This is neither a spat among shareholder groups for control, nor a summary sacking of a chief executive officer by a promoter. We have seen those movies before. This is almost the first time that a professional manager-CEO, with the board on his side and non-shareholder government institutions weighing in, has sought to marginalise a 66 per cent-owning promoter in decision choices that impact not just the direction of the business (though we are not explicitly hearing from either side about strategic fault lines), but also the promoter’s shareholding.
While CEOs pushing back publicly and openly fighting shareholders is common in bastions of capitalism like the United States, with widely distributed shareholding and boards playing a greater fiduciary role, in India such battles are rare, especially if it is a promoter shareholder. Indian promoters hold the hallowed place of a company’s birth parents with special rights and responsibilities — some enshrined in law, others in culture.
ITC and Larsen & Toubro (L&T) are two unforgettable examples in India of CEO-shareholder battles. In the case of ITC, the battle was against promoter BAT’s (British American Tobacco’s) move to gain control of the company and stop diversification, while in the case of L&T, it was against a dominant shareholder group, with the CEO fighting to retain management control. In both cases, the government backed the CEO, but by weighing in through its 30 to 40 per cent shareholding via financial institutions it controlled, keeping within the legitimate norm of capitalism: Jiski lathi, uski bhains (whoever has the stick owns the buffalo).
What makes the present Tata Sons case different is that government-controlled entities do not own large chunks of shares, and the duelling ground is not an annual general meeting or extraordinary general meeting. That a CEO with no shareholding backing, along with board members who do not represent chunks of shareholding, can challenge a promoter with a 66 per cent holding and pressure it to dilute its stake, and not have sway over decisions is a first-time challenge to power structures — which have stood the test of time, tradition, convention, and culture, rightly or wrongly. It brings a fresh round of calibration, especially by promoters, of their terms of endearment and engagement with professional CEOs, not to mention boards. More so, if their shareholding is well below 51 per cent.
The relationship between professional managers and promoters in India has always had a degree of tension. The differences that typically end in the CEO quitting could be on several dimensions —differences in direction, risk appetite and prudence, business ambition, remuneration (less so of late as CEO salaries and stock options have zoomed upwards) and often over different perceptions of where the power to make what kind of decisions rests — the birth parent or the foster parent. Human resources consultants frequently counsel boards and CEOs that once the chemistry with the promoter has gone sour, there is no salvaging the relationship.
The separation of management from ownership is not common in India yet, though nascent examples are emerging. Big stock market influencers welcome owner presence in management because they feel a reassuring common focus on increasing shareholder value. Many employees also prefer a promoter at the helm, seeing this as offering more predictability and benevolence than the CEO or the board of the day. Even in a company like Infosys, set up by professionals, the “founders” (as they preferred to be called) took turns in running the company in accordance with their pre-agreed plan. The board went along with the frequent changes at the top, presumably because these were the promoters who had built an amazing company and it seemed only fair that they each had their turn.
Given the promoter-friendly, promoter-respectful and promoter-on-top ethos of corporate governance that has existed and continues to exist in India, this departure from the norm against none other than the venerated, iconic Tata promoter group with its track record of trusteeship and larger good over personal gain has rocked the comfort boat all around.
The ripples it will cause are yet to become clear — will promoters be nervous seeing such a coup by the professional hire? How will they respond? Will they pick boards like in the old days, based on loyalty and narrow subject-matter expertise? Especially as the law of the land and the market regulator push more power and accountability in the hands of independent directors? Will boards be now placed under more pressure from external directives on which way to vote, getting trapped between the rock and the hard place of the promoter and the proverbial hand of God? Will CEOs have less freedom to operate and more fetters? And does this add to the bad rap that India has been getting of late as a safe, stable place to invest in for the long term? Probably yes to all.
Since one big pillar of the argument is the national and systemic importance of Tata Sons, its board perhaps needs to be more transparent on the rationale for its many volte-faces.
The writer is a business advisor in the area of customer-based business strategy
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