Independent directors set refreshing precedent
The action of independent directors of the Tata Sons-promoted Indian Hotels Company limited late last week was revolutionary in Indian corporate history. True, the events of the past 10 days at Bombay House, the headquarters of the Tata Group, have been setting precedents every day. But the events of Friday at this board meeting took the battle between Ratan N Tata and Cyrus P Mistry to another level. By reposing confidence in Mistry, the board, which included nominees from Tata Sons, effectively told the promoters, that is Tata Sons, that it did not agree with the ousting of Mistry as chairman of the group holding company. It says a lot about the convoluted structure of Tata Sons where Mistry had been removed as the chairman of the holding company but remains chairman of many Tata Group companies. And, after the Indian Hotels board took the momentous decision to stand up to its promoters, there are wagers being made on the streets that other company boards are likely to act similarly. By reposing faith in Mistry and thus effectively ignoring Tata, the actions of the board, not only chip away at the already weathered Tata ‘reputation'; they have also set a precedent for other corporate boards across the country.
There is little doubt that Mistry's actions, in the case of Indian Hotels, were highly positive for the company. The losses of the company had been reduced, and the board stood behind Mistry's decisions. But it is only the first of many Tata Group companies where board meetings will be held over the next few days. The question on the minds of investors, journalists, and even possibly Ratan Tata and Mistry is: What decision will the boards takeIJ There are already reports that the two groups have begun to lobby for support of the independent directors. Who will winIJ
Most boards in India are beholden to their promoters and the independence of ‘independent' directors is considered nominal at best. Boards should, and must question the actions of the promoters and executives and not give them a carte blanche. Small shareholders are like small fry, best ignored by the big fish. However, small shareholders deserve to get answers and need accountability and board members should protect them as well as the company's prospects. When people invest their hard-earned money into a company, they deserve a voice too. Despite talk of corporations taking care of all stakeholders, the small shareholder is often ignored. Globally, however, activist investors are making boards stand up and take action. Indian chairmen and promoters, used to unflinching loyalty from boards, should take the cases of Tata Sons and Indian Hotels as a turning point. Boards should stand up and take the decision that they feel is right for all investors and not just the promoters. Other boards in India should learn from the brave actions of the Indian Hotels board. Whether they will, should be known in the coming weeks and months.