The battle between Indian conglomerate Tata Sons and its sacked chairman, Cyrus Mistry, is a classic illustration of how not to bring about a leadership transition.
The falling-out between Mistry and the Tatas was primarily a result of the latter’s unhappiness with the former’s management style and business decisions. Mistry was the group’s first chairman from outside the Tata family, and also the first to be sacked.
While this is playing out at Tata Sons, it could have happened at any other family-run business in India. The ugly spat alludes to such businesses’ lack of trust in outsiders. Most of India’s top conglomerates—in fact, 67% of all listed companies—are family-owned. They make up around 65% of India’s GDP.
Many of these groups struggle to find a balanced solution to succession issues. Only 13% of family-owned businesses survive up to the third generation and 4% make it beyond that. They often lag behind in shaping future leaders.
So, should leaders let go when the baton is passed? How much control should they continue to exercise? Quartz raised some of these questions with academics. Here are some of the key points they highlighted:
Selecting the successor
Mistry, Tata’s chosen one, was no stranger to the company’s boardroom. He’d been a non-executive director on the group’s board for five years and was selected from a list of illustrious names after over 15 months of deliberation. His father, Pallonji Mistry, remains the company’s largest individual shareholder.
Evidently, the 48-year-old was well-versed with the Tatas’ management style and functioning, crucial for any succession plan.
John A Davis, founder and chairman of the Boston-based research organisation Cambridge Institute for Family Enterprise, wrote in a blog post:
Ownership of a family business is a job that requires certain sensible qualifications. It shouldn’t be treated as a birthright. So select owners with the same care you select key leaders of your family business. And then create the right governance (agreements, policies, plans and discussion forums) for the owners so they can discuss, decide, and manage conflicts in an effective way.
So, in choosing Mistry as chairman four years ago, the Tata Group seems to have followed a reasonable course. However, his ouster is being perceived as drastic and damaging by investors and observers alike. “The board of a $100-billion business should have a leadership succession plan in place before it starts firing, not after,” said Randel S Carlock, an entrepreneurial leadership professor at the INSEAD business school in Singapore.
Giving up control
After a successor is picked, letting go can be hard for the incumbent. So, such business leaders should understand the “spirit behind succession,” said K Kumar, a family business and entrepreneurship professor at the Indian Institute of Management, Bangalore (IIM-B).
“Once a successor is put in place, the predecessor should sever all connections with the business and take up other pursuits in life,” he explained in an email.
However, this isn’t common in India. For instance, N R Narayan Murthy, a co-founder of India’s most celebrated IT firm, Infosys, returned as non-executive chairman seven years after stepping down. He took it upon himself to fire-fight at the software firm he built from scratch with six others.
Tata, too, has been the face of the 148-year-old conglomerate for over two decades. Now he is back, albeit temporarily.
Predecessors must refrain from giving extensive advice and opinion to successors, Kumar added. “Such advice should also be provided with no expectations that the advice would be listened to or implemented either partly or fully,” he said.
One of Mistry’s gripes, as highlighted in his now-public letter to the board and trustees, is that Tata influenced major business decisions.
“The passion for the airlines sector has led Mr Tata to continue his involvement with the strategy of the two airlines. It is on his advice that the Tata Sons board has increased the capital infusion in the sector at multiple levels of the initial commitment,” Mistry wrote in the letter.
Mistry’s letter says the group modified some clauses in the articles of association, limiting the chairman’s ability to make decisions.
Family-owned businesses shouldn’t resort to such limiting of freedoms, Kavil Ramachandran, a professor at the Indian School of Business (ISB), Hyderabad, said.
“Most families do not involve their entire team in all key decisions. Loyalty is seen (as) more important than capabilities. Questioning by non-family executives is not tolerated,” Ramachandran, executive director of ISB’s Thomas Schmidheiny Centre for Family Enterprise, said.
Another sticky issue is not experimenting enough and not undoing bad decisions, said Cambridge Institute’s Davis.
“They (family businesses) need to not only be able to experiment with new ideas but also need to be able to pull the plug on bad ideas. Families in business tend to be okay at experimenting outside their traditional areas and awful at pulling the plug on bad investments,” Davis, who also teaches at the Harvard Business School, said in an email.
Support the successor
In times of a conflict involving a successor, the predecessor must extend support, according to IIM-B’s Kumar. Here’s his explanation:
Usually, a predecessor is fully involved in the process of selecting a successor. That being the case, the predecessor should own up (to) his or her choice of successor and fully accept the consequences (that includes erosion of business value and personal or family wealth) that arise from the successor’s conduct and performance. Keeping the back door open to second guess (the) successor’s actions and to pull the rug from under the successor’s feet only means that the succession has not happened in spirit. This is not to say that the successor gets a carte blanche—the successor can be held accountable through other governance mechanisms, like the board, family council etc. which can be structured to function without the involvement of the predecessor.
Tata Sons’ surprise move to fire Mistry, thus, “does not build confidence in the board or firm for thoughtful leadership,” Carlock said.
“…I see firing the top leader as the last resort when all other options have failed because it destroys the firm’s strategic momentum and confuses the firm’s stakeholders,” Carlock added.