| All in the family
Professional managers could be members of the promoter family or purely employees. However, some very large companies have shown that continuity in the name at the top of the company many times acts as a strong binding force and carries the trust of all the stakeholders. The Tata group of companies is an example. The man at the top is not just a titular head. He gives direction to the group.
At the time of Independence, the Tatas were the largest industrial group in India. Yet, within a few years, the Birlas, with their political investments and using the industrial licensing system, arranged their presence in almost every sector. Tata was a respected name for its value systems, but not for its successes in the market.
Government policy was to discourage 'groups' from expanding in their existing operations because of the misconceived idea that they would become too large, even monopolies. Other family groups used relatives and relationships to expand into new areas. The Tatas would not do so. The government's 'group' concept meant that a common name for the group was a liability; investment by one company in another was discouraged (though it did not stop many from doing so, at times under benami names). A 'group' was restrained from expanding capacity and had to apply for licenses to make products and in locations far removed from their competence. Moving people between companies could make the companies a 'group'. Representation on many boards could bring the companies under the definition of belonging to a 'group'.
J.R.D. Tata had to run the Tata companies in this situation of command and control by government. Between 1950 and the late Seventies, Indira Gandhi's nationalization of banks and insurance, management control over large sections of the textile industry and many other failing industries, reservation for small-scale by the Janata government, made corporate management more difficult. JRD was one of the few who kept protesting against this interference in enterprise autonomy and also one among few who adhered to the rules, however distasteful.
Tata companies fell behind many others who were less respectful of the rules. JRD had few relatives who could be posted to run the different companies, even if he were willing to send them to such positions, and minor equity holdings in many of the Tata companies. He found competent executives to entrust the companies, trusting them to run them in the Tata way and with the Tata value system.
The Tata value system expected that the companies would behave as good corporate citizens and be run in the best interests of shareholders, customers and employees. Major Tata companies in the group were entrusted to charismatic people with managerial skills and the ability to function effectively despite government controls and interferences ' Russi Mody in Tata Steel, Mulgaokar in Telco, Darbari Seth in Tata Chemicals, Ajit Kerkar in Taj Mahal Hotels, were some of them. The Tata style became well set. The chairman might advise but would not interfere in the way in which a company was managed. But Tata companies were expected not to short-circuit the system. They would follow the law of the land. By comparison with many other chief executives, JRD's performance may not have been as good for the shareholders of the companies. But he became an icon because of his transparent integrity and willingness to speak out against the ills of the day.
When JRD handed over to Ratan Tata, the managers he had appointed to run the Tata companies were ageing. Many were major personalities and satraps, and the companies they headed had become identified with them personally. Some developed delusions that they owned the companies they headed. They refused to converge more closely into the Tata fold or follow the new age-specific retirement policies. By 1991, as the Indian economy opened up, many of the government's 'group' restrictions had gone or were going. It took years for Ratan Tata to dislodge the satraps and induct other professionals, amenable to be members of a Tata group. His status as the Number One in the group took a few years to be established. A non-Tata might have lost control over these companies, especially with minority Tata stakes.
His strategy was clear: Raise the Tata shareholding in each company. Rationalize the product portfolio in the group to focus on those that had good prospects of becoming leaders; for example, Tomco, Lakm' and other companies or parts of companies were sold. Develop the Tata name as a trusted brand with clearly stated values. Set standards for excellence that would stimulate each company. Develop a central human resource information bank so that the best and brightest could be watched and used in other companies in the Tata Empire. Encourage each company to develop technologically, improving costs, expanding through acquisition, leveraging assets to produce more value, exposing managers in all companies to training and new experiences, and exploring and exploiting global opportunities. All this was done in a relaxed and non-threatening atmosphere. Inevitably, the process took many years.
During this time, many group companies suffered severe setbacks. These included the large funds defalcation in Tata Finance which was dealt with openly; the collapse of market shares and share values in Telco because, it was whispered, of 'Ratan Tata's folly', the Indica car project that went on to become a crown jewel; the decline of profits and share values in Tisco as steel prices went down; the debacles in Tata Chemicals and Rallis; and many others. Allied to the slowness in implementing changes in the group's functioning, there was criticism. But never was there a demand for a change at the top.
Possibly, a more accomplished chief executive might have brought about these changes much faster. Performance might have improved more speedily. Equity holdings might have been raised faster. The much-awaited public issue of TCS might have taken place earlier and infused needed capital for the purpose as well as for other expansion. But the value system and culture of the Tata group nursed carefully by both JRD and Ratan Tata, might not have survived unscathed. A non-Tata would not have retained his job in the face of the many debacles.
Large corporate groups must look for the best man to run the group. They might well be outsiders ' not members of the family with its name on the group door. But non-family people carry the disadvantage of job insecurity in face of major or repeated setbacks. Small shareholders, financial institutions both domestic and foreign, and family members want their incomes and asset values to keep rising. If they falter, stakeholders will be ruthless in seeking a change of guard. But hereditary top positions in a group are protected, especially in large groups with many different businesses within them.
Ratan Tata could persevere with his plans for the Tata group in the face of adversities and criticism. So perhaps could a Godrej and some others. That is why only a Tata can succeed a Ratan Tata. Not because he will necessarily be more capable than anyone else, but because despite their still small shareholdings in the Tata companies, the Tata name inspires trust, a solidity of assurance in having a Tata at the helm in good and bad times. Gandhi said that industrialists held their companies as trustees for the community. All stakeholder interests must believe this of the family that runs a company. They must be perceived as not wanting to make quick money for themselves but to grow wealth for the stakeholders and the country. When the stakeholders have this confidence in the family name, the name itself adds immense value for shareholders. It is ironic that these desired results from good corporate governance might well come from family businesses as they replicate the Tata magic.