Tata Sons row: 'Separation of ownership and control may offer a solution'

Separation of ownership and control could increasingly be an option for businesses across the world, according to Cohen, who's a top global family enterprise academic

The Tata leadership battle has triggered a fresh debate on family businesses versus professionally-run firms. Even as Tata Trusts, a philanthropic organisation, holds 66 per cent in Tata Sons, setting it apart from any family business, the current in-fighting and board-level disagreements over critical issues have put a question mark over the structure of the organisation. Business Standard spoke to experts and academics who have studied business disputes to make sense of the ongoing turbulence in the Tata group. 

 

Lauren H Cohen, who is LE Simmons professor in finance and entrepreneurial management units at Harvard Business School, said over a virtual conversation that the Tata leadership dispute has a flavour of family business coming in even though it’s supposed to be a professionally-run group. Replying to a question on how business issues and disputes vary from one geography to another and how they are getting resolved, Cohen pointed out that business owners in the western world have been giving up decision-making while focusing on access to cash flows being generated by companies. 

 

Historically, major companies such as The Ford Motor Company, Walmart, Alphabet, Apple, Microsoft, Blackrock among many others are counted as professionally-run businesses. Separation of ownership and control could be an option for businesses more and more across the world, according to Cohen, who’s a top global family enterprise academic. 

Kavil Ramachandran, professor of entrepreneurship at the Indian School of Business (ISB), who recently warned against changing the captain in the middle of a storm while referring to the Tata Sons leadership crisis, spoke to this newspaper on the matter. On the larger question on family business, he referred to the global classification by Gerard Hendrik (Geert) Hofstede, who was a Dutch social psychologist, suggesting India and other Asian countries have a collectivist culture as against individualistic culture in Europe and America. 

“In our context, members of Indian family businesses have considered it their birthright to work there and responsibility to take care of it. In most Indian or Asian family businesses of any size, family members get operationally involved and often become CEOs,’’ Ramachandran said. That’s not the case in Europe or the US where it’s neither a birthright nor a responsibility to work in the family’s business, he added. “This fundamental difference has huge implications for their nature of involvement or oversight.’’ 

To put things in context, the Tata Group or Tata Sons, the holding company of the conglomerate, is not part of the Hurun India Family Business Rankings. Hurun India publishes multiple benchmark indices tracking wealth creation and corporate value across businesses.   

Elaborating on the role of the board in case of a business dispute, Dalhia Mani, professor at the Indian Institute of Management (IIM) Bangalore, said that independent directors can provide a neutral objective view and bring in expertise and insights from other firms and industries. “However, the effectiveness of independent directors depends upon how well the board functions.’’ Simply adding outside directors is not a universal fix, she argued. 

“The independent director only has access to information made available to him/her and has limited authority to implement changes. Their role is to make their views known, but if the board is structured to ignore differing views, then there is not much that an independent director can do,’’ Mani said. 

Legacy of business versus true information about the business would often be a case of dispute in family-led companies, according to Cohen. What the firm has meant to the owners over generations has an emotional weight, he said while referring to the Tata case. While the owner may like to retain what has been there for several decades, a change may be required for the asset to grow and the business to expand, he said. “Also, a professional manager may have a horizon of five to 10 years in decision-making, but the family could feel the need for a 100-year vision,’’ Cohen explained, adding that this could cause conflict. 

On listing of the company, he said if raising capital is important to the company for big projects, Tata Sons would be right to go for it. However, the nimbleness of a company could reduce with listing, he said. 

The current conflict, according to Ramachandran, seems to be a manifestation of the efforts of Tata Trusts, as the largest shareholder in Tata Sons, “to wield power to determine the strategy and destiny of the group companies’’. This is reflected in Noel Tata, chairman of Tata Trusts and nominee director on Tata Sons’ board, being the only one opposing N Chandrasekaran’s reappointment for a third term, Ramachandran said.