Trust deficit

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.