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Asian Family Conglomerates

Asian family conglomerates: The Tata group gets back on track following leadership change

The first chairman from outside the family keeps core ideals at the forefront

MUMBAI Renovation work has begun on Bombay House, the headquarters of the Tata group. Located in the heart of Mumbai, India's commercial hub, the landmark structure went up in 1924 and had not received any substantial refurbishments since.

Inside the four-story building, stray dogs roam the halls with the blessing of Chairman Emeritus Ratan Tata, while outside, guards stand watch. The renovation, for a reported 800 million rupees ($12.3 million), is expected to be completed in eight months. While the work will leave the building's colonial-era facade unchanged, the upgrades to its interior will bring the headquarters of India's largest conglomerate firmly into the tech-savvy 21st century.

The refurbishment -- which comes amid a slew of major operational and governance changes at the group -- symbolizes the salt-to-software company's determination to regain its stride after a series of stumbles.

In January, the Tata group announced Natarajan Chandrasekaran's promotion to chairman. In the group's nearly 150-year history, Chandrasekaran is the third person without the Tata name to hold that title -- and he is the first from outside the extended Tata family.

Chandrasekaran's predecessor was Cyrus Mistry, the heir to the Shapoorji Pallonji Group, another family business, which owns 18.4% of Tata Sons, the Tata group's holding company. Mistry also is a blood relative of the wife of Ratan Tata's half-brother, Noel Tata.

Bombay House, Tata Group headquarters in Mumbai, is undergoing its first major renovation since 1924. (Photo by Subhash Sharma)

It was Ratan Tata who reached out to Mistry as he approached retirement in 2012. The chairman emeritus, who will turn 80 in December, was well aware that the dominance of the Tata name was coming to an end.

He told the Times of London in 2011 that Noel Tata did not have the proper experience for the top job. Demands from board members were growing for an insider to lead the group, and the best candidate was someone who was part of the family and had experience: Mistry. It was believed that Mistry could take on the role since he had served on the Tata Sons board for six years.

"The board always had a view that it is better to have an insider as chairman of the Tata group, because it is huge and complex," said a person who spent several years in Tata-owned companies and sat on the Tata Sons board.

Mistry's nomination as chairman was eventually approved by Tata Trusts, a network of philanthropic organizations run by retired Tata executives and the Tata family. Tata Trusts wields massive power over decisions at Tata Sons, in which it has a 66% stake. It is the organization to which generations of Tata family members have bequeathed their wealth, following in the footsteps of group founder Jamsetji Nusserwanji Tata.

In August at Bombay House, Tata's directors brainstormed on the fate of the $103 billion group's failing telecommunications unit, Tata Teleservices and its affiliated company. After several rounds of deliberations, a decision was reached to sell the consumer mobile businesses, much to the satisfaction of Chandrasekaran.

Chandrasekaran won the approval of Tata Sons' board to go ahead with the sale of the telecom businesses -- which were laden with debt of "around 310 billion rupees" and "incurring cash losses on a monthly basis" -- to Bharti Airtel.

Traditionally, around one-third of Tata Sons board members have been Tata Trusts nominees, who hold veto power on strategic decisions. While the number of board members is the same under Chandrasekaran, at 11, more company directors have been brought in.

Tata Trusts currently has three nominees on the board, a trio Chandrasekaran must be mindful of as he steers the company. In addition to the four executive directors, including Chandrasekaran, the board has four independent directors.

The Mistry family is now fighting for a place on the board, citing its large shareholding.

The family petitioned the National Company Law Tribunal in November to be granted a seat on the board, with its counsel arguing that despite holding an 18.4% stake in Tata Sons, it is not privy to conglomerate business proceedings.

The hearings are expected to be completed in three months.

"[Board] meetings are held twice a quarter," said the source familiar with the matter. "Those plans that require investments from Tata Sons are generally considered apart from long-term plans." A two-thirds majority is required to approve plans.

CORE IDEALS For nearly 80 years since the chairmanship of Jehangir Ratanji Dadabhoy Tata, known as JRD Tata, began in 1938, the family has strived to include capable executives in the group's decision-making process and on the operational front, instead of depending solely on kin. But the influence of Tata Trusts, the largest shareholder, has remained strong.

Born in 1839, Jamsetji Nusserwanji Tata was the only son of Nusserwanji Tata, the scion of a Gujarat-based family of Zoroastrian priests that had fled Persia several generations earlier. He was inspired to start a textile business after a visit to England convinced him that, according to the group, "there was tremendous scope for Indian companies to make a dent in the prevailing British dominance of the textile industry." The Mistry family is also Zoroastrian.

Traditional Zoroastrian values of working for the greater good of the people and the idea of harmony with the community were the core of Jamsetji Tata's business ideals.

Jamsetji Tata's philanthropic principles were rooted in the belief that for India to climb out of poverty, its finest minds would have to be harnessed. He established the JN Tata Endowment in 1892 to support Indian students, and it is still active today.

Tata Trusts Chairman Ratan Tata speaks in an event in Tokyo, Nov. 7. (Photo by Maho Obata)

His sons Dorabji Tata and Ratanji Tata continued the tradition while expanding the family business. As successor to his father as chairman, Dorabji Tata established Tata Steel and Tata Power, and also set up the country's first planned township in Jamshedpur, eastern India, a move that earned the group the approval of the community. But the group's greatest period of expansion came under JRD Tata, the group's fourth chairman, who served in the position for more than half a century.

On the cusp of India's economic liberalization in 1991, Ratan Tata, the nephew of JRD Tata, took over as chairman, casting his gaze toward foreign shores and leading some of the biggest outbound acquisitions India had ever seen.

