A question of trust

Tata Trusts must let go of controlling powers

Cyrus Mistry’s resignation from the Tata group’s listed companies may have spared these conglomerates the ructions of his very public battle with Ratan Tata in the immediate future. But his exit does not solve the broader institutional issue that will influence the fate of India’s largest corporate group: Of setting in place governance structures to insulate itself from such controversies and strengthen its ability to survive the dynamic hyper-competition of the coming decades. Even if the group were to replace Mr Mistry with another candidate as chairman of Tata Sons, the group holding company, the structural problems will remain. Distilled to its basics, the dispute centres on separation of ownership and management. In the Tata group’s case, the problem is amplified by a structure that embeds management power in ownership structures. Thus, the Tata charitable trusts, which own two-thirds of Tata Sons and, through it, significant chunks of group operating companies, can wield disproportionate power in the affairs of the group. With directors representing the trusts having veto powers on board decisions, this imbalance of power has negated the efficacy of the board. The fact that these trusts are controlled by a family scion who is 78 years old and with no strong line of inheritance only magnifies the potential for future crises.

 
The short point is that the Tata group needs to address possible areas of conflict and clearly set the terms of engagement between the three tiers of the group:  The trusts, Tata Sons and the operating companies. It needs to put in place an operating structure that outlives individuals. After all, unlisted, opaque charitable trusts should not be allowed to play key roles in the decision-making of listed corporations through the holding company.
 
One sensible solution, as suggested by Institutional Investor Advisory Services (IiAS) in a paper titled “Tata Group: Time to Reboot,” is for the trusts’ veto rights to be cancelled, a move that would restore the “balance of power” and ensure decisions driven by “equally empowered directors”. This, in turn, would widen the scope to induct fresh talent and ideas from outside in place of the preponderance of “tenured employees”, as Mr Mistry called them. No conglomerate can prosper if personal loyalties override strategic objectivity. Realigning relations with the group companies to create an arms-length relationship is also critical. IiAS has recommended that future Tata Sons chairmen should not chair the group operating companies, which would provide them leeway to attract best-in-class talent available internally or externally. To retain some measure of control, Tata Sons could nominate directors to sit on the boards of the operating companies.

 
The broader question is why these trusts, whose primary function is administering a variety of charities, should exercise control over a corporate group at all? The Tata Trusts do so as the result of an exemption they were granted along with the Birlas in the seventies after the government banned charitable trusts that enjoyed tax-exempt status from owning shares in companies. Other charitable trusts are allowed to invest in bank and postal savings accounts only to continue enjoying their tax-exempt status.  This slanted playing field means that other large corporate charitable trusts that receive tax breaks and put in some sterling social service cannot invest in group companies. At a time when corporate philanthropy has been mandated, it makes sense for this exceptionalism to be scrapped. To insulate companies from a dominant trust-based shareholding, the law should introduce a cap and mandate the Tata and Birla trusts to reduce their shareholding to this level in phases.