The recent board room battle between Ratan Tata and Cyrus Mistry is most likely to become a subject matter of study for various disciplines, including the subject of corporate law and governance.

Two of the giant Indian corporate have garnered a lot of unwanted and negative attention in this regard.Though both Tata and Infosys had to deal with a conflict between the board and the founders,the issues surrounding Infosys was somewhat different to that of Tata. For Infosys, Mr. Murthy, the founder of the company, had openly displayed his discontentment over the issues involving higher compensation to executives, acquisition strategy and appointment of independent directors. The whole board along with the management became the target of the founders.

The ouster of the Tata Sons chairman and the tiff over it cover almost every point, from corporate governance to conflict management, role of independent directors, higher levels of transparency and fairness, and succession planning. India has largely borrowed the philosophy of American corporate governance in our new Companies Act. There is a large influence of Sarbanes Oxley (the Sarbanes-Oxley Act of 2002). This is rooted in a very disaggregated shareholding context, with a large number of shareholders. It’s not just promoters. There are conglomerates and conglomerates lead to promoters within promoters, there are cross-holdings. Tata Group, being a promoter-driven conglomerate represents the scenario of a ‘typical’ large-sized, promoter-driven company in India.

Therefore, Unlike US, in India, the presence of a relatively ‘weak’ board is an issue in large promoter-driven conglomerates; and concerns regarding the exploitation of minority shareholders at the hands of majority shareholders loom large. Tata-Mistry tussle as wellthe problems that came to the forefront in the controversy laid bare the realities of substantial concerns relating to the corporate governance regime in India.

The Infosys dilemma:

Corporate governance is how the board of a corporation carries on its work dealing with the values it sets while managing the interests of the shareholders. The founders instead of dealing it by them allow the management team to deal with it.

The severance issue: From where it all started

The issue of corporate governance has gathered spotlight in the past year for all the wrong reasons. It all sprouted out when Infosys acquired a $200-million worth Israeli Automation Company called Panaya in 2015. Murthy has come forward and questioned the accountability and transparency of the unusual severance package shelled out to the former CFO, Rajiv Bansal and an equally mammoth severance package paid to David Kennedy, the company’s general legal counsel. With the quality shareholders (the founders) making their displeasure regarding the functioning of the company, the trust of the shareholders was also seen swaying.

The Powerless Board

The Infosys board was supposed to ensure that the company is functioning on the lines of corporate governance however it failed miserably on several fronts. As a board it failed to provide the requisite safeguard to Sikka, from the harsh criticisms of the corporate’s founders. Initially with the appointment of Ravi Venkatesan, the board tried to take a step in order to appease Murthy by addressing his concerns; however the continuous disenchantment by Murthy over the ever so deteriorating standards of corporate governance eventually forced Sikka to submit his resignation. Its inability to defend a man it had publicly backed has only reflected upon its inabilities.

The board had failed to harmonise the relationship between the founders and Sikka. Further its failure to garner the public trust that had swayed away due to the attacks upon it by the founders do not narrate a good story. With the CEO stepping down and the founders continuously questioning the policy of Corporate governance and the standards being followed, the board could have achieved glory had it been able to clear the air and taken strong steps in this regard. However failing to answer with transparency the concerns raised by Murthy only went ahead and damaged its own self-interest.

The board could have saved itself from blushes by acting properly while engaging with Murthy’s criticism. It had assured the shareholders that it hadn’t found any piece of evidence about questionable actions however its failure to put up the findings of the reports in the public domain or disclosure of its major aspects to the shareholders makes it all the more baffling. Had it been able to deal vigilantly with the issues it would have brought an end to the concerns over Bansal’s severance package and the eviction of Kennedy.

The Post retirement crisis

One of the most baffling aspects that cropped up in this board-founder drama is the actions of the owners. The founders disapproving of the idea and decisions taken by the board poses a very serious question, Do the founders enjoy a right or a have an obligation in who’s furtherance they have acted the way they did? The entire fiasco saw the founders time and again expressing their wants and wishes in the way the company should have run. It poses a question over their intent and what exactly do they want from such affairs. It is quite evident from Murthy’s statements that he doesn’t put in much regards to power and hence doesn’t want a seat back on the table. He just wants a proper corporate governance policy practiced by the company, however the way he and the other founders had acted in furtherance to their object is bemusing.  If they were such well-wishers then instead of jibber jabbing in the public they could have made their dissent known to the board by holding talks with them in the capacity of shareholders or could have reported their ill actions to the governing and regulating bodies.

The founders also have the problem with the way the values they had enshrined is being changed. The apparent expenditure and shift towards a greater technological dependence isn’t something appreciated by the old bloke. The paradigm shift that was initiated by Sikka didn’t go down well with them. They have also questioned Sikka’s commitment of 2021 to the shareholders. Their continuous interference with the company’s affairs even post retirement hampers its autonomy. If they believe that the company is not in the safe hands then instead of displaying their displeasure I public, taking the seat at the table and initiating change could have reaped more fruits.

