Synopsis-In India’s legal system, there is no place for redressal if, while following the letter of the law, its spirit is ignored. This can apply to many issues, especially those related to corporate governance, since even a powerful minority shareholder like Mistry is unlikely to get redressal on this count.
On July 12, 2018, the National Company Law Tribunal (NCLT) dismissed Cyrus Mistry’s petition, holding that the board of directors is competent to remove the chairman, and that no selection committee is required to remove the executive chairman. At that time, I had written in this column (bit.ly/2P8Ckgy) how the prime question Mistry had asked was: most boards of companies have a god who can’t be wrong. But what if he or she is wrong?
Perhaps the manner in which he had posed this question was inappropriate, and to the wrong forum. In India’s legal system, there is no place for redressal if, while following the letter of the law, its spirit is ignored. This can apply to many issues, especially those related to corporate governance, since even a powerful minority shareholder like Mistry is unlikely to get redressal on this count. Hence, it is hardly surprising that his plea was dismissed by the Supreme Court on Friday.
Objectively, one expected three things from the Supreme Court in this case. One, to act as an arbitrator and define the parameters of an amicable settlement in a complex case of shareholding in a private company with restrictions on transferability. Two, to define what corporate governance really means in promoter-driven companies in the context of minority rights, corporate democracy and management control. Third, to define what constitutes oppression and mismanagement under the Companies Act 2013.
On all three issues, the apex court has ruled equivocally upholding the 2018 NCLT judgment while carefully sidestepping the question of valuations and terms of separation. This is the right position, as I had argued in September 2020 during Justice Arun Mishra’s aggressive stance in effectively negotiating a commercial settlement between two parties in the telecom case involving spectrum dues.
However, a much larger question will linger despite this legal closure on the Tata-Mistry front. And that has to do with the conduct of the Tata Group in this episode. It will continue to reflect on how decisions were actually taken at Tata Sons, the managerial accountability for repeated strings of poor business decisions — and consequent value erosion — which were effectively rubber-stamped by the board and its independent directors. It will continue to send out the message that non-partisan and professionally meticulous efforts to clean up the debris of previous management decisions will be resisted, where the strong umbilical cord of past decision-makers continues to remain attached in a new management dispensation.
Do you take requests?
If a storied group like the Tatas can demonstrate such a demeanour in the public domain, what is the form of corporate governance we wish to look forward to in India? The question whether providing advice is tantamount to ‘interference’ in the affairs of the company, and the existence of ‘shadow directors’ superimposing their will on board decisions, now remains settled in favour of the latter. While the legality of the decisions justifies this position as long as the board has legally voted, does this observation ignore the reality of how boards are run and decisions are actually taken?
While commenting on the role and accountability of the executive chairman, NCLT earlier had held that the executive chairman does not have a ‘free hand’ in running the company. Her or his powers are circumcised by the collective decision of the board. In principle that is fair. However, it does not allow for a smooth interplay where powerful non-board advisers exist and whose ‘advice’ is tantamount to a ‘direction’.
In the event of serious differences of opinion on matters relating to adoption of difficult decisions, this also blurs the line between executive management and advisers. Paradoxically — and, perhaps, unfairly — the executive management has prime accountability for results but with limited authority, and the adviser has unfettered authority with scant responsibility. This can, and will, create serious issues impacting the future direction of any corporate entity, and is a question that remains unsettled.
In situations of such wide, and repeated, divergence of views, conflicts are bound to arise. Thus, minority shareholders’ perception of mismanagement in running the affairs of the company will not be unfounded. However, India’s current legal structure does not provide a forum for redressal for such intricate issues on the ‘spirit of the law’, though the legislative intent for protection of minority rights is prevalent in many contemporary statutes through the ‘letter of the law’.
God of big things
In view of this precedent-setting judgment, the practice will get strengthened, as it has unequivocally demonstrated, that even powerful minority shareholders like Mistry are, in fact, powerless in this aspect, and will have to subject itself to the will and judgment of the ‘god’ who ultimately ‘controls’ the board — often remotely — through charisma, voting power or sheer influence.
Once again, so what if god is wrong? For the aggrieved minority shareholder, there is no answer to that question — yet. But those have always been the established terms of engagement, and rightly reiterated by the Supreme Court.
The writer is Sloan Fellow, London Business School, UK.