There are multiple perspectives on the issue, based on legal norms, regulations, and historical events, to name a few. However, I will focus on the implications for efficient and effective corporate governance, especially as they relate to family-controlled businesses, and the role of professional managers.
There are many entities that together make up Tata Trusts, and there are many trustees. Following Ratan Tata’s stepping down, a sequence of events led to the entry of Noel Tata and his children into various trusts under the Tata Trusts umbrella. This was followed by an apparent dissent over who should lead Tata Sons. There are, of course, other trustees, and some of whom may not be in sync with Noel Tata’s perspective. Such dissonance among stakeholders is a common occurrence in any organisation, including family-controlled corporations.
The “family”, in this case Tata Trusts, has two nominated directors on the board of the holding company, Tata Sons. The latter is then bound to follow the vote of the majority (i.e, both) of the nominee-directors on key issues. Arguably, this is a rather neat organisational design. That is, limited owner-nominee directors ensure coherent instructions, while binding clauses and veto powers enable control over the holding company. But this design assumes alignment within Tata Trusts. Unfortunately, in this case, the two nominated directors ended up on different sides; the core dissonance, therefore, emanates from Tata Trusts.
Running any corporate entity requires both managing contracts and managing relationships. Contracts cannot capture all eventualities and informal mechanisms and relationships bridge that gap. The latter are idiosyncratic and individual-specific. Therefore, when regime change occurs within family-owned corporations, the new owner and incumbent manager relationship is weak; the next-generation owner tends to replace incumbent managers. This, of course, causes much distress to the managers, but it is an important component of long-term owner and manager relationship.
Ratan Tata needed the full might of J R D Tata and his immense goodwill to eventually control the Tata group. Together they accomplished with great difficulty what typically unfolds far more smoothly in other family businesses. Although I am not conversant with the inner workings of the group, it is obvious why a change of leadership at the Tatas is more difficult than in other groups that depend on professional managers. The Tata ecosystem embraces, perhaps even adopts, managers as its own, much more than other families do.
This has the advantage that professionals steeped in the culture of the conglomerate can help sustain and grow its cultural-commercial foundations. But in doing so, the professional managers are no longer as answerable to the family — they effectively become “family”. Consequently, the group suffers from the same problem that owner-families with many progeny suffer from. Efficiency is compromised because the chain of command is compromised, decision-making becomes blurred and consensus becomes a necessity in such situations.
There is a quirk in this specific situation. J R D Tata enabled Ratan Tata to take over from entrenched managers. Ratan Tata, on the other hand, favoured the professionals who grew under his leadership. Moreover, almost all of the Tata Sons board has been around for about a decade, whereas Noel Tata, who joined the board a couple of years back, is the most recent entrant. The chairman of Tata Trusts is, in effect, the outsider in this equation.
Perhaps because of this, his ascent as the overall head of the Tata group is also being questioned. This, too, is not unusual. In a family regime change, leadership lines often become blurred. This can be resolved in three ways. First, the group can be carved up; second, a compromise solution with divided powers can be found; and third, all players yield to a single entity. While all three are feasible, the problem we must solve is which owner-manager dynamic yields maximum efficiency.
Carving up the group makes sense if the entities are independent and unconnected. But given its current situation, the group will need all its might and more to navigate through the difficult challenges ahead. Air India will continue to bleed for some time; Tata Digital still needs to find its space; and Tata Electronics has taken big bets in emerging technologies. At the same time, Tata Consultancy Services’ core model faces a deep challenge from artificial intelligence, while Tata Motors has much to catch up in the global electric vehicle space.
A compromise solution will be by far the worst from an efficiency standpoint. In the volatile business climate ahead, a clear chain of command is key. The professional manager who eventually leads Tata Sons must be fully empowered with strategic flexibility and tempered by high levels of accountability. Compromise solutions achieve neither.
And, therefore, from an efficient corporate governance perspective, the question is not what, or who, but how. The “what” is well understood: Tata Trusts answers to philanthropic goals, and its investment choices reflect both national pride and commercial objectives. The “who” will be decided by Tata Trusts voting at the annual general meeting on who best represents its perspective. But in the “how” lies the real challenge. The distinction between ownership and executive is critical for accountability. The accountability of the professional manager who heads Tata Sons will best be achieved if this person operates at an arm’s length from Tata Trusts, not fused with it. And the professional manager’s empowerment will work best when he or she enjoys the confidence of the Tata Trusts and whoever is its key representative. Compromise plays no role here.
The writer heads CSEP Research Foundation.
 "tata | illustration: binay sinha")