In the fallout from the very public fight for control of the Tata Group which ended with the ousting of its chair Cyrus Mistry in October last year, Dr Christine Chow, Associate Director, Hermes EOS, Hermes Investment Management, assesses some of the lessons that can be learned for all parties involved in the governance of family businesses.

On 24 October 2016, the board of Tata Sons, the holding company of the Tata Group, dismissed its chair Cyrus Mistry who was due to finish his four-year contract in March 2017. This turned out to be just the tip of the iceberg and the beginning of an unfolding situation that is defining the future of corporate governance in India.

The background

Founded in 1868 by Jamshedji Tata, the Tata Group is a multinational conglomerate and holding company with 30 listed companies and over 660,000 staff globally. At the end of 2016, the combined market capitalisation of Tata businesses stood at US$115 billion, equal to 7.4% of the Bombay Stock Exchange.

However, the Tata Group is not just a commercially oriented business conglomerate. It is controlled by Tata Sons, a holding company where two family-owned Tata trusts, headed by Ratan Tata, hold a combined stake of 66%. Tata Sons is the owner of the Tata name and the Tata trademarks. The trusts have a social mission to provide grants and partner with organisations that engage in innovative and sustainable initiatives and with the potential to make a positive impact on society.

The Tata companies do not have an impact lock – a mechanism designed to ensure that some intentional impact of activities, for example the social or environmental goals of an organisation, are secured – in their articles of association. It is clear, however, that the spirit of the trust is reflected in the expectations of the social responsibilities of the companies. Article 4A of Tata Motors Ltd, for example, states that ‘The company shall have among its objectives the promotion and growth of the national economy through increased productivity, effective utilisation of material and manpower resources and continued application of modern scientific and managerial techniques in keeping with the national aspirations; and the company, shall be mindful of its social and moral responsibilities to consumers, employees, shareholders, society and the local community’.

Mistry was the first chair in almost 80 years to come from outside the Tata family. He was approved by Ratan Tata, who mentored Mistry for the role of chair. The selection committee at the time was composed of a number of close confidantes of Ratan Tata. Mistry, however, was by no means independent – his family is the single, biggest non-family shareholder of Tata Sons, owning an 18.4% equity stake. Moreover, his family ties with the Tatas began with his grandfather and both families are of Parsi origin. The Parsi community originated from Persia/Iran and is a closely-knit social community that has formed a number of influential business groups in India. In 1936, the Shapoorji Pallonji Mistry family bought a 12.5% stake in Tata Sons from the Parsi family, the Dinshaws, who acted as adviser and lender of last resort for the Tatas. FE Dinshaw lent 20 million Indian rupees to bail out Tata Steel and Tata Hydro in the 1920s, and this debt was subsequently turned into an equity stake.

The battle for control

In December 2016, the conflict between the two parties escalated. Mistry filed a petition with a 300-page report to the National Company Law Tribunal seeking protection of the rights of minority shareholders. The petition was dismissed in January 2017. Tata Sons, on the other hand, issued a legal notice demanding Mistry to return all confidential documents.

Following Mistry’s dismissal, announced in October 2016, both sides have
disclosed further information detailing their disagreements and these are summarised below.

  1. Tata Sons believe that the integrity of the Tata Group is based on being a responsible business group where suitable synergies are harnessed across the group. Mistry believes that, although the group is promoter-controlled, the extent of influence from the family should be limited. ‘Promoter’ is a common term used in India, referring to persons or a number of persons or founders of a business that often form part of the management of a company and often have overall control of the company. Mistry has shared on his website ( that the family should not, for example, influence strategic directions and business decisions. Disagreements appeared to be related to the degree of freedom that each listed company should have in deciding the use of discretionary funds, such as the amount of political donations to be made and where these should go.
  2. According to reports from the Times of India, a reputable Indian newspaper, Tata Sons believe that Mistry misled the chair selection committee in 2011, accusing him of failing to retract from existing business commitments and making statements about management changes at Tata that did not materialise. Mistry claims that the Tata family influences boards of each listed company, which is why he has taken the view that they have become dysfunctional and business decisions were made to the detriment of minority shareholder rights.
  3. According to the Economic Times, another reputable Indian newspaper, Tata Sons claim that dividend income (other than from Tata Consultancy Services) declined continuously and staff costs more than doubled during Mistry’s tenure as chair of Tata Sons. The restructuring of Tata Sons was also seen by the business community as a test of Mistry’s abilities. Jaguar Land Rover (JLR) and Tata Consultancy Services (TCS) have been successful but others such as hotels and chemicals have suffered. Mistry’s decision to sell Tata Steel UK was deemed controversial as it was reported that Ratan Tata did not want to sell it. Mistry specifically highlighted the comment of Lord SK Bhattacharyya, a close confidante of Ratan Tata, who advised on the purchase of Corus (British Steel) and JLR regarding the group’s commitment to UK steel operations.
  4. Both Tata Sons and Mistry claim to represent the spirit of the founding father of the Tata Group. On Mistry’s website, (, a quote from JL Tata is used to represent the spirit of the group, which is why Mistry believes his actions were legitimate.

