistry group says the letter is full of half truths.)
The Tatas have obviously decided to now move to get Mistry out of all companies, whether there is a replacement available immediately or not. The immediate strategy seems to be to aggressively counter any sympathy that Mistry was garnering, and to force EGMs in other group companies to remove him as chairman or director. However, a spokesperson says that the move is only to remove Cyrus, and not his brother Shapoor, who also is a director in some Tata company boards.
The removal of Mistry from TCS was relatively easy because Tata Sons holds over 70 per cent of the shares in that company. The bid to remove him from the other companies will be less so and probably far messier, given that Tata Sons has between 30 per cent and 40 per cent shareholding in those companies. The Tata letter insinuates that Mistry manoeuvred himself into a position where he was the only Tata Sons director on the boards of most listed companies. And that he packed the board with people who were his supporters. The nod seems to be aimed directly at the independent directors in the Indian Hotels, and later Tata Chemicals board of directors, all of whom endorsed Mistry's leadership. In the next few weeks, it could be expected that Mistry will seek similar endorsements from other Tata Group company boards in which he is the chairman or director. Similarly, Tata Sons can be expected to persuade the independent directors in these boards that Mistry is not quite fit to remain there. They might even seek to remove directors considered to be supporters of Mistry, like Nusli Wadia. In a sense, you could see the Mumbai corporate circles and high-profile independent director clubs getting increasingly polarised as some people back Mistry and others back Tatas. Thus, while Mistry could count on the endorsement of no less a person than Deepak Parekh, and now even Nusli Wadia, long considered a close friend of Ratan Tata, the Tata Sons board meeting saw Ajay Piramal and Venu Srinivasan squarely voting to replace Mistry. The Parsi society itself is taking sides, and this battle is going to be long and bitter.
Meanwhile, there are two things that come out. Till the time we went to press, the Tata Sons board and search committee still hadn't made up its mind as to who would be Mistry's replacement for the long term. So, while seeking to remove him from various boards, the best Tata Sons has been able to do is nominate interim chairmen/ directors. Two, there is a certain clarity about what the Tata Sons board saw as Mistry's underperformance.
Tata Sons had initially hoped that Mistry would go away once he was fired from the chairmanship of the group. Now that he has dug in his heels, they are taking the other steps to eject him. Meanwhile, one of the big points that both sides underlined in their letters - the underperformance of all companies bar TCS and JLR - is likely to get worse in this confusion.
There are two puzzling bits that one cannot quite figure out. The first is that how come the goals of Mistry and Tata Trusts started diverging. After all, both have a vested interest in maximising Tata Sons' profits, because the value of their shareholdings and the not insignificant dividends they get from it should have put them on the same page. The second is why Tata Trusts, in its own interests, did not choose to diversify its portfolio and why it depends entirely on income from Tata companies. As the battle has brought out sharply, there are just two really good performers in the Tata Group, and the rest are pretty middling companies, if not outright bad performers. In the US, most founders' Trusts shift out from the founder stock to hedge their bets. The Hewlett Foundation, the Bill and Melinda Gates Foundation, and even the Ford Foundation all have diversified portfolios, and HP, Microsoft and Ford Motors stocks, respectively, form a minor part of their portfolios. This brings far more financial stability to the trusts and don't make them overly dependent on a single company or group. It could be time for the Tata Trusts to consider a similar philosophy so that they do not depend only on the fluctuating fortunes of the Tata Group companies.
The Tata Trusts could argue, of course, that they have an adequately diversified portfolio given the sheer number of Tata Group companies and the very disparate businesses they operate in. However, that is really not the point. The Tata Trusts are too invested in the Tata Group companies, good, bad and indifferent, and not on building a high-performance portfolio that maximises their returns like many professional trusts abroad. Many Tata Group companies are not the first, second or even third best companies in their sectors. The Tata Trusts could have made far more money if they held Maruti Suzuki's shares rather than Tata Motors' shares, shares in banks like HDFC Bank and IndusInd Bank instead of shares in Tata Capital, and even the better-performing hotel companies along with Indian Hotels. It would pay them better dividends in the long run - and more than that it would free the Tata Group companies from being overly worried about the direction in which the Trusts want them to go. It would, most of all, make all three - the Tata Trusts, Tata Sons, and the group companies - act according to their best interests instead of trying to forever move in lockstep with each other.