Tata Sons-Tata Trusts | Separate heads for both will not solve the problem

The Tata group has put in place clear guidelines for the leadership of Tata Sons-Tata trusts. (File image: Reuters)

Over the last 90-100 years since they were set up in 1932 and 1919 respectively, the Sir Dorabji Tata Trust (SDTT) and Sir Ratan Tata Trust (SRTT), along with a dozen other smaller trusts, have done commendable social and philanthropic work. The pity is some of that good work has been marred in recent years by controversies including institutional scrutiny, emanating from the confusion caused by their role as the controlling shareholders in Tata Sons, the holding company of the conglomerate.

That’s why any move to end the ambivalence, and put in place clear guidelines for the leadership of the two powerful institutions, bound together by their shareholding pattern but dissimilar in their objectives, is most welcome.

Thus, the 2021-22 Tata Sons annual report states that at its forthcoming annual general meeting on August 30, members will consider a resolution seeking an amendment to Article 118 of the Articles of Association of the company such that “Provided that a person who is the Chairman of either the Sir Dorabjee Tata Trust or the Sir Ratan Tata Trust or of both will not concurrently be eligible to be the Chairman of the Board of Directors.”

A parallel narrative that’s been mentioned following from the wording of this resolution (“a person who is the Chairman of either the Sir Dorabjee Tata Trust or the Sir Ratan Tata Trust”) without finding any confirmation from the group, suggests that the same person may no longer head the two powerful trusts. In the absence of a specific provision to this effect, such an interpretation appears exaggerated particularly given Ratan Tata's focus for the last few years on getting the various trusts to deploy their resources collectively and in unison, rather than in parallel. Having two different people heading the SDTT and the SRTT would defeat that purpose even if it is meant to ensure neither becomes too powerful.

The more relevant proposal relates to a bar on the same person heading the Tata Sons and the trusts. There is compelling logic for such a move since it is in keeping with the spirit of corporate governance, increasingly being codified by regulators and administrators. The era of JRD Tata and then Ratan Tata when the two stalwarts headed the Tata Sons and the major trusts, is over. The personalities of the two men, as well as their value systems, were enough guarantees that they would wear the two hats without compromising on the interests of either.

At a time when Sebi has been insisting, albeit unsuccessfully, on splitting the position of chairman and managing at listed companies, it is the right optics for a business group that has defined standards of corporate behaviour in India to set the example, even though there are no rules to that effect.

In this, the group’s history provides a perfect precedent. For long stretches before JRD Tata became the numero uno at both institutions, a non-Tata often headed the trusts. In the 1940s for instance, Ardeshir Dalal headed the Sir Dorabji Tata Trust, while in the 1950s it was career diplomat John Mathai who became its chairman. Homi Mody, also chaired the SDTT besides serving as chairman of Indian Hotels and Tata Electric Companies.

What may have been a matter of choice in the past, could soon be institutionalised. When that happens it will come with its set of potential headaches. For long the trusts played a benign role in the Tata Sons. They have never been known to veto a major decision. Over the years, the Tata Sons amended its Articles of Association whereby only eight distinct types of decisions require the approval of the Tata Trusts, and that too only from a majority of the trustees. The change in the articles was aimed at giving greater operational freedom to the chairman of the Tata Sons, but it also meant that in the specified areas, the trusts would have a say.

That the largest shareholder in a company should enjoy that right seems rather obvious. But under different leaders, it will leave open the possibility of the trusts overriding a decision by the chairman of the Tata Sons. It is a risk that every other family-owned company runs. The trusts are the Tata family from the perspective of shareholders rights, and protecting their interests, in this case the income they derive from their stake which goes into their philanthropic activities, is their duty.

The Articles of Association of the Tata Sons in prescribing for the selection of the chairman as well as his removal, empowers the trusts laying down that the selection committee for the task shall comprise three persons nominated jointly by the two trusts who may or may not be directors with the company, one person nominated by and from among the board of directors of the company, and one independent outside person selected by the board for this purpose.

The balance of power is clearly in favour of the trusts, and the proposed amendment will only cement that equation.

The problem is it won’t bring to an end the uncertainty regarding the future relationship between the two with chances of friction if their goals are in conflict. The trusts’ problem is that it is dependent almost completely on the payout from the Tata Sons, something which places the trust at a disadvantage as compared to, say, the Azim Premji Foundation, which does not have to rely on the dividends from Wipro Ltd., since it has an alternate source of funds in the Premji Invest, the family office of the Premjis.

With the Tata Sons almost completely dependent on TCS, which has consistently accounted for well over 90 percent of the holding company’s dividends and share buyback proceeds, the trusts’ future work will be limited by the fortunes of the software mogul.

What both the Tata Sons and the Tata trusts really need, is another cash cow.