One of Asiaâ€™s most important firms has descended into chaos. Its patriarch, Ratan Tata, is largely to blame
November 21, 2016: When the management of a giant company engages in a civil war, everyone gets hurt. That is the sorry situation at Tata Group. It is Indiaâ€™s most important firm, with $100bn of sales, tens of millions of customers and products that range from salt to software. Tata is also one of the emerging worldâ€™s largest multinationals, spanning technology services, steel in Europe and carmaking in China. And until a few months ago it was a rare beacon of good governance in Asia.
That reputation has now been shredded owing to a brutal fight for control between Ratan Tata, the groupâ€™s 78-year-old patriarch, and Cyrus Mistry, his successor. The battle is bad for Tata, rotten for its outside investors who have tens of billions of dollars at risk, and damaging to India. Mr Tata needs to get a grip before his legacy and the company are destroyed.
Origins of the Mistry
The seeds of the crisis were sown in 2012 when Mr Tata, who has no children, stood down after decades at the helm and handed over to Mr Mistry, whose family has long-standing links to the Tatas and is also a big investor in the group.
Since then Mr Mistry has been grappling with two problems. One is that Tata Group is worryingly flabby. During Mr Tataâ€™s reign it went on an expansion binge at home and abroad. Some projects, such as the acquisition of JLR, a British carmaker, have been roaring successes. But vast chunks of the group are not making enough money: 60% of its capital employed makes a return of less than 10%. Dealing with this requires closing, selling or restructuring loss-making businesses, including its European steel arm and its telecoms unit. Mr Mistry is keenly aware of what is wrong but has not dealt with it.
That may have something to do with Tataâ€™s other headache: its Byzantine structure. There are a dozen big operating companies, some of which are listed. These are controlled by a private holding company which owns stakes in them of 20-75%. That holding company is in turn controlled by murky and secretive charitable trusts set up in 1919 and 1932. Until recently they were widely viewed as benign and passive, but they now appear to be under Mr Tataâ€™s sway.
Mr Mistry may have thought he had a free hand. Far from it. Mr Tata was breathing down his neck from the start. On October 24th Mr Tata, through the trusts, orchestrated the firing of Mr Mistry from the holding company. But Mr Mistry has the support of some of the operating companies, so the supervision of this giant conglomerate is split. That is farcical and dangerous. The value of Tataâ€™s listed firms has dropped by $17bn since September. As accusations fly over dodgy accounting and unethical deals, the odds are rising of an investigation by regulators. And if Tata drifts, its numerous weak and loss-making firms could eventually pull the entire group under.
Mr Tata created the mess and it is up to him to resolve it, in four steps. First, he needs to assert outright control. Ideally he would make peace with Mr Mistry, but if this is not possible the younger man will need to be ejected from the operating companies. Mr Mistry has been treated shabbily but he no longer has the authority, nor the legal power, to run the group.
Second, Mr Tata needs a plan to deal with Tataâ€™s zombie businesses. When he was in power he shirked this task. Third, he needs to reform the groupâ€™s structure. He should list Tataâ€™s main holding company, so that it is subject to outside scrutiny. The trusts at the top of the pyramid must then gradually sell down their stake in the holding company to below 50% and diversify their assets. The result would be a streamlined group that is accountable to investors, instead of a rickety legal pyramid designed before India won independence in 1947.
Last, while Mr Tata says that his new stint at the firm will be brief, he must also put a time limit of, say, 12 months on his role at the trusts. After that he must renounce all control. Not long ago he was among the most revered figures in the past half century of Indian public life. Now he is flirting with disgrace. He has a year to put things right, for his own sakeâ€”and Indiaâ€™s.