The holding company of the largest conglomerate in India is going through a turmoil as its board of directors decided to go ahead with stock exchange listing to meet a regulatory requirement, a move contested by Tata group scion Noel Tata, who questions the legality of that decision and asserts there are alternative ways to meet compliance obligations.
Lawyers said professionalising the board of directors of companies with outside experts does not mean eliminating promoter influence. Instead, it is about clearly defining who sets the direction, who executes it and how disagreements are resolved so that ownership and management do not become competing centres of authority, they said.
Jidesh Kumar, Managing Partner at King Stubb & Kasiva, Advocates and Attorneys said this episode is likely to prompt promoter families and closely-held businesses to look more carefully at the boundary between ownership and management. “Promoters may increasingly seek to retain defined veto or reserved rights over such fundamental matters while leaving day-to-day management to the professional leadership team,” he added.
Legal experts Business Standard spoke to shared that broad consensus. Xerxes Antia, Partner at law firm BTG Advaya said, “Promoters should set the overall direction of the company, approve the matters that could alter its contours and hold management accountable for delivery, while leaving the actual every day running of the business to management.”
Ashish Bhakta, Founding Partner of law firm ANB Legal said ownership remained important for accountability and for setting the company’s “long-term strategic direction, objectives and fundamental interests”.
The distinction between ownership and management is also embedded in corporate law, pointed out Akshaya Bhansali, Managing Partner, Mindspright Legal. “Shareholders per se do not get the right to participate in the management and operations of the company,” she said, noting that Companies Act, 2013 identifies shareholder rights.
For businesses hiring an outsider as CEO, the appointment should be accompanied by a governance structure that gives management operational freedom while protecting promoters’ long-term interests.
Lawyers expect the Tata Sons episode to prompt promoter families and closely held businesses to revisit their governance documents.
Antia said companies would likely take a closer look at the Articles of Association (AoA) to ensure that special approval rights are clearly drafted and enforceable, while also addressing nominee-director replacement and board-level deadlocks.
Soumya Singh, Co-founding Partner, Thistle&Law, said governance documents should include a “clear list of reserved matters requiring promoter or shareholder approval”.
Amita Desai, Head of Corporate Secretarial Practice at Ascentium India, a global business services, corporate advisory, and professional services firm, said AoA are particularly important for unlisted companies as these function as governing manuals defining who decides, who executes and where authority ends.
Bhakta of ANB Legal said promoter families must first decide their own fundamentals, including roles, control, authority, vision and culture, before translating those decisions into formal governance documents.
Experts pointed out that the developments at Tata Sons raise questions about the rights available to nominee directors of trusts and how those rights sit alongside the fiduciary duties those directors owe to the company under the Companies Act, 2013. That legal question will ultimately have to be determined on the governing documents and applicable law, rather than on conventional notions of who should have the ‘last word,’ they said.
“The larger lesson for India Inc. is that promoter oversight and professional management are not inherently contradictory. The difficulty arises when the boundaries between the two are unclear,” said Anupam Prasad, Partner, White & Brief – Advocates & Solicitors.
Why promoters turn to outside CEOs
As businesses grow, administration, processes and compliance become more complex and there are areas where professional Chief Executive Officers (CEOs) may have greater expertise, said the promoter and chairperson of a large healthcare company who declined to be named.
“After 15-20 years, how many times can you keep looking at the same profit and loss sheets?” she asked. “Also, if the next generation is not interested in running the company, or is not capable of doing so, the promoter’s responsibility is to find the right professional.”
The head of an executive-search firm, who has worked on CEO mandates for promoter-led companies, said some promoters sought professional CEOs when venturing into unfamiliar businesses or geographies.
“In such cases they were prepared to give the CEO considerably more freedom because the family itself did not claim operating expertise in the new area. The relationship becomes more difficult when a professional is brought in to run the promoter’s original business, where the promoter has spent 20 or 30 years making virtually every important decision,” he said.
Where friction begins
Longevity itself could create governance problems. “Long-serving professionals can build fiefdoms around themselves and, over time, populate boards with people who are unlikely to challenge them,” the chairperson of the healthcare company quoted above pointed out, without referring to any particular company.
She added that a board may meet all the required norms and yet cease to provide meaningful challenge if a long-serving professional has accumulated significant influence over the organisation and its board.
But tenure is only one potential source of friction. Disagreements can also arise over strategic decisions, the pace of expansion, risk appetite and the extent of a promoter’s involvement in day-to-day operations.
The head of the executive search firm quoted above recalled a mandate where the promoter was clear that he wanted a professional CEO because the business had reached a size where the family could no longer run everything directly.
But the brief came with an important qualification: the new CEO had to understand what the promoter wanted the company to become.
“The first question is not always whether this is the best CEO in the market. It is whether this person and the promoter can work together,” he said. “You can have a very good CEO, but if the promoter wants to build the business conservatively over 20 years and the CEO wants to double it in three years through acquisitions, it is not going to work.”
In another search, the promoter wanted someone who could professionalise the organisation but was uncomfortable with the idea that the incoming CEO would immediately replace executives who had been with the family for decades. Some were extremely capable; others had simply grown with the organisation and were no longer equipped for the scale it had reached.
A professional CEO who has worked closely with promoter families said the distinction between a promoter-run and a professionally managed company was rarely as clear-cut as it appeared from the outside.
The key question, he said, was the scope of managerial autonomy. A professional CEO must be allowed to run the business, but on decisions such as a major acquisition, entry into a new geography or taking on substantial debt, a promoter would naturally expect to have a say.
People decisions can be an even greater source of friction, he pointed out. “Promoter-led businesses often have executives who have been with the family for decades. Some grow with the company; others do not.”
Consider the case of a promoter of a listed company based in Tamil Nadu whose son recently joined the business. Since the son was a related party, the proposal went through the management, which approved a monthly salary of ₹50,000 for the trainee, in line with company standards. The promoter subsequently asked the management to reconsider the amount and raise it to ₹1 lakh. The management, however, settled on ₹75,000.
The promoter told Business Standard that such decisions should be governed by the law, with minimal intervention. But it is a no brainer that the broad view of the promoter and the outsider CEO must be in alignment.
A Delhi-based promoter with the group having interests in manufacturing, real estate and hospitality, some run by outside CEOs, said that the key factor between promoter-professional management was trust from both sides, but crucially it’s the promoter’s view that holds more weight.
“You have to trust the CEO as sometimes he is more qualified. But the pain of building your own company, and the pain of losses of your company cannot be felt by the CEO or professional management at all,” he said.
A CEO who has previously worked with one of the largest business groups in India, said that the executive cannot function without the backing of the Board and in most instances, the Board has promoter representation.
“The management has to be aligned with the broader vision of the promoter, for the group or a company to function, only then can there be growth. If there’s no alignment, there will be conflict and the friction will hinder any meaningful development in the business, even if it’s a business in a high growth segment,” the CEO said.
