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Asian Family Conglomerates

Tata Group regains footing under new 'outside' leader after 150-year journey

After 4-year detour, India's largest conglomerate finds growth and stability with first chairman without family ties

MUMBAI -- In this dynamic commercial hub of India, an ambitious refurbishing project of the Bombay House, the headquarters of conglomerate Tata Group, began earlier this month.

The work on the interiors of the landmark 1924 building is intended to make it in sync with the technology-savvy 21st century.

Inside the four-story structure, stray dogs roam the hallways with the blessing of Chairman Emeritus Ratan Tata, while guards keep watch over the colonial-era building, whose facade will remain unchanged. The renovation, for a reported 800 million rupees ($12.3 million), is expected to be completed in eight months.

The refurbishing underscores the slew of important decisions by the group on both its operations and governance, symbolizing the salt-to-software company's intention to regain momentum after a series of stumbles.

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

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.

It was Ratan Tata himself who reached out to Mistry as he approached retirement in 2012. The chairman emeritus, who will turn 80 next month, 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," according to 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 the Tata Sons, with its 66% stake. It is the organization where generations of Tata family members have bequeathed their wealth, following in the footsteps of group founder Jamsetji Nusserwanji Tata.

In August, inside the wood-paneled, fourth-floor boardroom of the 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 managed to get the approval of holding company 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.

The Tata Sons board traditionally has had one-third of its members from Tata Trusts, 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 has three Trust nominees, a trio that Chandrasekaran needs be mindful of as he steers the company. Along with three executive directors, in addition to Chandrasekaran, four independent directors give the board a more independent appearance.

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

The family asked the National Company Law Tribunal this week 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 the business proceedings of the conglomerate.

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.

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 on just kin. But the influence of Tata Trusts has remained strong with its grip as the largest shareholder.

Core ideals

Born in 1839, Jamsetji Nusserwanji Tata was the only son of Nusserwanji Tata, the scion of the Gujarat-based family of Zoroastrian priests, who had fled Persia several generations earlier. His inspiration of starting a textile business came after a visit to England when he became convinced 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 shares the Zoroastrian background with the Tatas.

Traditional Zoroastrian values of working for the greater good of the people and the ideas of harmony with 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, and which is still active today, to support Indian students.

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, while also setting up the country's first planned township in Jamshedpur, in eastern India, winning the Tata Group the approval of the community. But the Tata Group's greatest period of expansion came with the ascension of JRD Tata, the group's fourth chairman, who served in the position for more than half a century.

At 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.

What caught the attention of the international business world was Tata Group's acquisition in 2007 of the European steel company Corus Group by Tata Steel and, in the following year, of Jaguar Land Rover, the British auto company.

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. During the four years under Mistry, the group had a series of troubles. Group revenue peaked in 2015.

Even though Mistry was hailed at the time of elevation by Ratan Tata, he was 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.

Chandrasekaran so far has succeeded, acknowledges Ratan Tata, who also serves as the head of Tata Trusts. (Ratan Tata briefly returned as interim chairman of the group 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."

One of Chandrasekaran's key decisions within his first year as chairman was resolving a dispute between the Tata Group and Japan's NTT Docomo over the Japanese mobile carrier'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, formerly Corus -- 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 he 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 sore spot. Its passenger car business has been a drag on profits and if not for its Jaguar Land Rover unit, it would have suffered.

Jaguar Land Rover, which had a loss of 402.4 million pounds ($534 million) in the financial year ending March 2009, has turned around its fortunes. It 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 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 a 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."

Back on track

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 created India's most valuable company by market capitalization, Tata Consultancy Services.

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

The holding company and other shareholders expect Chandrasekaran to replicate the success of Tata Consultancy in most if not all 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 the role of Tata Trusts in matters of the company as one that any business owner would have. He also views the Trusts as the keeper of the group's long history of ethics and philanthropy. His understanding of the value of accountability has bolstered Chandrasekaran's ability to perform.

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

While working to keep the group on a path toward growth, Chandrasekaran also has to ensure it is done ethically and adhering to "the Tata way," which in Ratan Tata's words speaks of transparency and good governance.

Tata Group's 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 17. Debts have piled up and there is an urgent need to untangle complex cross-shareholding structures.

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

Some observers, though, see the move purely as a way of preserving its original nature while not getting into the governance hassles of a listed company.

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

The tightening of ownership was seen as necessary because the most prominent member of the family, Ratan Tata, is likely in the final stretch of his long career.

He said later generations of the Tata family will only be considered for the top post if they demonstrate their abilities -- and not for merely carrying the Tata name. That is the professionalism Ratan Tata envisions.

What he also envisions is 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 it is 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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