Is the Tata crisis another Satyam moment?

One is wondering what to make of the Tata crisis. First one was thinking whether to compare it to Lehman moment or Satyam moment. But I guess let it be Tata moment only given the huge prestige and aura of the group.

Cyrus Mistry’s letter is so damning (and shocking) that it exposes a lot what is wrong in Indian board rooms. All this happening at one of the most respected groups makes wonders of the standards in other places.

Prof TT Rammohan of IIMA says once again role of eminent individuals as board members comes under a scanner:

One particular item in Mistry’s letter stands out and it had me rubbing my eyes in disbelief. Let me reproduce that portion:

The trust nominated directors, who I would assume would use their own independent judgment and discharge their fiduciary duties, were reduced to mere postmen. As an example, once, the trust directors (Nitin Nohria and Vijay Singh) had to leave a Tata Sons board meeting in progress for almost an hour, keeping the rest of the board waiting, in order to obtain instructions from Mr Tata. Such a work pattern has also created the added risk of contravening insider trading regulations and exposed the Trust, apart from exposing the trustees to potential tax liabilities.

This is incredibleif the staements are indeed correct. The Dean of Harvard Business School, we are told, excused himself from the board meeting and kept the board waiting for nearly an hour in order to take instructions from Mr Tata, who was not even a member of the Board! Is this what they teach by way of corporate governance at HBS? Is this how independent directors are expected to function- go out and take instructions from the leading shareholder even while a board meeting is in progress? The possible violation of insider trading regulations, to which Mr Mistry refers, makes the disclosure even more lethal. SEBI and the stock exchanges, one hopes, will look into this item closely. If proved right, Prof Nitin Nohria’s behaviour might well attract strictures from the regulator and the exchanges. Since some of the listed Tata companies are shareholders in Tata Sons, institutional investors would be within their rights to raise this issue.

One wonders what HBS would make of this matter. This is not the first time that an HBS prof’s behaviour has raised questions in the Indian context. In the Satyam Computers scandal, Prof Krishna Palepu, another HBS professor, drew attention as he was found to have earned a tidy amount by way of consulting fee from the company with which he was associated as independent director. As reported in the media, the court dealing with matter issued an order asking him to disgorge around Rs 2.7 crore in excess remuneration paid to him.

Many questions arise on governance and board room matters:

The question arises: did Mr Mistry raise these concerns at Tata Sons board meetings and were these concerns duly minuted? Did he express his disapproval of the two independent directors holding up proceedings in order to seek Mr Tata’s input? What did the other independent directors have to say on various matters? Were their comments, if any, recorded and minuted? It would be appropriate for SEBI to go through the minutes of the board meetings and take stock. Perhaps SEBI needs to issue guidelines on the minuting of board meetings, an area that needs considerable improvement.

Two thoughts arise. One, if this is the state of affairs at what has been India’s most respected corporate brand, what can we expect at other boards?What sort of discussion happens at those places? How well are minority shareholder rights protected?

Two, what do we make of the role and functioning of independent directors. As readers of this blog would know, I have been extremely sceptical about the functioning of boards and independent directors. Most boards are rubber-stamp boards that duly accord their approval to whatever the CEO or Chairman wants done. There’s very little dissent, very little questioning. This state of affairs cannot change as long as so-called ‘independent’ directors are selected by the CEO or the promoter. We need a wide variety of stakeholders to appoint independent directors- institutional investors, banks, minority shareholders, employees and others. In my book, RETHINC, which came out last year, I devote a whole chapter to corporate governance and the functioning of boards.

Alas, there’s no sign of genuine reform in the board room.

All of a sudden we are looking at lack of talent to head firms in India. This was not even a case of an outsider but pretty much an insider. The media on the appointment in 2011 touted this as an insider who will bring fresh external perspective. But all this has come bunkum.

Mistry letter could go into history as one of the most damning ever written. It is yet to be seen whether it will push into some real changes at the top..

2 Responses to “Is the Tata crisis another Satyam moment?”

  1. MS Says:

    Tata moment indeed !! Sycophancy everywhere – from HBS dean to Dalal Street analysts. Let the crackers explode and rockets fly, Happy Diwali to Amol and Mostly Economics readers!!

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