Prelude:
So, on Oct 24th 2016, Cyrus Mistry was replaced as the chairman of Tata Sons, and then a war has begun on many fronts.
In News media, from Cyrus himself stating almost on the next day that Tata Sons/Tata Group faces a write-down of 1.18 trillion INR due to five unprofitable businesses he inherited, To the board stating that this information was never disclosed by Cyrus while he was in office, and from the actual termination notice, to Cyrus's email to the board, to celebrities and politicians taking sides and releasing statements about the entire episode, there is a plenty of variety to be seen.
In the social media, depending on the side they have chosen, mindless trolls have been forwarding posts to an extent of portraying Ratan Tata as a hypocrite, and Cyrus Mistry as a traitor.
With my MBA background, I could think of some more dimensions to the entire episode though, and instead of accepting and forwarding and spamming the stuff that is doing rounds on social media, I am going to post some aspects of my perspective in here, for my readers to judge the situation better.
During the course of this post, some concepts and citations may give a feel that I am digressing, but trust me, it will all add up eventually.
Firm, Capitalism, Shareholder Value and CEO pays:
By classical definition in economics, a Firm is an enterprise or corporation/company that sells goods or services in order to maximize profits. More recently though, say in last 4 decades or so, the notion of 'maximizing profits' has completely been translated to 'maximizing shareholder value'.
In fact, this notion of maximizing shareholder value has become the central theme of all management practices and lessons, that are undertaken in various corporations.
Studies and statistics have revealed that over time, the increase in shareholder value of successful firms has a direct correlation with increase of the CEO compensation. Below are couple of the many graphs that you will find on various websites supporting this correlation.
Furthermore, studies have also revealed that a majority of this "huge" CEO pay is actually in form of stocks and stock options. I found the below graph on internet towards this breakdown.
[Sorry for not citing anything, but most of this is now public information anyways]
This trend has in fact given rise to many debates around CEO pays and whether it is appropriate to make them shareholders of the firm to boost their commitment towards maximizing shareholder value; the 1% elite and rich club who are in fact majority shareholders of most of the world's big corporations and the income disparity in the world; and the shareholder versus stakeholder interest as central theme of a business, etc.
More on the stakeholder interest later in this post, but, the point is, the way major corporations are run, and the way management is groomed and institutionalized and compensated in today's world is by making them believe that best interest of the firm is in increasing the shareholder value.
Tata Sons and Cyrus Mistry:
So, four years ago when Cyrus Mistry, who has done his M.Sc. in management from London Business School, took over as the chairman of the Tata group, the group did not have to pay him extravagantly and offer him stock options - He and his family already owns around 18% of the Tata Sons shares, next only to the charitable trusts that own 66% of the shares.
(while it doesn't say CEO in there, being the chairman of Tata sons, which is the holding company for Tata group, does give executive decision capabilities to the Tata sons chairman, hence the analogy to CEOs of the world).
In other words, he had the right incentives, to 'maximize shareholder value' for the firm that was Tata Sons.
While the media coverage is now full with how he did good with few companies and how he could not revive some of them, the fact of the matter is, he did increase the market capitalization of the firm by almost 75%, which is more than Nifty and all other peers of the firm such as Reliance Industries.
Found a graph on this one as well, on the internet.
So, with increasing market cap, and with many other restructuring etc, that Cyrus was doing, I do not have any doubt that he was doing the best that any current day executive could have done, to "maximize shareholder value" and "market cap".
There is a reason why I put those two in quotes in my previous statement.
When the largest shareholder of the firm is the person trying to increase shareholder value, does it fit well within the corporate governance framework and the whole debate on separation of ownership and management?
I would say, why not - after all many family run businesses, and start-ups do work in this way. Of course, Tata Sons is more than a family run business - but then, a major stakeholder exercising management control, is not a strange phenomenon either - So I am going to give the discussion on Corporate Governance a pass, even though readers may choose to ponder on the topic for a while :-)
And yes, I am not getting into all those dramatic media outburst about how Cyrus was not talking to the board lately, and how there was a disconnect between him and the board, etc. Those are the problems which he and the others could have easily overcome, even by reading some Dilbert strips.
That brings us to my second quotation - market cap.
Was an increase in market cap the only thing that Tata Sons is looking for?
Tata Sons, that is 66% percent owned by Trusts, and has a heritage since 1868 to nurture - legends like Jamsetji Tata and JRD Tata to look up to?