Identification of Corporate Governance issues in Tata Dispute

A relatively ‘weak’ board is an issue in large promoter-driven conglomerates

The fight between the management and the Chairman of the Tata and Sons flashed across the world when Mr Cyrus Mistry was removed from his office, and Mr Ratan Tata was appointed as the Interim Chairman of the group.Cyrus Mistry stated that, during his tenure as the Chairman, he was not conferred with enough independence to carry out his operations and that the continued interference by the then ‘Emeritus’ Chairperson, Mr. Ratan Tata reduced him to a ‘lame duck’ chairman. The larger issues toward corporate governance are the creation of honourable positions like Chairman, Director emeritus and many other in favour of Promoters. There exist no formal rules and regulations defining the powers, duties, rights, disabilities, privileges, and so on, of people holding such positions. Similarly, it has not been defined that if, similar to a chairperson, an emeritus chairperson/director also owes fiduciary obligations towards the corporation. Where concerns with respect to counteractive action and impact of, and impedance by, promoter and maintaining the segregation of ownership and management in corporations prevail, regulating the involvement of company’s promoters in the company’s managerial affairs in the capacity of honourable positions becomes crucial. It is suggested that in the beginning these regulations can be implemented as guidelines and could be converted into mandatory regulations thereafter, provided they turn out to be effective.

When an independent director (ID) was removed by Tata apparently for presenting an opinion contrary to the views of majority shareholders, the ease with which independent directors can be removed from company’s board came into limelight. It highlighted yet another form of the board’s weakness under Indian corporate set-up. Presently, the removal of IDs requires passing of an ordinary resolution. As also highlighted by the Securities and Exchange Board of India (SEBI), this requirement of ordinary resolution appears low in light of the existence of large shareholdings by promoters or promoter groups in large-sized Indian companies, as well as on account of the unawareness and inactive role of majority of retail investors into the matters of company’s management, including the passing of resolutions for removal of Ids. Retail investors mostly demonstrate interest in obtaining material financial gains on their shareholdings. They thereby play a passive role in company’s management, due to which shareholding percentage of promoters/promoter groups further gets strengthened while counting votes in case of any resolution due to the reduction in the size of the denominator. Therefore, as suggested by SEBI, the process for removal of IDs should become more stringent to strengthen their position. Further, initiatives need to be taken for encouraging the participation of retail investors in company’s management and enhancing their level of awareness regarding corporate matters.

Moreover, the Tata-Mistry debate likewise showed another way in which investors strategize to render the decision adopted by the Board as ineffective while remaining inside the legalities. For example, in the present case, upon the development of the likelihood that Mr. Mistry may not be expelled from the organization’s Board as director due to the possibility of IDs backing him, investors were called upon by Mr. Tata to expel Mr. Mistry as the organization’s director. This was done in light of the fact that Mr. Mistry’s evacuation as a chief would naturally suspend him from being the organization’s director. This kind of obstruction by investors, rendering the Board’s decision ineffective, can’t be controlled by law; rather the arrangement lies in internalising the discipline among investors/promoters in giving a due share of autonomy and forces to the board in the issues of company’s management.

Shareholder Misbalance and Mis-Governance of Trust

In this situation, upon Mr. Tata’s retirement as the chairperson, the organization’s articles of affiliation were amended wherein most of the executives assigned by the Tata Trusts were vested with the specialist of ‘affirmative voting’ in connection to the appointment and expulsion of Tata Sons’ chairman.This concentration of managerial powers in the hands of a couple of directors appointed (or designated) by larger part investors by correcting the organization’s articles can’t essentially be named as illegal, unless these forces are utilized as a part of a oppression and mismanagement  under the Companies Act.

Therefore, this issue of imbalance of power among the board’s individuals can significantly be resolved by promoting the participation of smaller investors in company’s decision-making particularly by method for their participation in organization’s resolutions. This would guarantee that the prerequisite of passing any resolution with special or ordinarymajority under Companies Act. In the case of listed companies, corporate governance literacy also needs to be enhanced among retail investors to enable them to take informed decisions for the company.

The need of the hour is to improve the governance of public trust wherein they are majority shareholders of a company. Mr. Mistry also complained against the mis-governance at the Tata Trusts, which holds 66% of shares in Tata Sons, which in turn is a holding company in the Tata Group. He argued that mis-governance at Tata trusts had put the corporate governance in the Tata Group in jeopardy.  In the current scenario the  ambit of public trust is confined to ‘supervising’ or ‘administrating’ the affairs of public trusts; these laws do not extend to regulating the ‘governance’ of public trusts.The public trusts law should also regulate some governance matters such as need to appoint independent trustees on the board, enhance the board’s diversity, form sub-committees, hold certain minimum number of trustees’ meeting in a year, furnish timely notice for the meetings, etc.

Enhanced and improved levels of administration among publictrusts holding noteworthy share in a corporate world would likewise contribute towards enhancing corporate governance in India.Both the Tata-Mistry and Infosys controversy point to the need for Indian lawmakers to frame the corporate governance laws in India. It is also essential to keep in mind the typical characteristics that India’s corporate world possesses. Given that the SEBI has appointed a committee to review corporate governance norms in India following some recent disputes, one can expect changes in the near future.

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