What Made Ratan Tata Remove Cyrus Mistry As Chairman Of The Tata Sons

Tata Sons, the holding company of India’s largest business group, said on Monday it had decided to replace Cyrus Mistry as chairman, a shock announcement that stunned many.

Ratan Tata, patriarch of the $103-billion salt-to-software conglomerate, will take over as interim chairman for four months while a company-appointed search panel finds Mistry’s replacement. A selection panel has been formed to find a successor in four months. The committee will include Ratan Tata, Ronen Sen, Venu Srinivasan, Amit Chandra.

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Mistry is the son of Pallonji, who controls nearly 18% of the equity in Tata Sons. That makes him the single largest individual shareholder in the group that operates in 150 countries.

The philanthropic trusts — including the larger ones like Sir Dorabji Tata Trust and Sir Ratan Tata Trust — together control about 66% of Tata Sons, the group holding company that was created by the families of the sons of founder Jamsetji Tata, and are still largely under the family’s grip.

The company removed Mr Mistry, almost four years after he became its first chief from outside the Tata family, and brought back Ratan Tata, 78, who has taken interim charge until a successor is appointed.

“The board in collective wisdom and on recommendations of principle shareholders took a decision to change for long-term of interests of Tata Sons and Tata Group,” a Tata Sons spokesperson said.

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What could be the possible reason for Mistry’s sacking ?

There was a fundamental disconnect between Mistry and Tata, particularly with regard to ethos, values, vision and the direction that the group was headed in. Detailed letters were sent to Mistry asking him to spell out his vision, five-year plan, etc, but the responses were vague and non-specific. Things got aggravated as the chairman of Tata Sons and Tata Trusts were not the same individual. The former was not a Tata family member but represented the single largest shareholder while the latter was custodian of a century old legacy.

Detailed letters were sent to Mistry asking him to spell out his vision, five-year plan, etc, but the responses were vague and non-specific.

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Several of Mistry’s decisions, including the disposal of some of Indian Hotels Co’s overseas properties and especially the move to shut the UK steel operations, did not go down well with Tata Trusts. Many were considered Ratan Tata’s legacy that helped the group revenues top $100 billion even if it left the group hamstrung with ballooning debt burden. Mistry’s war on the legacy of the old guard, and the comment about the necessity of ‘tough love’ within the organisation was considered overtly aggressive and unnecessary.

Several of Mistry’s decisions did not go down well with Tata Trusts.

Tata Trusts were of the view that the group under Mistry had not been able to take into account the sensitivity of shareholders as well as the global ecosystem in which the group companies operate. “Tata Steel could have been handled better and blunt decisions could have been avoided,” a person close to the development said. The move to shut the UK steel business had come in for heavy criticism in Britain.

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“Tata was unhappy with the decision to shut down or sell the group’s steel business in Europe,” said a person close to Tata. “He wanted the group to turn around the loss-making business rather than sell it.”

Tata was unhappy with the decision to shut down or sell the group’s steel business in Europe

The earliest signs of strain between Tata and Mistry were evident when he sacked Indian Hotels managing director Raymond Bickson in 2014. Bickson, perceived to be close to Tata , was replaced with Hyatt veteran Rakesh Sarna. Matters worsened when Mistry continued with Sarna despite alleged complaints against him.

“Mistry’s eye for talent is also being questioned. The people he has hired are not inspirational leaders, just individuals,” said a former Tata Motors executive. But the crucial post of the Group CFO remained vacant for almost 3 years after the retirement of Ishaat Hussain.

The people he has hired are not inspirational leaders, just individuals.

The creation of the Group Executive Council (GEC) as Mistry’s main brain trust had upset many in Tata Sons who perceived it as a parallel power centre. Only a handful of its members had actual operational experience of running a business. Most of Mistry’s key advisers, including Madhu Kannan, NS Rajan, Nirmalya Kumar, were also shown the door along with him.

Mistry’s critics point out that he did not relinquish his Irish citizenship though as Tata Sons chairman he should have. Concerns were also voiced about conflict of interest regarding award of contracts to construction companies of the Shapoorji Pallonji Group even after Mistry took over. This, many feel, gave more ammunition to Tata Trusts to strike back.

At a stormy Tata Sons board meeting on Monday, other than Ishaat Hussain and Farida Khambata who abstained, the rest voted for the chairman’s ouster. Mistry himself voted to stay.

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What happens to investors ?

Tata group stocks are in for short-term volatility, when trading resumes on Tuesday. “It is a shocker, because Cyrus had a different way of handling things. He was consolidating the Tata businesses by selling non-crore businesses of the Tata group. He was concentrating on selling low-margin businesses and concentrating on high-margin businesses. Tatas are good as humans, but in business cycle, they are bit lavish,” said AK Prabhakar, who heads IDBI Capital. “They closed their low-margin broking arm. How the market may react, one cannot say. But we may see some knee-jerk reaction. There will be few stocks which will react negatively,” Prabhakar said.

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