For that matter, Ratan Tata is one of the living legends himself.
Let me bring us out of the emotional appeals, in to the real world.
"By 2025, Tata will be amongst the 25 most admired corporate and employer brands globally, with a market capitalisation comparable to the 25 most valuable companies in the world.
"
This is what the vision statement of Tata Sons looks like, and it has three keywords: most admired Corporate, most admired employer, comparable market cap, to be achieved by 2025.
While all the restructuring that Cyrus was doing, and all the decisions he was taking, were good enough to grow the market cap of the firm, and increase shareholder value; were they good enough to make it one of the 25 most admired corporations, and one of the 25 most admired employers, by 2025?
I will let the readers of this post go through the news and articles about measures adopted by Cyrus in last 4 years, and figure out answer to this question by themselves.
By the way that brings us back to the topic of "Stakeholder interest".
The notion of Stakeholder Interest:
So, who all are the stakeholders of a firm, or to focus on the ongoing discussion, lets say, of Tata Sons?
Tata Group: Tata Sons is a holding company for the Tata group of companies, which comprises of its Cash cows like TCS and Jaguar Land Rover, as well as those like Tata Steel and Tata Chemicals who are not doing very well.
Tata Group Employees: I remember when I was young, a local newspaper, I think Sakaal, ran a comic strip one day - where a government employee was complaining that he should have gotten himself into Telco [Tata Motors now], as the employees there enjoy so much more perks and leisure than the government servants. From those days, to the modern day friendly neighbors working in TCS and Tata technologies and Star Bazaar, this is a large group of people we are talking about. One of 25 most admired employer globally by 2025 - remember?
Tata Group Share Holders: 66% to the Trusts, 18% to the Mistry family, less than 1% each to existing Tata family members, to name a few stakeholders.
Ratan Tata: Well, for a person who has everything, (and when I say that I mean, a business empire that produces salt to steel to software, and coffee to cars) and who has inherited legacy of Jamshetji and JRD Tata, what could be the stake involved in the firm, when he may be the last person with surname Tata to chair it?
a. He may have a chance to beat Robert Woodruff by controlling the firm at a even greater age than Woodruff [just kidding];
b. He would like to create and leave behind a legacy of his own, a narration, that will last for and will be cited even after a century, like his predecessors.
Tata Group Consumers: I had a chance to once visit the Britannia corporate office in Mumbai as part of the IE India trek - there I learnt that the mission statement for Britannia is, to have at least one of its SKUs consumed by every household in India, every day.
While I was thinking of it, I thought, is there any firm currently operating in India, which actually is close to this mission statement?
And the answer I gave myself was Tata - Tea, Coffee, Car, TCS passport service, Steel - I am sure each one of us is using at least one Tata product in our daily life - and so, we are also equal stakeholders to this firm.
Government of India: It's not only about taxes - when a company like Tata motors or TCS sets shop in town, the entire town flourishes due to supplementary industry that these giant plants and their operations create. No wonder, Ratan Tata personally called our prime minister, to inform him of the decision about Cyrus Mistry.
Anyways, enough stakeholders listed already.
Point is, when we talk about a firm maximizing profits, this same capitalistic notion can be broadened from mere 'Shareholder interest' to 'Stakeholder interest', and only then a firm can sustain in the long term, not just for few decades, but for centuries. Only then can the year-on-year profits and cash flows convert into long term gains.
I would like to believe, given the facts that Tata group has in fact survived and flourished for more than a century so far, and considering the talks about benefits that the Tata group employees have been receiving all these years, and the in general prosperity that Tata group companies bring to the locality they are operating in, that there has got to be a certain element of stakeholder interest that is looked after, in all Tata group decisions, during all these years. So, was the same philosophy continued by its last chairman Cyrus Mistry?
While there is a flood of articles listing various KPIs that Cyrus met and did not meet, there is no scorecard of Stakeholder interest that is being discussed. Despite this, I believe that one of the major drivers for replacing Cyrus was that he has scored low on the overall stakeholder interest. The set of news which talk about 'cultural clashes' may be a hint in this direction.
Of course, in absence of any objective measure or framework to evaluate the growth in stakeholder interest, I can only speculate on this part.
But, on a parting note, and with all the background that this post provides, I would now like to toss the closing question for all of the readers to answer - do you think that the move by board of Tata sons, "to replace Cyrus Mistry" is a win for its stakeholders, considering the long term interests of all the stakeholders?
