I teach a corporate finance class, a class that I describe as big-picture (since it covers every aspect of business), applied and universal in its focus. I use six firms, ranging the spectrum from large to small, developed (Disney & Deutsche Bank) to emerging (Vale & Baidu) and public to private (a privately owned bookstore in New York), as lab experiments to illustrate both corporate finance first principles and financial models/theory. One of my illustrative companies is Tata Motors, an India-based auto company, to illustrate the special challenges associated with managing and investing family group companies, where the conflict between what’s good for the family group and for the company can play out in every aspect of corporate finance. I picked a Tata group company for a simple reason; among Indian family groups, it is among the most highly regarded, and my intent was to show that even in the best run family group companies the potential for conflict lies just under the surface and events over the last few weeks has added weight to that argument.
The Tata Group, the Enlightened Family Group?
It is not hyperbole to say that the Tata family and Indian business have been for much of the last two centuries. The first Tata company came into being in 1868 and it was built up incrementally and often through difficult times to become the behemoth that it is today. Along the way, it spread itself across many businesses, creating what would have been a classic conglomerate, if it had stayed as one company. In typical family group style, though, it chose to pursue each business with a separate entity and by 2016, the group included more than 100 companies, with 29 of these being publicly traded, stand-alone entities. The picture below captures the company’s holdings and control structure in 2016:
Family Group Companies
Note how the companies are all bound together by Tata Sons, which, in turn, is controlled by the Tata trusts, holding close to 66%, with power lying with the Tata family. As a side note, the largest non-Tata stockholder is the Shapoorji Pallonji Group, which control 18.4% of Tata Sons. While each publicly traded company in the group is an independent entity, with a CEO and a board of directors (with a fiduciary responsibility to protect the shareholders of that company), the independence is illusory. Not only does Tata Sons own a significant piece of each company, the companies all own shares in each other (cross holdings effectively controlled by the family group) and directors representing family group interests serve on each board. Note that though is much is made of the conglomerate nature of the Tata Group, the group derives the bulk of its value (>70%) from TCS, a technology company that derives most of its revenues from outside India. It is a testimonial to the stability and continuity in the Tata Group that it has had only six men at its helm over its 150-year history:
|Jamsetji Tata||1868-1904||Founded the Tata Group as a trading company in 1868.|
|Dorab Tata||1904-1932||Instrumental in creating the Tata Trust, the family philathropy|
|Nowroji Saklatvala||1932-1938||Related to the Tatas and started profit-sharing scheme.|
|JRD Tata||1939-1991||Legendary and longest-serving CEO and a pioneer in civil aviation.|
|Ratan Tata||1991-2012||Presided over global expansion of the group, acquiring global companies to do so.|
|Cyrus Mistry||2012-2016||Related to Tatas and son of one of the Tata group’s largest stockholders.|
JRD Tata who presided over the company for a large portion of the last century was legendary, not just for his business acumen but his social consciousness and was viewed as India’s most upstanding corporate citizen. In fact, Cyrus Mistry who became chairman of Tata Sons in 2012, was more insider than outsider, backed by Shapoorji Pallonji Group, as a scion of the family (behind that group) and also related by marriage to the Tata family.
This history of stability is perhaps why investors and onlookers were shocked by the events of the last few weeks. On October 24, 2016, the board of directors of Tata Sons fired Cyrus Mistry as the Chairman of Tata Sons for non-performance, a failure to deliver on promises. Mr. Mistry did not go quietly into the night and fought back, arguing that not only was the removal not in keeping with Tata traditions of decorum and fairness, but that his removal was effectively a coup by old-time Tata hands who were threatened by his attempt to clean up mistakes made by prior regime (headed by Ratan Tata). In particular, he argued that many of the high-profile acquisitions/investments that Mr. Tata had made, including those of Corus Steel (by Tata Steel) and forays into the airline business (Vistara and AirAsia) were weighing the company down and that it was his attempts to extract Tata companies from these messes that had provoked the backlash. Defenders of the removal argued that Mr. Mistry had been removed for just cause and that his numbers-driven (and presumably short-term) decisions were not in keeping with the Tata culture of building businesses for the long term.
The opacity that surrounds the Tata companies with their incestuous corporate governance structures (with directors sitting on multiple Tata companies) and complex holding structures makes it difficult to decipher the truth, but the two sides seems to be in surprising agreement on one point, that the bulk of the value of the Tata Group derives from two investments, TCS and Jaguar Land Rover. In fact, the area of disagreement is about why rest of the group was in in trouble and what should have been done about them. The Mistry camp argues that the troubles at the rest of the group can be traced back to ill-advised and expensive acquisitions (Corus, Tetley) and investments (Nano) made during the Tata tenure and the Tata camp suggests that Mr. Mistry knew about those problems when he was hired and that he did little to fix them during the four years of his tenure. Whatever the truth, the company has a mess on its hands. While Mr. Mistry has been forced out at Tata Sons, he remains on the boards of the other publicly-traded Tata companies and was chairman of the board at TCS until a couple of days ago. That sets the stage for a war of attrition, which cannot be good news for any Tata company stockholder or for either side in this dispute, since they both have substantial stakes in the group.
The more general question raised by this episode is a troubling one. If a corporate governance dispute of this magnitude can occur at a family group that many (at least on the outside) viewed as one of the least conflicted in India, and you and I, as stockholders in Tata companies, can do nothing but watch helplessly from the outside, what shred of hope can we have of being protected at other family groups that are much more open about putting their interests over that of stockholders? I remember being asked after I had completed a valuation of Tata Motors a few years ago whether I would buy its stock and shocking my audience by saying that I would never buy a Tata company for my portfolio. When pushed for