Small investors
are on their own in a promoter-manager power tussle, with no help from
institutional investors
By Mohan Sule
At first glance, the flare-ups at
Tata Sons and Infosys look similar: larger-than-life retired honchos expressing
frustration at the direction of their companies, clashes spilling out from the
boardroom and hand-wringing over existential trauma. Tata Steel and Tata Motors
are facing the twin blows of huge debt accumulated for acquisitions and the
subsequent worldwide slowdown. The business model of Infosys is being
questioned due to the increasing commoditization of the space. Yet, the market
looked at both the crises differently. The valuations of the Tata group eroded
while the drama was being played out in public glare. Infosys shareholders, on
the other hand, looked more annoyed than angry at the distraction at a time
when the focus should have been on bagging high-margin orders from the
recovering US and EU markets. The stock remained stable and even gained in the
midst of the storm in the tea cup. The inference is that the steps being taken
by the new boss at Bombay House to shed fat were viewed appropriate and his
sacking considered unfortunate. So also the compensation and severance packages
of the top helmsmen at the Bengaluru-based back-office supporter were not
bothering ordinary investors to the extent they were to the promoters. Despite
the return of calm, the lessons learnt from the two episodes should not be
brushed aside. The first area of concern is succession planning. Recent events
challenge and at the same time confirm conventional wisdom about companies run
by families and those with dispersed shareholding managed by professionals.
The lateral induction of Cyrus
Mistry into the Tata group was welcomed by the market, comfortable with his
family’s large shareholding. The collective stepping down of the founders of
Infosys in favor of competent outsiders, too, got thumbs up as the act was considered
the pinnacle of the good governance pyramid. The situation has reversed now,
with the market favorably inclined at the hotels-to-coffee group’s decision to
promote an insider, while looking with unease at the running of the IT
bellwether, wondering whether ordinary investors were being short-changed by
the newcomers. What has capped the stretching of the tussle is the improving
economic situation. The second lesson, therefore, is the environment determines
the success of any generational shift. During times of difficulties, the
successors appear to be doing nothing right. Due to their integration with the
global markets, the conglomerate and the tech leader have passed through tiring
times. The new CEOs inherited the problems rather than creating them. Hence,
their strategies differed. If, in one case, fault was found with the
re-examination of the capital deployed, in another it was the allocation of
capital that drew ire. Low returns can weigh on the bottom line of a
manufacturer, while retaining talent is important for a services provider to
maintain the margins.
This brings to the third draw-down.
Should the opinions of predecessors given weight? JRD Tata died a couple of
years after the succession of the anointed heir, who subsequently eased out the
ageing heads of group companies, by setting out a retirement policy, without
much resistance. Despite Infosys founders requesting the stock exchanges to
re-classify them as non-promoters, the board preferred to cash on their
goodwill. Against this background, Ratan Tata’s coup appears interference,
while the Infosys’s board’s irritation with NRN Murthy’s grouse puzzling. If
promoter-managers after a long stint continue to remain suspicious of the
motives of their successors, they should remain on the board and guide the
incoming management. The Tata group is so unwieldy that the best service to the
investors will be its breakup. Infosys, too, needs a break from the past by
entering new areas. This leads to the final observation. Small investors are
left to fend for themselves while the power play between past and current
shareholder-managers destroys wealth. Neither domestic nor foreign big-ticket
shareholders seem to have the ability or the capability to notice (in the case
of the Tata group) or resolve (in the case of Infosys) the contentious issues
before there is a blow-out. The traditional theory of following institutional
investors stands exposed as this class is focused on short-term gains without
bothering about systemic issues such as promotion policy. It will be some time
for investors to decide if Tata’s and Murthy’s interventions were beneficial
for their companies. Both may have won the battle by focusing on corporate
governance issues but have lost the war of perception by believing in their
indispensability and distrusting their successors.