So, on Oct 24th 2016, Cyrus Mistry was replaced as the chairman of Tata Sons, and then a war has begun on many fronts.
In News media, from Cyrus himself stating almost on the next day that Tata Sons/Tata Group faces a write-down of 1.18 trillion INR due to five unprofitable businesses he inherited, To the board stating that this information was never disclosed by Cyrus while he was in office, and from the actual termination notice, to Cyrus's email to the board, to celebrities and politicians taking sides and releasing statements about the entire episode, there is a plenty of variety to be seen.
In the social media, depending on the side they have chosen, mindless trolls have been forwarding posts to an extent of portraying Ratan Tata as a hypocrite, and Cyrus Mistry as a traitor.
With my MBA background, I could think of some more dimensions to the entire episode though, and instead of accepting and forwarding and spamming the stuff that is doing rounds on social media, I am going to post some aspects of my perspective in here, for my readers to judge the situation better.
During the course of this post, some concepts and citations may give a feel that I am digressing, but trust me, it will all add up eventually.
Firm, Capitalism, Shareholder Value and CEO pays:
By classical definition in economics, a Firm is an enterprise or corporation/company that sells goods or services in order to maximize profits. More recently though, say in last 4 decades or so, the notion of 'maximizing profits' has completely been translated to 'maximizing shareholder value'.
In fact, this notion of maximizing shareholder value has become the central theme of all management practices and lessons, that are undertaken in various corporations.
Studies and statistics have revealed that over time, the increase in shareholder value of successful firms has a direct correlation with increase of the CEO compensation. Below are couple of the many graphs that you will find on various websites supporting this correlation.
Furthermore, studies have also revealed that a majority of this "huge" CEO pay is actually in form of stocks and stock options. I found the below graph on internet towards this breakdown.
[Sorry for not citing anything, but most of this is now public information anyways]
This trend has in fact given rise to many debates around CEO pays and whether it is appropriate to make them shareholders of the firm to boost their commitment towards maximizing shareholder value; the 1% elite and rich club who are in fact majority shareholders of most of the world's big corporations and the income disparity in the world; and the shareholder versus stakeholder interest as central theme of a business, etc.
More on the stakeholder interest later in this post, but, the point is, the way major corporations are run, and the way management is groomed and institutionalized and compensated in today's world is by making them believe that best interest of the firm is in increasing the shareholder value.
Tata Sons and Cyrus Mistry:
So, four years ago when Cyrus Mistry, who has done his M.Sc. in management from London Business School, took over as the chairman of the Tata group, the group did not have to pay him extravagantly and offer him stock options - He and his family already owns around 18% of the Tata Sons shares, next only to the charitable trusts that own 66% of the shares.
(while it doesn't say CEO in there, being the chairman of Tata sons, which is the holding company for Tata group, does give executive decision capabilities to the Tata sons chairman, hence the analogy to CEOs of the world).
In other words, he had the right incentives, to 'maximize shareholder value' for the firm that was Tata Sons.
While the media coverage is now full with how he did good with few companies and how he could not revive some of them, the fact of the matter is, he did increase the market capitalization of the firm by almost 75%, which is more than Nifty and all other peers of the firm such as Reliance Industries.
Found a graph on this one as well, on the internet.
So, with increasing market cap, and with many other restructuring etc, that Cyrus was doing, I do not have any doubt that he was doing the best that any current day executive could have done, to "maximize shareholder value" and "market cap".
There is a reason why I put those two in quotes in my previous statement.
When the largest shareholder of the firm is the person trying to increase shareholder value, does it fit well within the corporate governance framework and the whole debate on separation of ownership and management?
I would say, why not - after all many family run businesses, and start-ups do work in this way. Of course, Tata Sons is more than a family run business - but then, a major stakeholder exercising management control, is not a strange phenomenon either - So I am going to give the discussion on Corporate Governance a pass, even though readers may choose to ponder on the topic for a while :-)
And yes, I am not getting into all those dramatic media outburst about how Cyrus was not talking to the board lately, and how there was a disconnect between him and the board, etc. Those are the problems which he and the others could have easily overcome, even by reading some Dilbert strips.
That brings us to my second quotation - market cap.
Was an increase in market cap the only thing that Tata Sons is looking for?
Tata Sons, that is 66% percent owned by Trusts, and has a heritage since 1868 to nurture - legends like Jamsetji Tata and JRD Tata to look up to?
