Is Ratan Tata's succession plan focused on the right thing?

“It is not easy to give up power, particularly if you have been the object of so much adulation,” said NR Narayana Murthy in his last letter to shareholders as Infosys chairman.

The statement could apply equally to Ratan Tata, who has taken the group from strength to strength during his 20 years as chairman and is now looking for someone to step into his shoes.

[caption id=“attachment_16740” align=“alignleft” width=“380” caption=“The Tata Group, for the first time, is looking for an outsider to head the group even though it hasn’t stopped looking within. AFP”]  [/caption]

Ratan Tata has taken the group he inherited from his uncle JRD from $5 billion to $70 billion. However, it has been a difficult search to find a successor to carry forward his vision. The group, for the first time, is looking for someone outside the Tata family to head the group even though it has not stopped looking within.

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However, there is an underlying unease.

A conglomerate, which has global operations, has dwelt far too long on finding a successor to Tata, and the very fact that the committee he set up to do the job is still working on some 11 names (according to a report in Business Standard) suggests that the search began too late, or is not making headway.

Jack Welch, former chairman and CEO of General Electric, began searching for a successor six years before he handed over the reins to Jeffery Immelt in 2000. There were three aspirants for the top job. It is known that Immelt was the youngest among the three when he was chosen by the company’s board. The other two went on to become CEOs of other Fortune 500 companies.

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But is the search committee looking in the right direction? Reuters reported that people like Indra Nooyi, currently heading American beverage company Pepsico, and Arun Sarin, former CEO of Vodafone, were considered for the job.

The search committee has now gone beyond the brief of merely searching for a leader and recommended a restructuring of the Tata Sons board by bringing in independent directors and younger executives from group companies, the agency said.

[caption id=“attachment_16792” align=“alignleft” width=“380” caption=“Indra Nooyi, currently heading Pepsico, and Arun Sarin, former CEO of Vodafone, were considered for the top job. Reuters”]  [/caption]

Nothing wrong with this, but the crucial question is this: Is the committee looking for someone to run Tata Sons (which is a holding company) or someone to head the whole group, which is what Ratan Tata is doing now?

If it’s the former, has the committee asked itself why a professional CEO with the experience of running multinational companies should join a group’s privately-owned holding company? In Ratan Tata’s case, the jobs of Tata Sons’ chairman and group executive head were combined. And he was a Tata. The same symbolised the unity of the two objectives - being head of the holding company and boss of the group.

Can a non-Tata manage to do both?

Business leaders like Nooyi or Sarin drew their authority from reporting to shareholders who expected specific operations results from them. But who are the shareholders of Tata Sons, and what would Nooyi and Sarin be expected to achieve?

To answer this, we need to understand the business of Tata Sons. It is a holding company, and its main business is to get its shareholdings to deliver returns. In short, its business is portfolio management.

For the year ended March 2010, Tata Sons reported revenues of Rs 2,958 crore and a net profit of Rs 1,629 crore. The real assets in the books of Tata Sons are the listed and unlisted investments in Tata group companies. The current market value of the listed holdings of Tata Sons in various group companies is Rs 2,16,195 crore. (It has barely moved in the past 14 months).

The purpose of hiring a professional CEO is to maximise shareholder value. The single-largest shareholder with an 18 percent stake in Tata Sons is Shapoorji Pallonji Mistry who runs his own construction business. The Tata family-owned trusts control the rest. Neither are involved in finding a successor to Ratan Tata.

A holding company needs a fund manager and not just a professional CEO. Is it any surprise Indra Nooyi and Arun Sarin have not expressed any great enthusiasm for a fund management job.

The job content at Tata Sons cannot change unless Ratan Tata wills it. Or it is listed. GE is a conglomerate like the Tatas (but not so diversified), and the key difference is that it is listed. It is strange that a listing of Tata Sons was never considered in the past.

An early listing of the holding company would have facilitated the creation of a professionally-managed board. The pulls and pressures of public scrutiny would have allowed the group’s holding company to make a smooth transition and plan for a leadership change.

The other advantage of listing Tata Sons would be to allow the family trusts, Shapoorji Mistry and the Tata family to unlock value.

“Shareholder activism makes a lot of difference in succession issues in US,” Richard Rekhy, head of advisory at KPMG, a consulting firm, said. “There is still some time before India witnesses similar level of maturity,” he added.

KPMG actively consults with firms in India on management and business-related issues. Rekhy says that there is a need to work towards separating management from ownership. It is not possible to impose such rules where the onus would be on the owner to give up power.

This is exactly why Narayana Murthy made that statement on giving up power. There is a message in it somewhere for Ratan Tata.