The ongoing feud between Tata Sons and Cyrus Mistry (following the removal of Cyrus as the Chairman of the board) is interesting. If you and I think its important to "manage expectations" - both with bosses and teammates / reportees - this episode proves its even more important. Cyrus's abrupt removal from Tata Sons board (which manages group companies valued at >$100B) is as much an issue of "managing expectations" as anything else.
First things first:
The first Tata company was incorporated in 1868 and over the next 150 years it has grown to be a conglomerate - 29 listed companies, over 70 unlisted companies. The group companies are controlled mainly by the chief holding company "Tata Sons". Tata Sons is mainly controlled by the various Tata Trusts (which are in turn very interesting to explore - as to how they came into being; I'm not going to be writing about that here) with 66% stake. The largest Non-Tata stakeholder is Shapoorji Pallonji Mistry (Cyrus Mistry's father) and his group company. Now - its no secret that the Tata Trusts are the true puppet masters of Tata Sons and any illusion of "independent board" is delusional. The 100-odd group companies are mainly controlled by Tata Sons along with a series of cross holdings by different Tata companies. So he-who-reigns over Tata Sons - inturn reigns over the Tata empire.
Its interesting to note that all the men who became chairmen of the board of Tata Sons came from the "Tata family" and there were only 5 men at the helm before Cyrus Mistry (over teh past 150 years which is remarkable). Cyrus is actually "no outsider" - being the crown prince of the Shapoorji Pallonji group and also related to the Tata family through marriage.
How can Cyrus screw it up? Did he screw it up?
Now, having set the stage, being as-close to the family as possible - one would have expected the crown prince of Tata empire - Cyrus Mistry to be able to manage the group companies for the next 30 - 40 years or so (he was in his early 40's taking up the mantle)... It beats the "sense of natural justice" to see the guy go barely after 4 years at the helm.
How did he screw it up? The question is - why did he screw it up. Especially of interest is the question which comes to mind - what was his charter when he was put at helm; and did he "understand", "internalize" and "execute" to the charter.
Let's break this down a little.
Did the Tata group perform badly during his helm of roughly 4 years -
This is an interesting question. When you look at the group with 100-odd companies, as is the case - 80/20 rule kicks in. 80% of the revenues come from 3 group companies - Tata Consultancy Services (TCS), Tata Motors (thanks to Jaguar-Land Rover acquisition which gave them an entry into China) and Tata Steel. Tata Motors is the unlikely revenue flag barer for the group (thanks again to Jaguar Land Rover) bringing in 40% of revenues of the group.
Over 80% of the profits come in from just one company - TCS.
So, looking at TCS - in the past 3 years (2013 to 2016), revenues as well as profits have gone up by 72% and 75% respectively. Not bad you would say - but wait a minute, what's Cyrus got anything to do with the growth here? It was built by a guy called S Ramadorai (now - how many of us have heard about this guy..).
Tata Motors has in the similar time-period grown 46% in revenues and a slower 11% in profit. Tata Steel has been the Achilles-heel of the group going deeper into the red after the phenomenally disastrous Corus acquisition (made during Ratan Tata's tenure).
Anyway - for the sake of argument, you could say that he's not done badly. Mainly driven by TCS. But - the rein was too small to make any difference, so essentially "he could have been a good commander". His helm was too short to judge.
Debt challenges -
This is one area that has bogged down the group ever since the last financial crisis in 2008. The group had ~$20B debt when Mistry took over and it has steadily climbed to over $30B. Tata Steel (thanks to Corus) has accounted for >70% of the debt growth. Tata Power and Tata Teleservices account for the 10% of the debt growth each.
However (again thanks to phenomenal growth of TCS), the overall group debt came down from Debt/Equity of 0.86 to 0.73 in 3 years time.
What did Mistry do to piss-off Ratan Tata (the apparent flag bearer of family baton and the Chairman of the Tata Trusts) -
Inability to manage expectations
One clear rule which most of us do not understand is nicely articulated by this German proverb -
"Who's bread I eat; his song I sing"
Going back to the legacy that the Tata's have built - they are known to be "empire builders" - family that does not drop the ball when the going gets tough. I am not sure if Cyrus really understood this or internalized this rule. That's the family's fabric - and its been so for last 150 years - its no easy matter to change the "culture" of the group - no matter how toxic that can become sometimes.
Ratan Tata in his helm from early 1990's until 2012 - grew the group revenues by 50 times (mainly through acquisitions). Most acquisitions (I am not saying all - as Jaguar Land Rover is an exception) have been poorly executed. Especially as Buffett says - the only way you can win at an auction is by not going there.
Every major purchase of the Tata's have been through bidding or auction like pricing (essentially where there is little relation to value and price). Corus, Tetley, Telecom buys, etc.. Sometimes when you do buy many companies - you end up buying a good one - like Jaguar Land Rover.
Almost all the investments made by Ratan Tata - Airlines, Telecom, Nano have been disasters. The return on invested capital at the major group firms have been consistently below the cost of capital. Irrational exuberance has been rampant at the group for many decades now. I think Ratan Tata became a victim of "anchoring bias" in many cases. Ex - pegging Nano sale price at Rs 1 Lakh ($1,500) since he committed that initially (commitment and consistency bias).
So, when Cyrus comes in and says - that he's going to shut down Corus (the steel plants in Europe losing $1M/day) or Telecom businesses or power companies or discontinue Nano - whatever becomes of the Tata legacy?
This is a direct attack on Tata nerve. And when someone hits where it hurts - especially in such a short time (3 years) - it hurts bad. When it hurts - and when you have the power to hurt back - you hurt back. It's cause and effect.
This I think was the reason for his exit. It is scary that human psychology can cause us to react the way we do - even if its a $100B + enterprise. I think therein lies a lesson for us.
Alternate histories - how could Cyrus have saved the day?
I think it's important to understand how to implement changes which you want to bring in. This is something which is not taught at business schools / as it seems even on the boards of companies worth many billions of dollars.
Go-slow - especially when you know you have 30 - 40 years ahead of you; its better to go slow and not rub too many egos on the wrong side.
I think if he had taken 10 years to do the things he tried doing in 3 - things might have been different. A bad business will always magnify its "badness or worthlessness" and a good business will continue to flourish.. you always have the opportunity to prune things down.
Get executive buy-in - especially in this case from Ratan Tata; as the chairman of the Tata Trusts he was the man driving things from behind the scenes. You see - If Cyrus shuts something - he questions the legacy of his predecessor. But, if he through gentle posturing lets Ratan suggest (through Tata Trusts) that he shut shop / rescind certain bad business moves - that will be a different matter. You see - after-all, Ratan Tata is not getting any younger - I'm sure he would have mellowed down a lot and would have been happy to give him some advise!
Don't cut pay-offs- especially not to the owners! I think Cyrus cutting back on dividends of group companies hurt Tata Trusts the most. It hurt them where it should not have hurt. The anger one feels when cash flow perishes can have disastrous consequences. What he could have done is not increased dividends for the next 10 years! Which in itself is a roll-back mechanism of sorts with inflation eroding value.
Be careful who you hurt! - There is a story that Abraham Lincoln narrates when he was fighting to end slavery -
"If I saw a venomous snake crawling in the road, any man would say I may seize the nearest stick and kill it. But if I found that snake in bed with my children that would be another question. I might hurt the children more than the snake, and it might bite them."
One has to tread very carefully when dealing with family entanglements.
Anyway - it's an interesting learning on how to manage expectations. I hope we can benefit from this. I hope Cyrus can benefit from this too.
Ciao till next time...Harsha
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