After sacking Chairman Cyrus Mistry by Tata Sons on October 24,2016 and appointing two new directors into the board, the evicted Chairman has criticized the board room “replacement” on his letter emailed to tata sons board on October 25th and termed the move as shocking and unparalleled in the corporate history.
Here is full text written by ousted chairman Cyrus Mistry to the Tata Son’s Board:
Date: 25 October 2016 at 22.05: 41
I was shocked beyond words at the happenings at the board meeting of October 24, 2016. Apart from the invalidity and illegality of the business that was conducted, I have to say that the Board of Directors has not covered itself with glory.
To “replace” your Chairman without so much as a word of explanation and without affording him an opportunity of defending himself in a summary manner must be unique in the annals of corporate history. The suddenness of the action, and the lack of explanation has led to all manner of speculation and has done my reputation and the reputation of theTata Group immeasurable harm.
At the outset, I have to say that I have great respect for theTata Group and the thousands of employees who are working hard despite the challenges. I am writing this letter to the Board to emphasise the total lack of corporate governance and to point out the failure on the part of the directors to discharge the fiduciary duty owed to stakeholders of Tata Sonsand of the group companies. All of this does not augur well for the future of the Group. All that is said here is well known to many among you, but I would like to put in one place my journey as Chairman of Tata Sons. It is important to emphasise the enormity of what has transpired in the Group and what corrective action is to be taken. Each of you is already in receipt of and familiar with the Strategy 2025 document that I presented to you, and in which I had articulated our growth strategy for the future.
Pushed into the position of a “lame duck” Chairman, my desire was to create an institutional framework for effective future governance
Prior to my appointment, I was assured that I would be given a free hand. The previous Chairman was to step back and be available for advice and guidance as and when needed. After my appointment, the Articles of Association were modified, changing the rules of engagement between the Trusts, the Board of Tata Sons, the Chairman, and the operating companies. Inappropriate interpretation indeed followed, and as elaborated below, it severely constrained the ability of the group to engineer the necessary turnaround.
I am not sure if the individual board members and the trustees truly appreciated the extent of the problems I had inherited. I cannot blame them, for I myself, as a non-executive director, did not have a clear grasp of the gravity of the issues involved. Without meaning to air a laundry list, let me outline some of the major challenges faced at the time of my entry.
I am not sure if the individual board members and the trustees truly appreciated the extent of the problems I had inherited.
IHCL, beyond flawed international strategy, had acquired the Searock property at a highly inflated price and housed in an off balance sheet structure. In the process of unravelling this legacy,IHCL has had to write down nearly its entire networth over the past three years. This impairs its ability to pay dividends. Tata Capital had a book that required significant clean up on account of bad loans to the infrastructure sector. The loan to Siva was under the strong advice of Executive Trustee Venkatraman, which has turned into a non-performing asset. All of this resulted in Tata Capital having to recognise abnormal size of NPAs.
An even more challenging situation arose in Tata Motors, both on the commercial and passenger vehicles. Before 2013, in order to shore up sales and market share,Tata MotorsFinance extended credit with lax risk assessment. As a result, the NPAs mounted to being in excess of Rs. 4,000 crores. Historically, the company had employed aggressive accounting to capitalize substantial proportion of the product development expenses, creating a future liability. Beyond this, the Nano product development concept called for a car below Rs. 1 lakh, but the costs were always above this. This product has consistently lost money, peaking at Rs. 1,000 crores. As there is no line of sight to profitability for the Nano, any turnaround strategy for the company requires to shut it down. Emotional reasons alone have kept us away from this crucial decision. Another challenge in shutting down Nano is that it would stop the supply of the Nano gliders to an entity that makes electric cars and in which Mr. Tata has a stake.
A recent forensic investigation (in Air Asia) revealed fraudulent transactions of Rs. 22 crores involving non-existent parties in India and Singapore
In the face of the above challenges, I had to take many tough decisions with sensitive care to the group’s reputation as well as containing panic amidst internal and external stakeholders. Despite bad press, impairments were taken to clean the books but substantial exposure remains. Dividends were reduced (e.g. Tata Motors, IHCL) to conserve cash for needed investments in the the teeth of shareholder fury.
Apart from hotels, the group made several exits in the fèrtilizer business, UK steel operations, and of course in smallercompanies such as the logistic company, DIESL. I had to ease out hangers-on who are prone to flaunt their proximity to power. On the more positive side, Kalinganagar, the largest domestic capital investment of the group was completed overcoming significant obstacles that had left the project in doubt previously.
Early in my tenure, our foray into the aviation sector began when Mr Tata ushered me into his office and handed me a report onAir Asia by Bain & Co. He had concluded negotiations to partner with Air Asia and wanted the proposal tabled at the forthcoming Tata Sonsboard meeting. My pushback was hard but futile. However, I was able to extract a promise of no debt to be raised at the level of the JV as well as limiting Tata Sons investment to 30% of the USD 30 million equity. A few months later, I was surprised to be confronted with a similar situation requiring me to execute a fait accompli JV with Singapore Airlines. Without the benefit of time and experience to fully evaluate the proposal, I had to accept that Tata Sons would take a 51% stake in a USD 100 million joint venture. The passion for the airlines sector has led Mr Tata to continue his involvement with the strategy of the two airlines. It is on his advice that the Tata Sons board has increased the capital infusion in the sector at multiple levels of the initial commitment.
I had to ease out hangers-on who are prone to flaunt their proximity to power
Despite all of the above, during my term, the operating cash flows of the group have grown at 31% compounded per annum. TheTata Group valuation from 2013 to 2016 increased by 14.9% per annum in rupee terms as against the BSE Sensex annual increase of 10.4% over the same period. The Tata Sons networth has increased from approximately Rs. 26,000 crores to Rs. 42,000 crores, after considering the impairments. This has significantly strengthened our balance sheet, enhancing our ability to absorb further shocks from restructuring in the companies
To come back to the amendments in the Articles of Association, as feared, the inappropriate implementation created a flux in the decision-making process. I have often presented to the trustees, before and afterTata Sons board meetings. This created alternative power centres without any accountability or formal responsibility. Invalidating the very governance role of 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. These circumstances forced me to circulate a note on corporate governance in order to clarify the distinct roles of Tata Trusts, Tata Sons Board, and the Boards of the operating companies.
If we were to exit this business (the telecom business) via fire sale or shut down, the cost would be USD 4-5 billion
In keeping withTata Group values, to engage employees and have a favourable impact on the communities we operate in, we launched a volunteering programme, challenging group employees to volunteer a million hours in 2015 and the result was volunteering of 1.2 million hours, making it one of the top ten global volunteering programmes.
I hope you do realize the predicament that I found myself in. Being pushed into the position of a “lame duck” Chairman, my desire was to create an institutional framework for effective future governance of the group. I believe I had to be true to myself and the best interests of the organization. While I would be lying if I said I am not disappointed, I have a sense of pride and dignity intact in the efforts I have taken to professionalise and institutionalise, regardless of the outcome of effort, I now witness.
Since the developments at the Board Meeting were purported to have been initiated at the instance of the Trusts, I am copying the Trustees.
(Cyrus P Mistry)
C.C. Trustees of Tata Trusts