Founder's keepers: The Infy, Tata poser

The role of promoters once they relinquish management control has never been so open to question as they have been in the two recent high-profile disputes — Ratan Tata versus Cyrus Mistry and Infosys founders versus Vishal Sikka. 

One dispute is about power without much accountability, an issue that is yet to be resolved despite the capable and unassuming N Chandrasekaran’s accession to chairmanship of the $103.51 billion group’s holding company, Tata Sons. The other is about accountability without power, an issue that is still to be sorted out between an equally proficient but feisty Mr Sikka and the unhappy founder group led by N R Narayana Murthy. 

The prevailing corporate governance discourse dictates that it is the best practice for promoters to exit management once they pass a certain age and gracefully hand over to professional managers to focus their attention on their (mostly) philanthropic and/or (increasingly) private equity businesses. The contretemps at Tata and Infosys suggest that this is patently unworkable in practice. 

Promoters may do well to relinquish their executive roles after, say, 60 years but it is humanly impossible to expect them to readily relinquish their proprietary (and/or hereditary) interests in their companies. Unless they have done something patently ham-fisted — like Jerry Yang of Yahoo! — or been outright corrupt — like Ramalinga Raju of Satyam – it makes sense for promoters to stay on the board after they hand over the management baton. 

Neither Mr Tata nor Mr Murthy (and co-founders) are on the boards of Tata Sons or Infosys but both challenged the executive management on grounds of performance and governance, respectively. Had they been more directly engaged, it is possible that the controversies with their attendant reputational damage may never have erupted so openly. 

The controversies at Infosys and Tata have arisen because their ownership structures are relatively novel in India. Many of the upcoming new-age companies in the post-liberalisation world will resemble them, so both will be signposts on the road to healthy post-proprietary governance structures. 

The Tata group faces a singular problem because of a dwindling promoter family and the indirect control it exerts via family-run charitable trusts over 100-odd companies. Ratan Tata is the largest promoter-shareholder via these trusts. He remains a promoter in terms of the definition of the Companies Act. 

Sub-clauses (b) and (c) of Section 2 (69) pretty much cover his  de facto  post-retirement role — respectively, “who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise;” or “in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act”. In any case, since the group bears his surname, he cannot, strictly, disengage himself from the fact of promoter-ship during his lifetime. 

Mr Mistry, too, qualifies as a promoter because of his family’s over 18 per cent holding but not, if his dramatic disclosures about Mr Tata’s serial interference are to be believed, by virtue of the two sub-clauses mentioned above. Clearly, Mr Tata, who presided over an inherited group for 21 years and re-moulded it from the slothful, flabby behemoth of the licence raj era, cannot realistically have been expected to remain a hands-off observer acting through selected board intermediaries. 

Equally, his contested legacy — questionable mega-acquisitions, telecom deals, and heavy debt — demanded that he should have retained a place on the Tata Sons board rather than remote controlling matters courtesy a change in the trusts’ powers to appoint and remove directors and the chairman. 

The chairmanship of Mr Chandrasekaran, a “Tata Lifer”, does not address this structural weakness. As a former employee he is unlikely to challenge Mr Tata (we discount independent directors in both cases; recent Indian corporate history suggests that this group has scarcely distinguished itself as guardians of corporate governance). 

Infosys’ problems are more complex because it is a listed company. After taking turns at running the company in an extraordinary spirit of corporate democracy, the promoters had stepped back — bar the controversial interlude when Mr Murthy had to perform a holding operation after the non-performance of the last founder-CEO, D Shibulal. Mr Sikka was Mr Murthy’s anointed successor and reinforced that relationship by touching his feet at an AGM. After this, the promoter group, which collectively holds 12.74 per cent along with their families, had requested reclassification as ordinary shareholders but were requested to stay on as promoters by the board in the interests of brand equity. 

In effect, then, the promoters retained obligations under the Securities and Exchange Board of India (Sebi)’s regulations — including a tedious list of compliances. The rules to reclassify promoters are currently under Sebi consideration but the draft suggests they would be too rigid to have helped Infosys’ promoters.  

With no board representation, the founders had accountability but no power to question major decisions, such as the Panaya purchase, Infosys’ second-largest acquisition. Mr Murthy and co and Mr Sikka would have done better to create a rotating board representation for the founders — this would have ensured the “brand equity” concerns and avoided allusions to shenanigans that has provoked so much ire. Are they “persons acting in concert”? Of course, but so what if the process is transparent?  After all, even Bill Gates, busy as he is in the depths of Bihar and Africa, retains a board seat on Microsoft and a role as technology advisor.