The Tata supremacy

The phase of the market during a CEO’s tenure often determines his success or failure

By Mohan Sule

Boardroom brawls are rarely genteel. There is intrigue and manoeuvres and strike-backs.  If the incident occurs near results announcement, the inference is that the turmoil stems from the poor numbers. If the bloodshed comes out of the blue, theories about clashes and corporate governance issues are rarely off the mark. The power tussle at Bombay House is being played out in public. Ratan Tata, the interim chief of holding company Tata Sons, has signaled the aggressive actions of his predecessor to staunch bleeding, particularly the refusal to buy the 26% stake of telecom joint venture partner, NTT DoCoMo of Japan, breached a commitment. Outgoing Chairman Cyrus Mistry has indicated, contrary to allegations, all his actions were with the approval of the board. There are five takeouts from the sordid drama unfolding in the media. Following a larger-than-life predecessor is a heavy burden to bear for the successor, even if he is the son of a business associate. Comparisons abound. The board has to be clear about the mandate for the selection. Is it to continue with the tradition or break from the past? Apparently, Mistry wanted to shrink the balance sheet that was weighed down by debt taken to finance overseas forays, while Tata wanted the group to ramp up revenues to US$200 billion by the fiscal ended March 2021. Second, the yardstick to measure outcome has to be defined: should it be creating shareholder value or the best company to work for? Restructuring cannot be painless. Legacy businesses might have to be shed merely to stay afloat. Cost-cutting affects suppliers as well as employees.

Third, the macro environment influences the track record of a CEO. Nearly three-fourths of Tata’s regime coincided with domestic liberalization and a boom in the global markets. The transmission of the adverse effects of the credit crunch post September 2008 began to be felt as he prepared to step down. The last four years, coinciding with Mistry’s ascension, were characterised by policy paralysis and, subsequently, drought at home. Overseas markets were being kept alive by pump-priming. The recent referendum to exit EU is expected to see the UK slipping into recession. The Tata group’s major international presence is in Britain. Flagships in the tech, automobile, steel and hospitality sectors have been at the forefront in absorbing the brunt of the sluggish global economy. Fourth, success or failure of a boss depends on the point at which his induction is taking place. A board might prefer a visionary to help the company climb up the next step in the value chain when the outlook is bright, while a competent manager might be suitable to tide over the downturn. Acquisitions are cheaper over the organic route to grow during a bullish phase. Importantly, Tata’s shopping was confined to the domains the group is operating. The purpose was to build up scale and international presence. Similarly, selling non-performing assets is a practical solution to cut fat and Mistry cannot be faulted on the score. Being at the helm for nearly two decades implies that the positives will overwhelm the negatives when Tata’s legacy is reviewed compared with the brief reign of Mistry. Fourth, any transition is fraught with uncertainty. The next generation might have more than one contender as might in-house promotion. An appointment making sense at that point of time might seem off the mark at hindsight.   

Any tragedy brings its own lessons for investors. First, the ramifications of the handing over of charge cannot be predicted. The process can be similar to an acquisition by a new owner. Tata ejected satraps to run the group without insubordination. Mistry, however, was labelled brash for bringing in his people. Second, the market is supposed to take into account transparency and earnings while giving discounting to a counter. Yet, the tyranny of quarterly growth can lead to the skidding of the best-managed companies. Putting on the block Corus, UK, could not have been an easy decision. Third is the perennial dilemma of stock pickers: choosing between a family-run company and a family-owned but professionally-managed company. The predominant shareholder is preferred for long-term growth but can be autocratic in decision making. An outsider’s perspective is needed for taking tough calls but the omnipresence of the controlling owner can be a dampener.  Fourth, emerging businesses pose a frightening challenge to promoters of historical groups. The thrashing many of them have received in the telecom space so as to prompt a re-jig of their conglomerates is a stark reminder that India is changing and so also the approach to hand-me-down empires.