Shareholders vs board: Is opposing Tata Sons true sign of board independence?

SES questions role of Indian Hotels IDs who have held long tenure and were part of decisions criticised by Mistry

Amid reports of stormy board meets in Tata group firms, proxy advisory firm Stakeholders' Empowerment Services (SES) has criticised the conflicting roles of some independent directors of Indian Hotels, the first to defy the promoter shareholder Tata Sons, and has asked them to explain their position more clearly.

In a report titled "Tata-Mistry: Shareholders vs board, battle for supremacy", SES has discussed the various corporate governance issues that have come up following the ouster of former Tata Sons chairman Cyrus Mistry on October 24. While a confidential letter by Mistry leaked listed several legacy issues in various Tata group firms, Indian Hotels (IHCL) board was the first to stand by Mistry in its November 4 board meet. The support of six independent directors (IDs) Deepak Parekh, Keki Dadiseth, Nadir Godrej, Ireena Vittal, Vibha Paul Rishi and Gautam Banerjee came as a shot in the arm for the Mistry camp.

"Amongst many issues raised by Mistry, issues at IHCL are very prominent and serious. Boards have collective responsibility so these IDs along with Mistry are equally responsible for mis-governance as well. However, SES is of the view that a least three IDs have placed them(selves) in (an) inexplicable position," SES report, a draft of which was reviewed by Business Standard said.

In his letter, Mistry attributed all the problems to decisions taken before his assuming the chairman's position in 2012, which he described as legacy hotspot

Referring to the long tenures of Parekh, Dadiseth and Godrej, SES said they were part of legacy and hotspots and their stand now was confusing stakeholders. " Dadiseth and Parekh have been independent director since year 2000 and Mr Nadir Godrej has been director since year 2008. What is more Cyrus Mistry's brother, Shapoor has been director since 2001. Surely stakeholders are confused and asking questions why these directors had kept mum for all these years and allowed the problems persist," SES said.

The proxy firm wanted to know why they were supporting Mistry when all of them are collectively responsible for affairs of IHCL from year 2000 onwards, in case points raised by Mistry on IHCL are correct.

Another conflicting situation for Dadiseth, was that he was also a trustee of Sir Ratan Tata Trust (SRTT). SRTT is one of the two principal Tata Trusts which control Tata Sons; it also owns IHCL shares. "It seems like Keki Dadi Seth has taken two different stands, one where he supports Mistry, other where he was also involved in decision making process for replacing Mistry as a Trustee of SRTT. Unless they come out and state the reason for their diverse views, doubts would remain," SES added.

SES asserted that just the opposition of the dominant shareholder was not the test of independence of the IDs, though optically it was a better position to take.

According to discussion in the report, in the present context, the question that came to mind was whether Mistry was appointed on board by IDs on its own identification as the best person to lead or on recommendation of dominant shareholder. While Mistry was not on the board of these companies in ex-officio position, however his appointment without any doubt was because his position as chairperson of Tata Sons board. "Did any ID at that time oppose the move? Now is it a case that the IDs have developed affiliation with Mistry hence supporting him (if that be the case it will not amount to being independent) or have come to the conclusion that he is best or have a feeling that he has been wronged."

SES was of the view that IDs felt that Mistry had been wronged. "If they know for sure he has been wronged it must be told to shareholders. The key issue that must decide their conduct is stakeholders' interest. Somewhere, in the anxiety to project and prove the independent mind, IDs have forgotten about stakeholders' interest. Once again we have a situation where form has won over substance."

Since the issues raised affects millions of shareholders, there should not be any hush-ups in the form of 'amicable settlement,' SES felt. "Their logic is do not wash dirty linen in public and cause value loss. SES is of the view that whatever may be the dirty linen, let it come out so that there is no risk of value erosion in future. Value systems cannot be strengthened when the foundation is based on doubts," the report said.

READ OUR FULL COVERAGE OF THE TATA-MISTRY BOARDROOM BATTLE