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Beyond the control of scions in India’s family businesses

Submitted by admin on Sun, 10/30/2016 - 08:08

Indians have a saying that captures the tendency of family businesses to decline over generations: “The life of a business house is 60 years.” This phenomenon was portrayed by the German writer Thomas Mann in Buddenbrooks, his novel about a wealthy merchant family in the city of Lübeck whose business disintegrates as the children lose an appetite for making money. Until now, the 148-year-old Tata Group has defied this rule. But today India’s largest conglomerate is caught in an existential crisis — its own Buddenbrooks moment — that began last week with the dismissal of Cyrus Mistry, its chairman, and the temporary return of Ratan Tata, his predecessor.

Mr Mistry called his sacking illegal and said he had become a “lame duck” chairman, while Mr Tata called his words “unforgivable”. I was once a member of a Tata company board and was shocked at this unseemly row. But the significance of the episode goes beyond the Tatas.

It is a cautionary tale for India’s business community as a whole, which is struggling to separate ownership and management, families’ interests from businesses’.

The appointment of Mr Mistry in 2012 was always risky. After a global search for his successor in 2011-12, Mr Tata settled on the son of the largest shareholder. Mr Mistry is personable and competent but his experience was limited to managing a second-tier construction company. Suddenly, he was being asked to turn around a complex conglomerate.

This is a cautionary tale for groups struggling to separate ownership and management.

I recall feeling somewhat uneasy about his appointment at the time. Why was the company compromising by choosing the scion of a family that had been its second-largest shareholder since the 1930s? Surely there was someone else somewhere in the world capable of leading the house of Tata?

Yet there has been no satisfactory explanation for Mr Mistry’s dismissal. He inherited a lot of problems. Tata Consultancy Services was delivering the bulk of the group’s profits, while too many of its subsidiaries were underperforming.

By the time of his departure, Mr Mistry seemed to be doing a reasonable job. He had managed to reduce debt on the balance sheet. Part of Tata Steel’s British business had been sold, while the Indian operations were delivering strong profit growth.

The domestic business of Tata Motors had created a car capable of winning market share, while the overseas Jaguar Land Rover was earning good profits. The only blemish on Tata’s reputation has been a legal tussle involving a $1.2bn payout to Japan’s NTT DoCoMo after a failed buyout.

Certainly, Mr Mistry was no visionary nor did he make forays into new markets like his predecessor but, at this stage in the group’s evolution, consolidation was the right strategy. Unfortunately for him, another recent corporate succession was on people’s minds.

Infosys, the software group, seemed to have made a happier choice in 2014 when it appointed Vishal Sikka as chief executive, a man with a bold vision for the future.

After Mr Mistry was defenestrated, a headline in Dainik Bhaskar, a leading Hindi daily, proclaimed: “Tata’s dharma is wounded”. This suggested an ethical failure. If America’s key word is “liberty”, India’s is “dharma”.

In this context, dharma refers to the right and wrong ways to do business. The newspaper was referring to failures of corporate governance in India, the inability of private and state-owned companies to be properly accountable to shareholders and the refusal of too many founders to take a back seat after retirement.

Of the many lessons for Mr Tata in this episode, the main one is to focus on bringing in the person best qualified to do the job. It will not be easy. But once he has found that person, Mr Tata should bow out gracefully.