Shades of global governance models reflected in Tata group boardroom battle

At home, though, unlike others, the Tatas are the only industrial group who consolidated all their trusts under a single public trust umbrella

The goings-on at the Tata Group have the rest of India Inc transfixed, as it were, as a corporate governance stand-off threatened to tear the highest echelons of India's largest industrial conglomerate asunder. What also made the Tata imbroglio unique was the question of how corporate boardrooms translate their relationship with a Trust structure that often houses the majority shareholding of the promoters.

 

While the role, even predominance, of trusts in the corporate world is not unknown in other parts of the world, the issue of relationship between the Tata Trusts and Tata Sons has some peculiarities that are specific to India.

 

Tata Trusts own 66 percent of the shareholding of Tata Sons but do not directly run operations. Instead, they exercise their influence through board appointments to the latter.

 

The different Tata Trusts are public charitable entities in the sense that they are governed not only by the Indian Trusts Act, 1882 but also by state laws. A public trust is established to benefit the public or a large, undefined group of people, according to this definition. Since these trusts are governed by state-specific acts they are also eligible for tax exemptions under Section 12A and 80G of the latest Income Tax Act. While the Birla Education Trust, Pilani established by group patriarch GD Birla is also on the same lines, the Tatas were the only industrial group who consolidated all their trusts under a single public trust umbrella.

 

In contrast, private Trusts are meant to manage and preserve assets for specific individuals, families, or their heirs, and are typically used for succession planning or wealth management. A database on trusts developed by Prime Database Group records 2126 such private trusts among companies listed on the National Stock Exchange (NSE). There are multiple such private trusts subscribing to the shares of single companies. The data shows that of 2,757 companies listed on the NSE, promoters hold their shares through trusts in 878 of them.

 

Trusts and the issue of governance

 

In the United states, trusts follow a unitary board structure that combines both executive and non-executive directors, and exemplifies watertight separation between promoter families and company stewardship. At the other end is Japan's Keiretsu system, which prioritises stability and cross-shareholding, thus limiting independent board oversight. The UK, French and the German models lie somewhere in between.

 

In the case of the Tata group, even as the curtains have not yet fallen on the departure of Mehli Mistry from his position at the Tata Trusts, experts said that going forward, the challenge to corporate governance norms in the group will dominate larger investor perspectives.

 

What is the Tata imbroglio about?

 

The Tata Group has been roiled by internecine conflict between the members of Tata Sons and Tata Trusts, many of whom occupy overlapping roles in the two entities. Under Section 121A of the Articles of Association of the Tata Sons, introduced in the year 2014, all decisions involving a sum of more than Rs 100 crore has to be cleared by the Tata Trusts. At stake in the troubled legacy from Ratan Tata is the fortune of the nearly $300 billion Tata Group with investments in sectors as diverse as salt and semiconductors.

 

The knotty governance issue was best exemplified by the discord over Noel Tata-run Tata International, which earlier this year had asked for a Rs 1,000 crore capital support from Tata Sons, a decision that would ultimately have to be cleared by Tata Trusts.

 

However, in an apparent conflict of interest, the Trust, which was also headed by Noel Tata, is understood to have approved the support despite alleged opposition by some of its other board members.

 

How does it compare to global models?

 

If one were to apply the Japanese corporate governance model, this straight-line connectivity between the Tata Trusts and Tata International through the via media of Tata Sons, would not be unusual. Several Indian firms currently expanding their businesses in Japan have found that board appointments there also often favour insiders rather than independent directors.

 

Flexibility in governance structures is much needed to operate smoothly within the country’s business ecosystem, it is argued there, even though like India, Japan too has a strong corporate governance code managed by the Financial Services Agency, the integrated financial sector regulator and the government Ministry of Economy Trade and Industry.

 

“The structure of the Tata Trusts vis-a-vis that of, say, Tata International is in alignment going by this principle,”, said Avirup Bose, Professor of Competition Law and Policy, Jindal Global Law School at JGU. "The interests of the largest shareholder is also getting helped by the presence of Noel Tata as the chairman of Tata International," he added.

 

But this could be a tightrope walk in other geographies. The new Tata model wherein Noel Tata chairs the Trust and also holds fiduciary responsibility in more than one group company, runs the risk of falling foul of the UK model, where the Group has a sizeable presence through both Tata Motors and Tata Steel.

 

The UK Corporate Governance Code of 2023 requires firms to comply with best practices or justify deviations. This "comply or explain" model differs from the rules-based US approach only to the extent that it is flexible. But it insists on the required separation of the role of the CEO and the chairman. It also mandates board diversity and independence of directors. There is another layer to ensure compliance: the UK Stewardship Code of 2020 where institutional investors must engage in governance and disclose voting policies. This smell test seems to be absent in the case of the Tata group.

 

The UK Model is based on the Cadbury report of 1992 asking for board independence along with that of non-executive directors and the effectiveness of audit committees, all geared to offer director accountability to shareholders.

 

In India, this Indian was picked up by the Kumar Mangalam Birla committee report on corporate governance in 1999 submitted to the market regulator Securities and Exchange Boar of India (Sebi). Going further, during the Covid pandemic of 2020, Sebi issued a draft paper suggesting the separation of the role of the CEO and the chairman in a company. The paper was subsequently withdrawn, reportedly due to opposition from many of the family-run business houses.

 

Where does the Tata model fit in?

 

The French hybrid model of corporate governance is probably closest to the Tata model. This is an optional dual-board structure where companies have the option to choose between a unitary or a dual-board governance. The model was adopted because the French government has historically held strategic stakes in firms, ranging from 10 percent in Airbus to 100 percent in EDF. The Florange Law passed in 2014 offers some unique facilities: among other things, it permits doubling of the voting power of shareholders who hold on to shares for a given, uninterrupted period of time. The Tata Trusts allowing the same person to be seated on both boards and the Florange Law, both aim for the same outcome, that is, a determination to ensure supremacy on the board.

 

Interestingly, this is not the first time a corporate governance challenge has roiled the Tata Group. The removal of Cyrus Mistry as CEO in 2016 was also a governance dispute. Again, the issue was whether the Trusts exert too much control over the decision-making process. While the Supreme Court decision affirmed the control model, the Tatas did promise to strengthen governance by improving succession planning. This was one of the reasons why the central government, too, had to get into the act this time. Home Minister Amit Shah and Finance Minister Nirmala Sitharaman both held meetings with both Noel Tata and N Chandrasekaran, chairman of the Tata Sons, as well as with Tata Trusts vice-chairman Venu Srinivasan and trustee Darius Khambata in early October. For now, the corporate governance sheet has been tucked into place but seems a bit soiled.