Thursday, October 27, 2016

Cyrus Mistry spat with Tata- a peek into the board room

As many commentators have noted, the sacking of Cyrus Mistry and the angry letter it has elicited from him has done great damage to the Tata brand. If the dispute drags out, the damage will be that much greater. Tata shareholders have cause for concern.

So do banks that have exposures to the group. Much of this exposure rests on the Tata reputation and TCS profit. The problems at the group will cause banks to seriously rethink the sort of name-lending they have been doing. The RBI's Large Exposure Framework is timely in this context: the restrictions on group exposures were long overdue and it's a pity that the regulator is having to require something that bank boards should have done on their own by way of prudent risk management.

One particular item in Mistry's letter stands out and it had me rubbing my eyes in disbelief. Let me reproduce that portion:
The trust nominated directors, who I would assume would use their own independent judgment and discharge their fiduciary duties, were reduced to mere postmen. As an example, once, the trust directors (Nitin Nohria and Vijay Singh) had to leave a Tata Sons board meeting in progress for almost an hour, keeping the rest of the board waiting, in order to obtain instructions from Mr Tata. Such a work pattern has also created the added risk of contravening insider trading regulations and exposed the Trust, apart from exposing the trustees to potential tax liabilities.
This is incredibleif the staements are indeed correct. The Dean of Harvard Business School, we are told, excused himself from the board meeting and kept the board waiting for nearly an hour in order to take instructions from Mr Tata, who was not even a member of the Board! Is this what they teach by way of corporate governance at HBS? Is this how independent directors are expected to function- go out and take instructions from the leading shareholder even while a board meeting is in progress? The possible violation of insider trading regulations, to which Mr Mistry refers, makes the disclosure even more lethal. SEBI and the stock exchanges, one hopes, will look into this item closely. If proved right, Prof Nitin Nohria's behaviour might well attract strictures from the regulator and the exchanges. Since some of the listed Tata companies are shareholders in Tata Sons, institutional investors would be within their rights to raise this issue.

One wonders what HBS would make of this matter. This is not the first time that an HBS prof's behaviour has raised questions in the Indian context. In the Satyam Computers scandal, Prof Krishna Palepu, another HBS professor, drew attention as he was found to have earned a tidy amount by way of consulting fee from the company with which he was associated as independent director. As reported in the media, the court dealing with matter issued an order asking him to disgorge around Rs 2.7 crore in excess remuneration paid to him.

Mr Mistry makes a number of other statements that are damaging. He would have liked to discontinue Nano but could not do so because of Mr Tata's attachment to it. He was opposed to the group's entry into aviation. There were dubious transactions in Air Asia.The potential write down in the value of assets of group companies is Rs 118,000 crore. IHCL's investment in the Sea Rock property nearly wiped out its net worth. Tata Capital made a large loan under the advice of one trustee and it has since turned into an NPA. And so on.

The question arises: did Mr Mistry raise these concerns at Tata Sons board meetings and were these concerns duly minuted? Did he express his disapproval of the two independent directors holding up proceedings in order to seek Mr Tata's input? What did the other independent directors have to say on various matters? Were their comments, if any, recorded and minuted? It would be appropriate for SEBI to go through the minutes of the board meetings and take stock. Perhaps SEBI needs to issue guidelines on the minuting of board meetings, an area that needs considerable improvement.

Two thoughts arise. One, if this is the state of affairs at what has been India's most respected corporate brand, what can we expect at other boards?What sort of discussion happens at those places? How well are minority shareholder rights protected?

Two, what do we make of the role and functioning of independent directors. As readers of this blog would know, I have been extremely sceptical about the functioning of boards and independent directors. Most boards are rubber-stamp boards that duly accord their approval to whatever the CEO or Chairman wants done. There's very little dissent, very little questioning. This state of affairs cannot change as long as so-called 'independent' directors are selected by the CEO or the promoter. We need a wide variety of stakeholders to appoint independent directors- institutional investors, banks, minority shareholders, employees and others. In my book, RETHINC, which came out last year, I devote a whole chapter to corporate governance and the functioning of boards.

Alas, there's no sign of genuine reform in the board room.


Sapan said...

Tata episode certainly raises surmise on Corporate Governance practices by India Inc. If Tata, which was regarded as an epitome of Governance, has "Yes sir" culture in the Board room, what can we expect from others. It's a pity situation and an alarm for Indian Regulators like SEBI or MCA. There is learning between the lines for Government, who should come forward to plug loopholes of CG in India.

I have not read your book 'Rethinc', but am following your blog for some years now. Your blog and many other academic research has already provided a prescription for CG practices in India. The Tata crises provides a silent and hidden learning, which we must not miss.

Sapan said...

Following are high priority CG reforms required at this hour, in my view:
1. Objective performance evaluation of Board/Independent Directors (Evaluation framework)
2. Split b/w roles of Chairman (Governance) & MD/CEO (Management)
3. Legal protection to Whistle Blowers
4. Higher say of Minority Shareholders.