Damage Done. How Will the Tatas Heal the Rift?

The new chairman must be someone the shareholders can trust. Else it will be a repeat of the Cyrus Mistry removal fiasco for the conglomerate.

- Morgen Witzel

Shareholders force chairman out of office’. At first glance, it’s not much of a headline. Chairpersons and CEOs are sacked every day around the world, often at the insistence of activist shareholders who disagree with the strategic choices the company has made. But when the company is Tata Sons, the shareholder is its former chairman Ratan Tata (head of the charitable trusts that own a majority stake in the company), and the man sacked is his successor, Cyrus Mistry, the development takes on different overtones.

Mistry’s removal raises some interesting issues. First, there is the governance question. The modern orthodoxy is that of the separation of ownership and control: That is, shareholders should step back from the day-to-day running of the business and let the professional management team get on with it.

In practice, it does not work like that, at least not all the time. Shareholders take a keen interest in what executives do with the capital that they, the shareholders,have invested. If I lend you my car, I will want to know that you are treating it well, and that you will return it in as good a condition as it was when I handed it over. Much the same applies in investment markets (except, of course, ideally the shareholder wants the car to be rather bigger and faster than it was when he handed it over; in other words, shareholder value creation).