By Manoj K. Sahoo & Prashanta Ch. Panda : Indian corporate legacy is baptism by fire! The tussle between the Old and NextGen leadership refuses to die down – the strategic game outcome is a ‘Nasty Equilibrium’ no more Nash Equilibrium. ‘Its My Way or Highway’ is now popular parlance in corporate corridor. Tata & Companies’ ousting Cyrus Mistry signals patchy history of corporate governance in India. Indian government applauds its achievement in considerable improvement in Ease of Doing Business in the country. The latest imbroglio in Tata invokes memories of episodes of poor corporate governance structure and lack of transparency in mammoth corporate in India. Recent history has rich memory from division of Dhirubhai Ambani’s business legacy, Satyam Computer’s debacle, Infosys’ struggle in setting next generation leadership and so on.

Tata Group companies’ shares continued its decline since Monday (24th October 2016). It is perhaps settling 5% lower post Cyrus Mistry’s ouster as Tata Son’s chairman. Major Tata Group companies including Tata Motors, Tata Motors DVR, Tata Steel, Tata Chemicals and Indian Hotels, Tata Global Beverages and Tata Communications had closed at 3%-5% lower level on BSE. (See Table 1) Tata’s Investors have lost more than Rs 25,000 crore during past two trading days on 24th and 25th October 2016. The total market capitalization of top 20 Tata Group listed companies, declined by Rs 26,426 crore, from Rs 851,020 crore on 24th October 2016 to Rs 824,594 crore on 27th October 2016 (Business Standard). The stock market bore the brunt, the BSE benchmark Sensex fell by 254.91 points on 26th October to end at 27,836.51.

Major Issues, Multi Groups and Bosses

Removal of Mr. Mistry has thrown up certain major issues for Indian business. But first, let us list out major events. Mr. Mistry was ousted hastily citing breach of Tata’s ethics. Mistry claimed that he inherited a mammoth business which was debt-laden, unfocussed with an imminent likelihood of $18 billion (Rs. 1.18 Lakh crore) write-down. Tata’s some of ‘Legacy Hotspots’ like hotel, automobile, steel and others businesses was dragging revenue down and were becoming unviable. And most importantly Tata Group had a string of poor and questionable transactions in past and recent history. Immense debt piled up due to past foreign acquisitions like Jaguar Land Rover, burden of Docomo deal and steel deal (chorus).

Tata Capital’s questionable loan advancements were turning into non-performing or bad debt. Unviable investment in Air Asia and Singapore Air businesses, questionable and bad foreign acquisition strategy, buying Searock property at inflated price and keeping it off balance sheet have yielded to colossal debt. No potential profitability but moreover, the lingering loss of Nano venture peaking at Rs.1000 crore is another case in point. Inability to shut down this business is due to emotional reasons. This have dominated and contributed to trust deficits between the Trustees and the Chairman despite far sights provided for value additions to farms.

Many feel that Mr. Mistry raised three pertinent issues which question undermining of corporate governance in Tata Group. First, the abrupt dismissal without being given an opportunity for self-defend make the Board Meeting is ‘invalid and illegal’. Second, promise of ‘free hand’ in running Tata group’s business as Chairman never happened. Alternative power centers were created and rules were changed. Third, Tata Sons risked violating insider trading rules. Trust directors contrary to expectations, used to take instructions from former Chairman Ratan Tata (Times of India, 27th Oct 2016) left the Board meeting in midway for about an hour to consult the chairman.

Figure 1: BSE Benchmark Sensex and Nifty 50 in Tata Tussle Week (www.MoneyControl.com)

Ten significant issues that Tata tussle provide for “what needs more attention with Indian business” are : 
1. Mismanaged Succession of Leadership in Indian corporate sector
2. Dominance of Family business in Indian economy
3. Poor Corporate Governance in Indian business
4. Inability of the Culture of Corporate Control to change with Globalization
5. Lack of Decentralization of Corporate Power overlooking smaller stakeholders
6. Faulty Business Expansion Strategy including Foreign Acquisition
7. Horizontal Expansion and Enhanced Diversity of Business vs. Focus on Core Business Strategy and Vertical Growth
8. Unproductive Outcome of Professionalism vs Emotionalism of Business Legacy
9. Foreign Joint Ventures poorly executed leading to more unproductive expenditure
10. Failure to evaluate and act on lending to preferred borrowers leading to piling of bad debts

We can throw some light on each issues. There is no dearth of events in Indian business when succession of leadership was badly mismanaged- Ambani’s was a classic case witnessed last time in 2002, throwing internal democracy and corporate governance issues to the brink. Dominance of family business in India is immense- 85% of all business is heavily dominated by founding families who do not allow transition to be smoother nor allow running of the business by the NextGen leadership in an non-conventional manner.

