New Delhi: The Tata-Mistry battle is a rare chance to gain glory for one of the lesser known soldiers of India Inc. The independent directors. A lot of what will now happen in this long and winding boardroom drama will depend on how fiercely these gentlemen and ladies protect their turf and take the right calls. After Cyrus Mistry was sacked as Chairman of Tata Sons on October 24, the Tatas now want him removed as chairman from every group company too. The only hitch: independent directors on the boards of listed group companies who may or may not agree that such a decision would be in the best interests of each company’s minority shareholders. In those instances where independent directors have not taken to the Tata view and voted for removing Mistry, the Tatas now want independent directors sacked from respective companies.
Not all independent directors on the boards of listed Tata companies agree with the Tatas and this is evident from the statements some have provided to the stock exchange recently. Indian Hotels Company (IHCL) said on November 4, that the board of independent directors of the company met before a meeting of the full board and expressed full confidence in the chairman, Cyrus Mistry.
“Taking into account Board assessments and performance evaluations carried out over the years, the Independent Directors unanimously expressed their full confidence in the Chairman, Mr. Cyrus Mistry and praised the steps taken by him in providing strategic direction and leadership to the Company. After deliberations, the Independent Directors came to a view that being a listed Company, it was imperative for the Independent Directors to state their views to the investors and public at large, such that those who trade in securities of the company, make an informed decision.”
Subsequently, independent directors of Tata Chemicals and Tata Motors have also expressed confidence in the decisions taken by the respective companies in the past, though they have not specifically supported Mistry by name.
The Tatas now plan to call an Extraordinary General Meeting (EGM) of each such listed company where Mistry has not been shown the door, to oust independent directors and seek shareholder nod for removing Mistry from Chairmanship. Amid this ongoing boardroom drama some key questions pertaining to independent directors arise.
1) Are independent directors on the board of any listed company meant to take orders from the controlling shareholder? In the present context, will independent directors on the board of Tata Group’s listed companies be doing the right thing in listening to the Tatas instead of using their own counsel on removing Mistry? In several listed Tata group companies – including Tata Chemicals and Tata Motors - the tussle over independent directors is getting farcical. The Tatas want Mistry removed from the boards of all group companies and expect independent directors on the boards of all listed companies to obey their dictat. It is another matter that independent directors are expected to remain, well, independent in discharge of their duties. They should be working only towards the benefit of small shareholders in listed companies – they are not required to do the bidding of the majority shareholder in any company. In other words, independent directors on any of the Tata group’s listed companies need to side with the Tatas in removing Mistry only if this action will help each listed company’s minority shareholders.
2) Also, the Tatas’ reported intent to get Nusli Wadia – an independent director on the board of Tata Motors and some other group companies – removed may also fall afoul of corporate governance ethics. Institutional investor advisory firm IiAS has said in a note to the clients this morning that "allowing controlling shareholders to remove independent directors from the board undermines the integrity of the entire process and the institution of independent directors itself.” It has listed out some mitigating circumstances though, under which their removal may be sought: when there is evidence of fraud and misconduct or when the director is being a disruptive force on the board.
3) Does such a precedent exist in the Indian markets? IiAS says it does. It says there have been instances in the past where minority shareholders have proposed resolutions seeking removal of independent directors, including in S. Kumars Nationwide and Ricoh India. “These instances are on account of shareholder activism or alleged mismanagement/fraud. But a resolution being proposed by the controlling shareholder to remove an independent director is rare. One recent example is Indiabulls Housing Finance, where the new management sought to induct a new board by replacing the previous set of directors. In this case however, the management had argued its position by saying it needed ‘greater expertise’ on the board.”
In this story in Mint newspaper, proxy advisory firm Stakeholders Empowerment Services (SES) has asked the independent directors to explain their divergent views to remove all doubts about the subsequent events that have unfolded since the boardroom coup on 24 October. This was the day when Cyrus Mistry was removed from the chairmanship of Tata Sons. The note by SES also questions the manner in which Mistry was removed from his position as a chairman from the board of the Tata Group cash cow TCS.
And this one in Business Standard says advisory firms are themselves divided over what independent directors should do in cases such as the Tata-MIstry battle. “Minority shareholders and institutional investors should vote against any move by primary shareholders to remove independent directors,” the story quotes Shriram Subramanian, managing director, InGovern Research Services, as saying. Subramanian argues that Tata Sons, the primary shareholder in the group, has not given adequate information and reasons to all shareholders in the current situation.