Is the Tata Empire Crumbling?

Tapas Piplai

Tata group internal struggle is a typical clash of power and conflict of interest between Tata Trust and holding company Tata Sons during transition and power succession. It is same as it is in case of any other family disputes like that of Ambani, Bajaj, Kirloskar, Modi, Sri Ram group etc.

India's business scenario is primarily dominated by the family businesses.

Interestingly Family businesses even in the US account for 80% of the companies, 50% of the goods and services and contribute to one third of Fortune 500 companies list. Similar is the trend in Asia as well. In India perhaps family driven businesses are more. They are more dominant by their presence in political field too. Political dominance by the industrialists started with G D Birla's close proximity with Gandhiji during pre-independence period. He did play a dominant role in articulating the political decisions of Congress where the capital protection was in question.

In all fairness, these family controlled businesses are more profitable in today's scenario. As per TMTC (TATA) Journal of Management—January 2012, the family businesses are 25% more profitable, shares perform much better in the capital market in terms of Price-to-Earnings (P/E) ratio, ROI is more. No wonder that mutual funds are more keen to invest in the shares and securities of family owned businesses. Yet the split is also more in this business vertical. The board room drama is very frequent.

It is an age-old debate on Entrepreneurship versus core competence and its systemisation. The crisis is mostly manifested at the time of succession between sons or sons and father. The control and power play the major role.

Usually the patriarch of a family after a very heavy hectic life of building the empire takes the refuge as non-executive Chairman on the board of parent company and becomes the head of the trusts. The Chief of Trust that controls the company's equity and memorandum of association, leaves the day to day management of the company to his western educated sons as a part of succession. These sons have no idea of managing businesses in India. They mostly never struggled to set up any business entity so far in India.

Apart from professionalism, the key foundation to run the business in India rests on three pillars—Bureaucracy, Political Parties and Ministry. The distant influencing groups are Taxation, Banking and Journalist groups. The closeness to all these pillars by keeping confidentiality and equidistance are the key factors of the success of earlier generation business doyens. These were the essential part of Relationship Management in India.

On the other hand these new generation business school passed MDs are totally ignorant of this aspect. They indeed have the bookish knowledge based on learning from western world. Therefore most of these new generation business heads spend their time on day to day review which are supposed to be carried out by the professionals down the line within the given Delegation of Power (DOP). The Vision, Growth and Risk analysis hardly get its time in new entrepreneur's meeting schedule so as the direction towards merger acquisition, advanced engineering, technology etc.

In other words, earlier traits such as controlling political, bureaucracy, funding issues do take the back seat. At the same time the operational excellence on long term time horizon such as Risk, Growth, Technology do not figure in the agenda of new entrepreneurs. Most of the companies become rudderless. After some time the so-called running good concerns start default, warrant the interference of earlier entrepreneurs. The conflict starts.

The succession and board room drama on control of the group companies are also another aspect of the family controlled business between father and sons, between the sons, and the predecessor and successor.

It would be interesting to address the crisis in Tata group, another family controlled group under the veil of human face and professionalism, against this backdrop. JRD was a business personality, completely delegated the powers and authority down below the line with frequent review of the performance . He was a symbol of Parental Leadership. But Mr R N Tata was more in transactional leadership domain without leaving his power and authority.

Ratan N Tata (RNT) was never inclined to leave the power and authority of Tata empire which he built to a new height in terms of turnover. He became victim of his own strategy of earlier fixing the retirement age of Chairmen. It was than articulated by him for sidetracking the JRD’s favourite people from the helm of group companies like Tata Steel, Tata Motors, Tata Tea, East India Hotels etc. They were no doubt domain experts who built the empire over a period successfully to an enviable position under the guidance of JRD Tata. They were the real architects of these companies. They virtually refused to accept dictums from RNT who had no exposure to manage such big industries at that time.

Before leaving the chair Mr Tata made several activities to portray himself as an iconic and successful leader of the industry. Even his sycophants openly declared that they did not require any other celebrity to open their Trade Fair pavilion in Delhi when RNT was there! Unlike JRD, Munjal or G D Birla he articulated his way nicely to a Celebrity status.

Instead of protecting the socalled family laurels property he made a series of acquisition globally to make the Tata Group a really big in turnover. But he gave no importance to weed out the bottlenecks of these age old companies in the wake of global competition or to transform these companies to a modern and efficient company. He did not take any step to elevate these companies to take a leading role in the forthcoming globalised era. He virtually added no values to these companies to compete with new generation companies or new challenges.

