A chairperson serves at the pleasure of the board, the law is clear on that. And yet, the unprecedented sacking of Tata Sons chairman Cyrus Mistry could do with more explanation.
Tata Sons offered none, when it first announced the dismissal on October 24.
Tata Sons today announced that its board has replaced Mr. Cyrus P. Mistry as Chairman of Tata Sons. The decision was taken at a Board meeting held here today.Tata Sons Statement (October 24)
On October 25, Cyrus Mistry wrote to board members and trustees of Tata Trusts claiming he had not been offered an explanation for the dismissal, nor an opportunity to defend himself.
He also said his performance had recently been commended by the Tata Sons board’s Nomination and Remuneration Committee.
In response to his letter, on October 27, a statement from Tata Sons said the board had lost confidence in Mistry.
It is unfortunate that Mr. Mistry had overwhelmingly lost the confidence of the Members of the Board of Directors for a combination of several factors. The Directors of the Tata Sons board had repeatedly raised queries and concerns on certain business issues, and Trustees of the Tata Trusts were increasingly getting concerned with the growing trust deficit with Mr. Mistry, but these were not being addressed. The Tata Sons board, in its collective wisdom, took the decision to replace its Chairman in the manner undertaken.Tata Sons Statement (October 27)
But Tata Sons has offered no clarity yet on the ‘factors’ that led to this loss of confidence.
The Truth?
Members of the Tata Sons board have maintained silence on the events of October 24 and the specific reasons for sacking Mistry.
So where does the truth lie? Cyrus Mistry claims the Nomination and Remuneration Committee had commended his performance. Tata Sons’ statement claims the Board had ‘overwhelmingly lost’ confidence in Mistry.
Well, there is another set of documents that will reveal the truth about Mistry’s relationship with the board over the past two years.
The Companies Act, 2013 introduced for the first time in India a formal board evaluation process for select companies. The Act and its Rules provide for the constitution of a Nomination and Remuneration Committee (NRC) by the board. This applies to all listed companies and public companies that meet any one of these criteria:
- paid up capital of Rs 10 crore or more
- turnover of Rs 100 crore or more
- aggregate outstanding loans/borrowings/debentures of Rs 50 crore or more
The law says the NRC should consist of three or more non-executive directors, atleast half of whom shall be independent directors. And the NRC is tasked with several responsibilities including the evaluation of every director’s performance.
The Nomination and Remuneration Committee shall identify persons who are qualified to become directors and who may be appointed in senior management in accordance with the criteria laid down, recommend to the Board their appointment and removal and shall carry out evaluation of every director’s performance.Companies Act, 2013 - Section 178 (2)
When deciding on a remuneration policy, the NRC has also been tasked with setting down ‘appropriate performance benchmarks’ among other things.
And the law requires this remuneration policy to be disclosed in the board report.
Mistry’s Performance Evaluation
Hence, by law, Tata Sons’ board would have appointed a Nomination and Remuneration Committee, mention of which Mistry has made in his letter. And the NRC must have evaluated the chairman’s performance for the past two years since the law came into force.
Since Tata Sons is an unlisted company, its director evaluation process or remuneration policy and hence performance benchmarks are not publicly available.
But a look at such policies at other Tata Group companies might offer some clues.
For instance the Tata Steel Annual Report for fiscal year 2015-16 says the board sought feedback of directors on
- fulfillment of key responsibilities towards stakeholders
- structure, composition and role clarity of the board and committees
- extent of co-ordination and cohesiveness between the board and its committees
- effectiveness of the deliberations and process management
- board/committee culture and dynamics
- quality of relationship between board members and the management
The Chairman of the Board had one-on-one meeting with the Independent Directors and the Chairman of NRC had one-on-one meeting with the Executive and Non-Executive Directors. These meetings were intended to obtain Directors’ inputs on effectiveness of the Board/Committee processes. The Board considered and discussed the inputs received from the Directors. Also, the Independent Directors at their meeting, reviewed the performance of the Board, Chairman of the Board and that of Non-Executive Directors.Tata Steel Annual Report 2015 - 2016
At another Tata Group company, TCS, the evaluation process appears to be just as detailed.
The board and the nomination and remuneration committee reviewed the performance of the individual directors on the basis of the criteria such as the contribution of the individual director to the board and committee meetings like preparedness on the issues to be discussed, meaningful and constructive contribution and inputs in meetings, etc. In addition, the chairman was also evaluated on the key aspects of his role. In a separate meeting of independent directors, performance of non-independent directors, performance of the board as a whole and performance of the chairman was evaluated, taking into account the views of executive directors and non-executive directors. The same was discussed in the board meeting that followed the meeting of the independent directors, at which the performance of the board, its committees and individual directors was also discussed.TCS Annual Report 2015 - 2016
Given the common code of conduct that all Tata Group companies follow and is available on their websites, it is possible that Tata Sons, despite being un-listed and by virtue of being the holding company of such a large, diverse set of companies, followed similar board performance evaluation policies, though BloombergQuint has not been able to confirm that.
In which case the Tata Sons board’s NRC would have assessed Mistry’s performance over two fiscal years, FY15 and FY16.
- The NRC or its chairperson would have met Mistry to ascertain his views on the effectiveness of the board/committee processes.
- The independent directors on the Tata Sons board would have evaluated the performance of the chairman
These evaluation reports would reveal the details of what led the board to dismiss Cyrus Mistry. If the evaluations point to a strained relationship and disappointed board, then Mistry’s sacking may have grounds to stand on.
Also, then these evaluations would have aided three of the six members who voted against him, as they had been appointed only in August.
But if, as Mistry’s letter suggests, the NRC had in fact recently commended his performance, then what prompted the board to sack him will continue to remain unclear. Especially, what prompted the three new directors, as they had just two months, and one board meeting on September 15, to come to the conclusion that Mistry had ‘overwhelmingly lost their confidence’.
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