It is worth noting that the chairman selection process may not have changed but the selection committee members have changed significantly. In 2011, when Mistry was selected to take over from Ratan Tata, the selection committee consisted of five members, all of them should be considered as insiders or connected persons, including four Parsi members: Ratan Tata, Lord SK Bhattacharyya (a close confidante of Mr Tata), Mistry (who stepped down when his name was proposed as successor), Noshir A Soonawala (a director of Tata Sons) and Shirin Bharuch (a lawyer for the Tata Group). In 2016, the selection process remained the same but the selection committee members changed, consisting of more independent members: Ratan Tata, Venu Srinivasan (an Indian industrialist and non-executive director of Tata Sons), Amit Chandra (from Bain Capital), Ronen Sen (a former diplomat) and Lord SK Bhattacharyya. Investors have mixed views about the appointment of Natarajan Chandrasekaran (Chandra), the current CEO of TCS, as the Tata Group’s next chair, but are generally pleased with the appointment as Chandra is a veteran employee within the Tata Group with proven success in running TCS. Board composition changes in the listed Tata companies may be subject to more scrutiny from investors going forward, who would like to see the appointment of independent chairs and fewer cross-boarding directorships as a sign of commitment to governance improvement from Tata Sons.

The lessons to be learned

So what have we learned so far and can we apply some lessons to other family-controlled businesses in India and in the region? Here are some thoughts.

Related-party transactions and cross-directorships

In Asia, business ties in multi-generations from a specific ethnic community group are common. Close ties may mean that when things get tough, the fraternity order is able to provide support which otherwise would not have been available from other business partners and financial institutions. However, there are increased risks of related-party transactions, especially when close personal relationships become the cornerstone of business transactions. In conglomerates, directors often serve on multiple boards at different business entities. The common arguments for such cross-directorships include insights and efficiency – interpreted as the ability of the directors to understand the overall picture of the connected business group. However, inter-group transactions often give rise to controversies – do the directors owe their allegiance to the family or to all shareholders? How would the executives handle conflicts of interest involving family-related matters? How would the directors prove that they have handled the rights of minority shareholders at different business entities fairly? The situation is often complicated, and cross-directorships become especially controversial in such cases. For Tata, Mistry appears to hold different views from Ratan Tata on a range of issues, from strategic partnerships between business entities within the Tata Group to how political donations should be determined at each business entity.

Separation of powers

Founders do not live forever and thus their direct influence stops at some point, after which it is up to their descendants and/or disciples to interpret their spirit. Founders of companies should make preparations early. They need to put in place the right governance structure so that the desired business culture continues and the legacy of the business reflects the value and mission of the business.

In relation to what constitutes the right governance structure, I would like to draw references from the US constitution where the executive, legislative and judicial branches of the government are kept distinct and locked in a mutually reinforcing system of checks and balances in order to prevent the abuse of power. Corporate governance ideally mirrors this public governance model. The executive role is played of course by the company management. The company’s board can be compared to the legislative branch of the US constitution. Chairpersons of a business should be genuinely independent, chosen by an expert committee with a diversified set of skills and background. Independent directors on boards should provide executives with the policies and frameworks in which they operate, covering strategic guidance, material environmental, social and governance matters, risk management, legal and audit functions. The role played by a company’s shareholders, especially institutional shareholders, can be compared to the judicial branch of the US constitution, for handling specific cases and controversies. A transparent and functioning investment market should serve well as a judge.

Final thoughts

When relationships turn sour and conflicts arise, as in the case of Tata, the involved parties might destroy much value of the business and harm the interests of minority shareholders who have little or no control over how confidential information is used and disclosed. We recommend that when such a situation arises, investors should engage with the concerned parties, in particular the board and controlling family, to limit unilateral leaks of information to the media, and to focus on structural governance changes that should improve transparency, strengthen accountability and reduce the risks of conflicts of interest in future.

Dr Christine Chow
Associate Director, Hermes EOS, Hermes Investment Management

The views and opinions contained herein are those of the author and may not necessarily represent views expressed or reflected in other Hermes communications, strategies or products.

SIDEBAR: The key governance issues at stake

Succession and legacy planning – a good corporate governance structure can help to ensure a smooth transition of power from the original founders of a business to independent professional managers and directors.

Separation of powers – the corporate governance structure will ideally ensure a system of checks and balances designed to prevent the abuse of power by the parties involved.

The role of investors – investors, particularly institutional investors, can play a role where conflict arises between the parties involved in the governance of an organisation. They can engage with the concerned parties to limit unilateral leaks of information to the media, and to focus on structural governance changes to improve transparency, strengthen accountability and reduce the risks of conflicts of interest in future.

Cross-directorships – in large, family-owned conglomerates, directors often serve on multiple boards at different business entities within the group. This practice becomes controversial where the ability of directors to handle the rights of minority shareholders fairly comes into question.

Related-party transactions – close personal ties between those at the top of the governance structure and in the wider network of the organisation can lead to increased related-party transaction risks for minority shareholders. Directors need to ensure decisions are made in the interest of all shareholders.