The deals that caught the business world's attention were Tata Steel's acquisition of European peer Corus Group in 2007 and Tata Motors' acquisition of Jaguar Land Rover, the British auto company, the following year.

By the end of Ratan Tata's tenure in 2012, the group had annual revenues of $100 billion, compared with $6 billion in the financial year ended March 1996.

But Ratan Tata ultimately stumbled with his move to bring in Mistry, who had less experience on the operational front than on the board, as his successor. The group experienced a string of problems during the four years under Mistry, with group revenue peaking in 2015.

Though he was hailed at the time of his elevation by Ratan Tata, Mistry was later removed by the board on the grounds that his tenure was "marked by repeated departures from the culture and ethos of the group," according to a statement in October 2016 by the group.

So far, Chandrasekaran has succeeded, according to Ratan Tata, who also serves as the head of Tata Trusts and was interim group chairman in the four months before Chandrasekaran took over in February.

"In the last six to eight months, the leadership has taken actions that were not taken in the previous four years, although the problems were the same," Tata told the Nikkei Asian Review in a recent interview in Tokyo. "The new leadership is much more action-oriented in dealing with the problems."

TAKING ACTION One of the new chairman's key decisions in his first year involved resolving a dispute between the Tata group and Japanese mobile carrier NTT Docomo over the latter's exit from their joint venture in India.

The group has also managed to sell its consumer telecom operations to larger rival Bharti Airtel and arrange a joint venture between Tata Steel Europe -- a troubled unit of U.K.-based Tata Steel -- and Germany's Thyssenkrupp.

Ratan Tata hinted in the interview that a major task at hand now is a decision on the restructuring of the group's automobile business, Tata Motors. "What [Chandrasekaran] has in mind, I don't know, but when he [proposes a plan] it will be subject to discussion and consensus," he said.

Tata Motors is one of the biggest companies in the Tata group, but it has a weak spot. Its passenger car business has been a drag on profits, and if not for Jaguar Land Rover, it would be in the red.

Jaguar Land Rover, which had a loss of 402.4 million pounds ($534 million) in the financial year ending March 2009, posted a profit of 1.272 billion pounds in the year ending March 2017. During the same period, Tata Motors' domestic business swung from a profit of 10.01 billion rupees to a loss of 24.7 billion rupees. Jaguar Land Rover now accounts for nearly 90% of Tata Motors' operating profit.

In a board presentation a few months before his ouster, Mistry had proposed a 381.6 billion rupee investment plan to turn around certain businesses. It was met with disapproval, said the person familiar with the matter, because the plan "was work-in-progress and merely an outline."

Mistry had earmarked the bulk of the proposed investment for the telecom businesses, and he suggested that Tata Sons set aside 20.3 billion rupees to increase its stake in Tata Motors. Neither went down well with the board.

Chandrasekaran, meanwhile, has offered more "concrete plans," said the person, and he has the support of Tata Trusts. "Having the confidence of the largest shareholder is important for the chairman for important decisions."

After a four-year detour, Ratan Tata chose a leader who was able to deliver. While Chandrasekaran does not have the DNA of the Tatas, he is an insider, a man who worked his way up over 30 years and turned Tata Consultancy Services into India's most valuable company by market capitalization.

BACK ON TRACK "Chandrasekaran has an advantage because he has been with the group for a long time," the source said. "He has also worked closely with Ratan Tata, which makes their relationship less formal. The communication flow is better."

The holding company and other shareholders expect Chandrasekaran to replicate the success of Tata Consultancy in most of the roughly 100 companies affiliated with the group. But most of all, he will be expected to continue applying the value system that has made him, in the eyes of the Tata family, deserving of the post.

Ratan Tata justifies Tata Trusts' role in company matters by saying it is the same that any business owner would take. He also views Tata Trusts as the keeper of the group's long history of ethics and philanthropy.

Ensuring that the values of the Tata group are intact is "the role the Trusts has to play," he said in the interview.

"They have to be concerned with [issues such as] are they getting their income flows for disbursal into the philanthropic areas," he said. "So to some extent, the Trusts has to be involved in the judgment, because eventually they exercise their holding to order change in specific companies or to demand something specific."

Chandrasekaran has to ensure growth is achieved ethically and adheres to "the Tata way," which to Ratan Tata means transparency and good governance.

Tata's group revenue has been volatile since the fiscal year ending March 2014, rising from $103.27 billion to $108.78 billion the following year, but falling to $100 billion in the latest financial year ending March 2017. Debts have piled up, and there is an urgent need to untangle complex cross-shareholding structures.

Meanwhile, Tata Sons has tightened its ownership by becoming a private limited company, a move seen as preventing the Mistry family from selling its stake to a rival or outsider.

Some observers, though, say the move is simply a way to preserve the original nature of Tata Sons and avoid the governance hassles of a listed company.

"It aims to preserve the character of the company as private company, which it has for almost a century," said proxy advisory company Stakeholders Empowerment Services.

One reason the move was seen as necessary is that the most prominent member of the family, Ratan Tata, is likely in the final stretch of his long career.

As for the future, he said later generations of the Tata family will only be eligible for the top post if they prove themselves -- simply having the Tata name won't be enough. He also spoke of his vision for Tata to ultimately be seen as a truly "Indian business conglomerate that is at home in the world."

"One hundred years from now, I expect the Tatas to be much bigger, of course, than [they are] now," he has said.

"More importantly, I hope the group comes to be regarded as being the best in India -- best in the manner in which we operate, best in the products we deliver and best in our value system and ethics."

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