Unfortunately all acquisitions over a time were failure stories except Taitley and JLR ventures. For acquisition he drew a big loan from everywhere leveraging the Tata name, Tata assets and his own political clout. In turn he made all companies virtually sick because of big debt burden. Servicing the debt at present level of earning (if at all any!) became next to impossible. Market preference already drifted away from most of Tata products. Air Asia JV with Singapore Airlines was another wrong move to satisfy the personal likings for aviation industry of RNT. It was not backed by any market survey or analysis. Nano was a good idea. But failed because of authoritarian leadership of the project by Mr Tata himself. During the implementation stage of the project everybody in Tata Motors including the supplier fraternity wanted to satisfy RNT's commitment of 'Rs One Lac Car' and compromised on Quality, Sourcing and Design issues everywhere. Product Definition and validation processes were absent in the development matrix, in the name of Chairman. Corus, global steel giant, buy-out was another wrong move as he never studied the capability of Chinese Steel maker and cost management of China. Tata Docomo project was another blunder and vitiated the India-Japan trade ties. There were immense internal reservations but to air discontents in front of Chairman was not allowed.

Today if market does not pick up drastically in favour of Tata Products (indeed a questionable statement) the entire group will become sick except TCS and Tata Tea. JLR project may withstand the market pressure if it is separated from rest of Tata laurels!

The group distinctly shifted from earlier professional processes and commitments and aligned to build up the Personality Cult culture ! And RNT successfully built it, no doubt.

This was the background when Cyrus Mistry entered into the shoes of the then Chairman RNT. He was that time the Managing Director of Shapoorji Pallonji group who were eventually the largest, yet a dormant share holder of Tata Sons from ages.

Cyrus was brought from an non-allied activity sectors at the top of a one billion USD group without any power to steer. After some initial years he really wanted to get involved in the turn-around activity. He was trying to reduce the debt created by his predecessor RNT and rationalise the value of the company in long run. Incidentally he was about to sell off some such projects which RNT personally brought in as it was not bringing any additional revenue. The liability of interest had been increasing.  Move was earlier taken by RNT to acquire some globally renowned entities to show the entire world about his performance.

Interestingly decision wise Tata group is managed by Tata Sons where Cyrus was the Chairman. In turn Tata Sons equity again is controlled by Sir Dorabji and Sir Ratan Tata (Sons of Jamsedji Tata) trust (Tata Trust) where RNT is the chairman alongwith his sycophants. Hence the real power lies with Tata Trust. While RNT left Tata Sons he even ensured that Tata Sons Chairman can be removed by the major stake holder in Tata Sons board through their nominee directors. In view of being the majority stake holders Tata Trust's number of nominee directors are more on the board and the Chairman can be removed any time by simple majority vote. Today the major stakeholder is none other than Tata Trust!

It was heard that, though RNT did not attend any board meeting ever since he stepped down from Tata Sons but every decision of the board must seek his approval before it was passed. Even it was heard that Tata Sons Board meeting were several times interrupted by RNT’s nominees to seek his approval in between meetings before conveying their decision!

The purpose of any trust is to focus on philanthropy and non-profit research from the income of the investment. But in case of Tata Sons, Tata Trust is more involved in board room drama from background under the veil of protecting family Jewels! Family Jewels became more important than the people who have been toiling in these companies.

It's a classic case study of how top line increase spree without functional process stabilisation may lead to crisis situation. On the fragile base if one constructs a big house it is bound to collapse. Another point is the conflict between entrepreneurial vs professional processes without real delegation of authority. Entrepreneurial processes are fine during initial time of incubation and to some extent during growing up stage but not afterwards. Promoter should remain as visionary and leave the rest to professional team without exerting his own ideas continuously.

Now there are few alternatives—to pay back the debts from profit—perhaps not possible in one year or in a few years—as the debt is too high. Or sell off some assets and pay the debt from the sale proceeds and come out from huge interest liability. Or to restructure the loan leveraging with low cost loan like LIBOR or other overseas loan etc. Finally if sale takes a trajectory valuation route than future incomes, from excess profit one can as well pay back.

Chances are remote as overall growth of global economy is not that encouraging so are for the Tata products in India. Moreover China price threat is looming large on the horizon. Instead of going in a steady growth path RNT wanted to grow faster in sales by acquiring big companies and by taking loan.

He himself actually kept his family jewels like Tata Steel, Tata Motors, Tata Chemicals at stake. Cyrus on the other hand was trying to guard the same in spite of being an outsider to Tata clan.

It is interesting to watch the future developments.

[tapaspiplai@gmail.com]

Frontier
Vol. 49, No.31, Feb 5 - 11, 2017