Ethics and Losses Vs. Value Decisions

Family business and corporate control structure has not changed much in India. In political sphere we witness family legacies- right row in UP Samajwadi Party (father-son duel). Corporate culture with globalization is failing to allow much change or flexibility and importantly internal democracy in leadership. Inflexibility has direct impact on the designing of corporate business strategy or inappropriate acceptance or trade off between the old and new business thoughts, strategies and ways of growing and reaping opportunities overseas. This is what is complained by the other power coteries of Tata trust i.e. “violation of values and ethics which Tata stands for or rather non-following of basic principles”. If this is the case, how can one rectify the mistakes of faulty foreign acquisitions or investments in Joint Ventures like JLR, Air Aisa or Singapore Air etc. Moreover, how can one deal with losses in UK steel business when the entire region is under slowdown difficulties.

In such a situation, transparency of corporate governance and information decentralization with smaller stakeholders is a distant phenomenon in Indian business. Old legacy still play a major role and call the shots which leads to non following major corporate governance principles. This was what complained by Mr. Mistry about taking important business decision by the directors when they did not pay heed to the current leadership rather prefer to consult and obey decisions of older leadership. In corporate governance terms it is unacceptable and violates its basic principles.

Table 1: Major Tata Group Companies’ Losses in Returns  & Market Capitalization 2 Days post Mistry’s Ouster  

Source: Business Standard, 26^th October 2016

Penny Counts and Blames Too

Other issues are related to horizontal expansion of business and allowing growth of diversity versus focused consolidation of the core businesses of the group. This is a wide divergent from Tata’s earlier strategies. It obviously involves risks, but more informed deliberations are required for making this departure a success. Remember Tata was initially a Steel and heavy automotive conglomerate which with changing time has changed into a salt to software selling giant.

In favourable times tides can be ridden. However, at difficult times of piling bad debts and slowing down of profits and top line stare, consolidation and focus may be the best options assuring vertical growth. This may lead to shedding ‘Legacy Hotspots’ like Tata’s Indian Hotels, JLR or even Nano. Yes developing a business requires lots of emotionalism also along with considerable professionalism- Nano case is a messy emotional issue from Singur to Sanand with Rs. 1500 crore loss at the beginning and legal tanglese to realization of Lakhtakiya Dream. But when Nano is no longer a common man’s car at one lakh rupees with cost escalation, it needs proper reviewing whether to continue or not with the project. At a Rs. 1000 crore accumulated operational loss now from running Nano, emotionalism can no longer save the business.

In the end, every single penny counts- be it foreign investments or lending to insiders. Corporate governance violation backfires later on. Hard decisions on Docomo deals is a case in hand. In 2009, Docomo bought shares in Tata Teleservices from with the agreement entitling the Japanese firm to sell its shares back at 50 percent of the purchase price. Tata Teleservices, with increased competition in telecom market and dipping bottom line, has accumulated more than 300 billion rupees in losses. When Docomo wanted to sell its stake in 2014, Tata cited Foreign Exchange Management Act (FEMA) restrictions towards it as per RBI guidelines in 2014 which prohibited non residents to sell stake at an assured exit price. This led to feud and London Court of International Arbitration directed in June 2016 Tata to pay $1.17 billion to Docomo, which is yet to be settled.

Now who is to blame? Yes the strategies may be questionable- one needs to question. The seeds of change and growth lie there. The older brigade must see with changed lenses and must experiment with a few of the crises, one at a time. Age old principles may be correct, but try a new one, implement and wait. Unwarranted war and unceremonious firing will only backfire. Mr. Mistry’s case this time however is going to be a watershed- a deeper scar in corporate ill-governance history in the country irrespective of whoever may be right in times to come.

(The Authors are Faculty, School of Liberal Studies, Pandit Deendayal Petroleum University, Gandhinagar, Gujarat, India.)