The move is BOLD, most likely initiated by Ratan Tata himself.
It wasn’t amicable decision. The guillotine was dropped unceremoniously on Cyrus Mistry, as he has now said that he is going to challenge the decision in Bombay High Court. Cyrus Misty and his group companies hold roughly 20% of Tata Sons.
Now the reasons could have been any of the following :
Performance : Ratan Tata have taken the group from 6 billion dollar to 100 billion dollar in revenue, and stated that by 2021 it should be 600 billion dollar. This was not something which echo’ed back from Cyrus. Also couple of days back, there was an article in economist mentioning how Tata group is socially responsible but financially disappointing. So, he was seen as someone content enough and not hungry for growth.
Ethics : On the other hand, Cyrus did mentioned in one of his interviews/calls that the group needs to take tough but compassionate decision in challenging times. Rumor has it that he was preparing to make the company lean and has said that in two decades the group has shut down 20 companies. Corus UK unit was sold for 1 pound. while this is contradictory to the first point of performance, it can also be viewed that Tata would not like to take its reputation down for short term profit.
In the same vein, Tata group is planning to challenge an arbitral award over paying over 1 billion to DoCoMo , which may again be considered unethical.
while hazarding a guess why Cyrus would have been replaced would be fiendishly hard, there is another fact which may give some hint into this conundrum.
Ratan tata also took the initiative of informing the prime minister Narendra Modi of this decision. This would probably be first for any company. But why would a chairman needs to appraise PM about this ?
This bold move has the potential to be very messy, because:
Removing the Chairman of the country’s largest business group without any prior pubic build-up is shocking.
Some reports are saying that Mistry is likely to fight this out in the courts . Now such legal cases are bad publicity and they might get icky over time.
This is a big news also because of the respect and value system that is associated with the Tata Group.
What exactly is the issue?
Mistry was appointed chairman around 4 years ago. Such premature removal of a chairman in Tata group is rare (in context, JRD Tata was the chairman for more than 50 years, and Ratan Tata for more than 20 years)
Cyrus Mistry’s appointment was a welcome move by the industry, reflecting a refreshing change in the leadership of old age Tata group leading in business for more than a century now. His sack therefore is equally shocking.
This was a sudden move (note that the group is still searching for his replacement and Ratan Tata is only serving as interim chairman). Now this begs a question: what was the hurry? Couldn’t it have been done more smoothly?
Sacking a chairman is not really uncommon. It is the sudden, unexpected and (emphasis here) unexplained sacking which creates worry for the investors. The company’s official statement only mentions this:
The board, in its wisdom and on the recommendation of the principal shareholders, decided that it will be in the long term interest of the group to replace Cyrus Mistry.
Why was the chairman removed?
The company’s official statement is very diplomatic and it does not mention the reasons. Some preliminary reports talk about the following possible reasons:
His style of working – As per some sources, the shareholders were unhappy with Cyrus Mistry’s managerial decisions . Apparently, it was discussed that Mistry’s approach to focus only on the profit making businesses and not supporting the loss making businesses was not a welcome move.
Contentious decisions to sell businesses – This includes selling of the group’s UK based assets which were then loss making . Similar decisions were made in Tata Chemicals also. Whether those decisions were good or not, only time would tell. But the shareholders, it seems, were not happy.
Ongoing disputes with Docomo – Now, having disputes with other companies is not new in business. But Docomo’s decision to leave the joint venture might probably have registered in the mind of the owners.
What happens next?
In the interim, Ratan Tata takes over as the chairman, again. This is obviously not a neat move for someone who had already resigned (see what happened to NR Narayan Murthy).
They have appointed a committee to search for a replacement of Mistry who can run the group. Now that is a tough task to run a $ 100 billion plus group with business ranging across all industries.
Meanwhile, Cyrus Mistry has appealed to the Bombay High Court against his sacking which he calls “illegal”. This legal proceeding could take up a lot of management bandwidth and result in unnecessary (and not all good) publicity.
Should we be happy or sad about this?
That’s the point! We don’t know. There is not much information to help us decide why such a move was necessary (and whether this is for the overall benefit of the shareholders). Tata group is extremely influential in the country and it matters a lot who sits at the helm of affairs. It is also not a good news to see unexpected movements in that chair.
Tata group commands stability, which is reasonable to expect from a business that is in business for more than a century. Such news coming from Tata group bothers us.
Stock markets are not likely to take this news in good stride. Public at large is still on the fence.