IiAS seeks structural changes in Tata group

The current combative conversation between Tata Sons and Cyrus Mistry is a distraction from the core issue, proxy advisory firm feels

Proxy advisory firm Institutional Investor Advisory Services (IiAS) has suggested some structural changes in the ownership and management of three key arms of the $100-billion Tata Group — the trusts, the holding company and the operating companies.

Claiming that the current combat between Tata Sons and its ousted chairman Cyrus Mistry presented an opportunity to get the structure right, IiAS said the group should make the most of this.

IiAS believed the current back-and-forth episode between Tata Sons and Mistry, with independent directors of Indian Hotels and Tata Chemicals in the fray, was reactionary — and unlikely to provide a long-term solution. The Tata Group needed to focus on making its complicated holding and governance structure work, it said.

 

In its third advisory issued since the crisis broke out three weeks ago, IiAS recommended that the group appoint separate chief executives for its philanthropic and business arms and suggested that it should explore the possibility of the trusts investing in fixed income securities to ensure a more stable and regular return on their investments. It also wanted Tata Sons, the holding firm or even the trusts, the ultimate owners, to exercise better control over the operating firms by directly appointing directors.

“The Tata Group needs to address possible areas of conflict and clearly set the terms of engagement between the three tiers of the group. They need to put in place an operating structure that outlives individuals. There can be many solutions. We put forward one of our own,” the firm said in a note titled “Tata Group: Structural Fixes Necessary” on Saturday.

IiAS, floated by ace dealmaker Anil Singhvi and former Fitch India chief Amit Tandon, has received equity funding from the Tata Group.

“To align the interests of the Tata Trusts and Tata Sons, the Chairperson of the Tata Trusts and Tata Sons must be the same individual. In the past when this has been so, this has worked smoothly. It needs to revert back to this structure with some minor fixes. The Tata Trusts and Tata Sons should in future be run by independent CEOs. The Chairperson should be the custodian of the Tata brand,” the note said.

According to the proposal, the Tata Sons CEO would monitor the performance of companies, establish dividend policy and will be responsible for capital allocation between companies. Additionally, the Tata Sons CEO would ensure adherence to the brand identity, and exploit group synergies by providing common services. The CEO will have the flexibility to rebalance portfolio companies, within reason given the Tata brand is associated with these. Like in corporate boards, the Tata Sons CEO will be answerable to the board and the chairperson. To see that costs and the bureaucracy at Tata Sons doesn’t balloon — a recent charge — it should be desirable to cap costs as a fixed percentage of income.

To ensure that the operating companies adhere to the culture and ethos of the Tata Group, IiAS believes Tata Sons will need to exercise influence over operating companies. For this, IiAS recommended that Tata Sons and may be even the trusts nominate directors to the board of operating companies. To strike a balance between the philanthropic agendas of the Tata Group against the need for investor returns, the operating companies must have independent chairpersons and professional CEOs (the Tata companies already have professional CEOs). As a controlling shareholder, the Tata Sons CEO will have material say in evaluating performance.

Just like with Tata Sons, the Tata Trusts CEO will be responsible for the Trusts’ programmes and philanthropy. The mandate should be broadened to include philanthropic investments — and this could well shape the future of the group. To serve even more meaningfully in the communities they operate in, the trust should examine the feasibility of monetising its holdings by selling down some stakes in Tata Sons, and park the money in fixed income securities, to reduce its dependence on dividends. Here, too, it will be desirable to cap operating expenses.

Well-defined roles and an unambiguous chain of command should ensure that all participants are clear about their roles and responsibilities. The proposed structure was likely to be beneficial for all stakeholders — the stakeholders of listed companies as well as the Tata Trusts, it was felt.

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