EconoMatters, Richter Scale

Why The Tata Case Is So Global and an Epoch-Making Event

Why the dismissal of the Tata Group’s Chairman is an epochal event in the annals of Indian capitalism.

Credit: Karoly Lorentey www.flickr.com

Takeaways


  • Tata group's unceremonious dumping of chairman Cyrus Mistry smacks of American-style boardroom capitalism.
  • Building up a mega-conglomerate when one's home market is stunted is inefficient, is the easy part.
  • Ratan Tata will now have to choose an outstanding professional manager who succeeds in turning around the group's fortunes.

Even savvy, cosmopolitan Indians believe the current Tata group brouhaha is strictly of local interest. In reality, it is an event of global significance, both in terms of what it symbolizes and in terms of the longer-term ramifications. Here is why:

First, the unceremonious dumping of the group’s 48-year-old chairman, Cyrus Mistry, without being accorded as much as the courtesy of a hearing or being put on notice to improve, smacks of brutish American-style boardroom capitalism.

It is certainly far removed from the sober and ethics-minded style for which the House of Tata has long been famous.

Second, the boardroom coup by Ratan Tata places him in a very risky position, whereas the much younger team that was just dumped may well find its hands strengthened over time, as the saga over who’s really at fault unfolds over the coming years.

Entrepreneurial to managerial

At the core, the battle concerns a longstanding global business phenomenon, the transition from founder-era entrepreneurial capitalism to managerial capitalism.

Many companies in countries from the U.S. and Germany to Italy, Japan and South Korea have had to deal with it at different stages of their history.

As Gurcharan Das, one of India’s most eminent thinkers on business, management and ethics (and a former CEO himself), has said, the current episode reminds him of Thomas Mann’s novel, “Buddenbrooks: The Decline of a Family.”

In that work, published in 1901, the famous German writer describes the case of a wealthy merchant family in the city of Lubeck whose business disintegrates over the course of four generations. Mann’s novel covers the years from 1835 to 1877.

In this context, it is not insignificant that the Tata Group’s origins date back to 1868, when Jamsetji Tata founded it as a trading enterprise.

Overstated accomplishments?

The Tata family — with Ratan Tata, the group’s current “uber” father, himself representing the sixth generation — may very well be in the process of meeting its very own Buddenbrock moment. In fact, it may be well past its “due by” date.

It is pointless to blame the younger man who was at the helm of the Tata group until several days ago. In fact, the real reason for the flat stretch of the group’s many businesses could just be the classic problems of building an ever-more complex conglomerate.

Call it the Tatas’ ITT problem. This once world-famous and world-beating diversified American conglomerate, after decades of an agonizing reshaping (read: dismantlement), is now a faint shadow of its former self.

Ratan’s accomplishments are many, and his personal modesty with regard to his lifestyle is certainly impressive.

However, a reality-oriented, non-hagiographic telling of his story must also include this point: Building up a mega-conglomerate when one’s home market is stunted and performing well under potential, not least because much of the competition, often state-owned, is inefficient, is the easy part.

What next?

Managing such a company after a big boom period and once the national economy settles is far more difficult. It is also important to remember that the Tata group’s biggest mal-investment, the acquisition of Corus Steel, occurred in 2007, years before the just-ousted chairman took over.

This deal was very much the doing of Ratan, and it may ultimately risk the integrity of the entire group’s balance sheet.

Looking ahead, the key question is how Tata’s business fortunes evolve. In what may well come to be known as short-sighted and potentially self-destructive move, Ratan has made a very risky one-way bet.

Only if, in a do-over, he chooses an outstanding professional manager who succeeds in turning around the group’s fortunes will Ratan’s move be seen as a success. If he fails, most of the egg will be on his face.

The possible outcomes

Unless Ratan succeeds spectacularly with that mission this time around, Mistry and his team can always claim the group’s lingering difficulties were not due to their actions and/or omissions.

They can simply say their turnaround plans were not given enough time and that Ratan’s intervention aborted what would have been a successful reshaping of the group’s business portfolio.

They have the better hand. Now, relieved of their business duty to perform and execute, they no longer need to prove a positive. They can use the more probable negative outcome — or even no materialization of a significant future improvement — as self-validation.

Similarly, the old guard’s argument that the youngsters relied too much on a few cylinders of growth — mostly just one, Tata Consultancy Services — could well turn out to be built on sand.

Conclusion

Why? Because the old guard is guilty of the same crime. Singing the praises of TCS as a kind of miracle drug is a global PR effort that is more than a decade old at this stage.

Business historians may come to see the Tata group’s move into business services as smart, prolonging the family brand’s business license and temporarily leading it to new glories.

However, they may come to judge that all the glitz and the series of good bottom-line results delivered by that one group company were not enough to prevent the gradual crumbling of the House of Tata.

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About Stephan Richter

Stephan Richter is the publisher and editor-in-chief of The Globalist. [Berlin/Germany]

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