Dynastic shift at Tata keeps the clan intact

Watch out Rahul Gandhi! Yesterday’s news that Noel Tata, a reticent low-key member of the Tata family, will not be the next head of India’s biggest and most respected business group shows that reluctant dynastic heirs do not always win by default. Gandhi of course is showing less reluctance now that he is wading into Uttar Pradesh’s coming state election campaign, but he is still an uncertain heir and questions are being raised about the wisdom of his dynastic succession at the top of the Congress Party – most recently by an international magazine, The Economist.

Gandhi has the advantage that he is backed by Congress’s current president, Sonia Gandhi, his mother, whereas Noel Tata was not backed by Ratan Tata, his half-brother who retires as chairman of Tata Sons at the end of next year. Ratan has said publicly that Noel, 54, who heads some of the group’s retail and other businesses and till yesterday evening was the seen as the front-runner, was not ready for the job.

Instead of Noel Tata, it is Cyrus Mistry, a 43-year old businessman, who is to take over from Ratan Tata at the end of next year. This does however keep the job within what is a complex extended Parsi family. Mistry (left) belongs to the Pallonji family and Noel is married to his sister.

He and his elder brother Shapoor are, with their reclusive father Pallonji Mistry, the largest single shareholders (with a combined 18% stake) in Tata Sons. The Tatas’ personal equity stake is small, though philanthropic Tata trusts hold some 66% of the group.

Mistry was yesterday appointed deputy chairman of Tata Sons. He will work alongside Ratan Tata, 73, heading a group that has a combined market capitalisation of nearly $80bn with 425,000  employees and revenues of $83.3bn covering businesses in India and abroad that range from tea, salt and hotels to steel, telecoms, autos and missiles. He graduated in civil engineering from London’s Imperial College and went on to the London Business School.

His appointment has been publicly welcomed by India’s business fraternity, with people who know him talking about his intelligence and good strategic judgement, though there were some private criticisms and also inevitable queries about his ability (as there once were about Ratan Tata). He was originally on the five-man committee set up last year to select Ratan Tata’s successor, so there will be questions about how  he came to get the job himself once other candidates had been put aside. There will also be questions about how the direct influence of his family on Tata companies will play out.

Presumably, Mumbai speculation suggests, his family saw the problem the committee was having finding a successor, especially given Tata’s (unexplained) lack of enthusiasm for Noel Tata (left), and decided to seize the opportunity to capitalise on its majority shareholding, shifting the dynasty from the Tata name to Palonji-Mistry. If Ratan Tata had backed Noel, it might have been difficult for Mistry, as Noel’s brother-in-law, to object and a Tata would have remained in charge.

Reports suggest that Ratan Tata respects Mistry’s business acumen, and there is also the advantage of his relatively young age. Mistry is currently managing director of the construction part of the Shapoorji Pallonji group, named after his grandfather who founded the business nearly 150 years ago. With revenues of some $2bn a year, which he has built up, it has been responsible for major projects in India and the Middle East and Africa. This means Mistry has been exposed to the ways of one of India’s rougher industries, though maybe not so much as his elder brother Shapoor, whose responsibilities include real estate. Both brothers are directors of various Tata companies, and Cyrus Mistry has been on the Tata Sons board since 2006.

Cyrus Mistry will therefore have useful experience for steering the Tata group’s basically clean reputation. This possibly gives him an advantage over Ratan Tata, who has always seemed uncomfortable with the complexities of political and corporate corruption that has grown enormously in India during the 20 years he has headed the group. “I can say, with my hand to my heart, that we have not in fact partaken in any clandestine activity,” Tata said two months ago when being questioned about his group’s involvement in India’s far-reaching telecoms scandal.  “I think there are many honest businessmen. There are many that bend. I am happy that I have not bent”.

So while the direct line of the Tata dynasty is being broken after three generations, control of the group stays within the extended Tata-Pallonji family and thus within the fold of the Parsi community and (Zoroastrian) religion.

Ratan Tata (right) will probably continue to head some of the Tata trusts, building up their charitable work, and non-family members might become chairpersons of major companies like Tata Motors and Tata Steel that are currently headed by Ratan Tata.

This looks a sound way to cover both dynastic succession within the clan, and shareholder power, bringing in a young executive who can gradually assert his authority, as Tata has done.

And the lesson for Rahul Gandhi? Start performing like the national leader India desperately needs. As The Economist put it, “the consequence of being in thrall to a bloodline is a weak party that lacks shared policies or common values”. Tata, which is far from weak, has managed its succession after some debate about admitting outsiders. Are Congress and the Gandhis strong and self-confident enough to do the same, should their heir apparent remain reluctant?