For that matter, Ratan Tata is one of the living legends himself.
Let me bring us out of the emotional appeals, in to the real world.
"By 2025, Tata will be amongst the 25 most admired corporate and employer brands globally, with a market capitalisation comparable to the 25 most valuable companies in the world.
"
This is what the vision statement of Tata Sons looks like, and it has three keywords: most admired Corporate, most admired employer, comparable market cap, to be achieved by 2025.
While all the restructuring that Cyrus was doing, and all the decisions he was taking, were good enough to grow the market cap of the firm, and increase shareholder value; were they good enough to make it one of the 25 most admired corporations, and one of the 25 most admired employers, by 2025?
I will let the readers of this post go through the news and articles about measures adopted by Cyrus in last 4 years, and figure out answer to this question by themselves.
By the way that brings us back to the topic of "Stakeholder interest".
The notion of Stakeholder Interest:
So, who all are the stakeholders of a firm, or to focus on the ongoing discussion, lets say, of Tata Sons?
Tata Group: Tata Sons is a holding company for the Tata group of companies, which comprises of its Cash cows like TCS and Jaguar Land Rover, as well as those like Tata Steel and Tata Chemicals who are not doing very well.
Tata Group Employees: I remember when I was young, a local newspaper, I think Sakaal, ran a comic strip one day - where a government employee was complaining that he should have gotten himself into Telco [Tata Motors now], as the employees there enjoy so much more perks and leisure than the government servants. From those days, to the modern day friendly neighbors working in TCS and Tata technologies and Star Bazaar, this is a large group of people we are talking about. One of 25 most admired employer globally by 2025 - remember?
Tata Group Share Holders: 66% to the Trusts, 18% to the Mistry family, less than 1% each to existing Tata family members, to name a few stakeholders.
Ratan Tata: Well, for a person who has everything, (and when I say that I mean, a business empire that produces salt to steel to software, and coffee to cars) and who has inherited legacy of Jamshetji and JRD Tata, what could be the stake involved in the firm, when he may be the last person with surname Tata to chair it?
a. He may have a chance to beat Robert Woodruff by controlling the firm at a even greater age than Woodruff [just kidding];
b. He would like to create and leave behind a legacy of his own, a narration, that will last for and will be cited even after a century, like his predecessors.
Tata Group Consumers: I had a chance to once visit the Britannia corporate office in Mumbai as part of the IE India trek - there I learnt that the mission statement for Britannia is, to have at least one of its SKUs consumed by every household in India, every day.
While I was thinking of it, I thought, is there any firm currently operating in India, which actually is close to this mission statement?
And the answer I gave myself was Tata - Tea, Coffee, Car, TCS passport service, Steel - I am sure each one of us is using at least one Tata product in our daily life - and so, we are also equal stakeholders to this firm.
Government of India: It's not only about taxes - when a company like Tata motors or TCS sets shop in town, the entire town flourishes due to supplementary industry that these giant plants and their operations create. No wonder, Ratan Tata personally called our prime minister, to inform him of the decision about Cyrus Mistry.
Anyways, enough stakeholders listed already.
Point is, when we talk about a firm maximizing profits, this same capitalistic notion can be broadened from mere 'Shareholder interest' to 'Stakeholder interest', and only then a firm can sustain in the long term, not just for few decades, but for centuries. Only then can the year-on-year profits and cash flows convert into long term gains.
I would like to believe, given the facts that Tata group has in fact survived and flourished for more than a century so far, and considering the talks about benefits that the Tata group employees have been receiving all these years, and the in general prosperity that Tata group companies bring to the locality they are operating in, that there has got to be a certain element of stakeholder interest that is looked after, in all Tata group decisions, during all these years. So, was the same philosophy continued by its last chairman Cyrus Mistry?
While there is a flood of articles listing various KPIs that Cyrus met and did not meet, there is no scorecard of Stakeholder interest that is being discussed. Despite this, I believe that one of the major drivers for replacing Cyrus was that he has scored low on the overall stakeholder interest. The set of news which talk about 'cultural clashes' may be a hint in this direction.
Of course, in absence of any objective measure or framework to evaluate the growth in stakeholder interest, I can only speculate on this part.
But, on a parting note, and with all the background that this post provides, I would now like to toss the closing question for all of the readers to answer - do you think that the move by board of Tata sons, "to replace Cyrus Mistry" is a win for its stakeholders, considering the long term interests of all the stakeholders?
