Tata vs. Mistry: Shaan* vs. Strategy?

3 11 2016

Tata Sons in their rejoinder to the leaked Cyrus Mistry letter have said ” The tenure of the former Chairman was marked by repeated departures from the culture and ethos of the group”

What is the culture and ethos of the Tata Group that Cyrus Mistry seems to have deviated from ?

Tatas are pioneers in Indian industry. They are founders of the many businesses that are part of the group. Due to their founder status, they consider themselves as owners. Owners, they are not. They are only part owners, sometimes even with minority stakes.

Till the 1960s, when managing agency system was prevalent, Tata Sons with a single digit stake in their companies used to control a big empire. After this system was abolished, Tatas created a complex web of cross holdings, which helped them keep management control. The government which often held majority stakes in these companies through FIs, just played along.

After liberalisation, Ratan Tata realised that he had to increase the stake in many companies in order to keep control. Here, he hit pay dirt with TCS. TCS was a division of Tata Sons till 2004. ( In an internal presentation made to employees, FC Kohli, then DIC of TCS, said that Tata Sons had invested Rs 25 lakhs in TCS in 1968, after which TCS never went to Tata Sons for capital ). The profits of TCS was used to increase the stakes in the Tata Group companies significantly.

Thanks to TCS, Tata group could maintain its “shaan” as the leading business house of India with business interests ranging from salt-to-software. Even today, dividend from TCS is the single biggest source of cash for Tata Sons and the TCS board religiously declares a fairly high dividend quarter after quarter. ( read this article by Jaggi in Swarajya)

Unfortunately, there are large parts of this conglomerate that do not generate adequate profits, some even incur losses. Tata group, overall has poor return on capital employed. This was being questioned and to a small extent even being rectified by Cyrus Mistry. This did not seem to go down well with the Tata Sons board, particularly Ratan Tata.

So the departure from culture and ethos seems to be whether we should continue to portray that we are a large conglomerate with companies in every sector or we run a profitable business with focus in a few areas.

In the first round “Shaan” seems to have won over strategy.

*Shaan is a Hindustani word which does not have an exact English equivalent. Pride comes close.

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