Mumbai: How independent are independent directors? This question has assumed more than cursory interest in the wake of the escalating controversy in the Tata Empire.
The goings-on in the Tata Group have placed the issue of conflict of interest firmly into focus.
Some of the independent directors on the boards of Tata Group firms are also trustees of Tata Trusts, the largest shareholder of Tata Group parent firm Tata Sons, chaired by Ratan Tata.
For example, K.B. Dadiseth, an independent director on the board of Indian Hotels, is also the member of Tata Trusts. While the board of Tata Sons resolved to remove Cyrus Mistry as chairman last month, independent directors on the board of Indian Hotels had reposed their faith in IHCL Chairman Mr. Mistry and had praised his strategic vision.
Similarly, N.M. Munjee, an independent director on the board of Tata Chemicals, is also a trustee of Tata Trusts, and is likely to attend the crucial board meeting of Tata Chemicals on Thursday, to be chaired by Cyrus Mistry.
“Ethically, there is a conflict of interest because governance begins where the boundary of law ends,” said J.N. Gupta, co-founder and managing director, Stakeholder Empowerment Services. “Being a trustee on Tata Trusts, which is the majority shareholder of Tata Sons, the parent company of Tata Group operating firms, just doesn’t meet the strictest governance criteria,” he said.
Mr. Gupta added, “Mr. Dadiseth, as an independent director of Indian Hotels, supported Cyrus Mistry as the chairman but he needs to clear his position as trustee of Tata Trusts, whether he had opined for or against Mr. Mistry’s chairmanship of Tata Sons.”
Mr. Dadiseth, in reply to a detailed query on the role of independent directors, said, “I would not like to be involved in this.”
Further, legal consultants questioned the need for Mr. Tata, the interim chairman of Tata Sons, to have hurriedly called a meeting of all the chief executive officers of various Tata Group companies a day after the Tata Sons board removed Mr. Mistry as the chairman.
These consultants said that Mr. Tata’s move to address CEOs was also flawed and was against corporate governance norms because the CEOs report to the board of respective companies and not to Mr. Tata, who is the interim chairman of Tata Sons.
Mr. Gupta also said that some of the independent directors have sent conflicting signals by backing Mr. Mistry as chairman of Indian Hotels. “If they approve of Mistry and his letter to the Tata Sons board, they need to disclose their positions on the question of Indian Hotels’s acquisition of Searock Property at an inflated price and housed in an off-balance sheet structure, as alleged by Mistry himself.”
Proxy advisory firm Institutional Investor and Advisory Services (IiAS) considered at least 10 independent directors on the boards of various Tata Group firms as having a conflict of interest because of their extended tenure on the board.
According to Amit Tandon, founder of IiAS, “The names include Mr. Dadiseth, Deepak Parekh, Nusli Wadia, Mr. Munjee, Nawshir Mirza, Dr. Homiar Vachha, Subodh Bhargava, Aman Mehta, V. Thyagarajan and Prof. C. M. Christensen.”
“These directors are not in compliance with the spirit of the regulation related to their terms of appointment,” he said “Three power centres are emerging in the Tata Group –Tata Trusts, Tata Sons and operating firms.The boards of these operating companies may become dysfunctional if divergent views emerge between the independent directors. This is of serious concern for the investors and the banks, with loans of more than Rs 2.4 lakh crore to the Tata Group,” he said.
