Did Cyrus Mistry misread the heartbeat of the Tatas?

Countries, companies and cricket teams, all get succession planning wrong more times than they get it right. Whatever the other issues involved, the sudden and shocking dismissal of Tata Sons Ltd chairman Cyrus Mistry is a clear instance of yet another company getting succession planning all wrong. It is a malaise that has laid low companies such as Citigroup Inc, Walt Disney Co, and Infosys Ltd. Apart from going wrong by picking someone unsuitable for the role, companies can also go wrong by mistiming the move--often by not picking a successor until it is too late. But why do smart companies, run by smart people, go so wrong when it comes to succession? And who is responsible?

The answer to the second question is simple: The board of directors. A board is meant to represent the interests of all shareholders. Yet, it is a rare board that will challenge the promoter of a family-owned company, or the rock-star CEO of a board-run one. This may work---but it is hugely dependant on the calibre and character of the CEO or chairman in question.

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For instance, the boards of both ITC Ltd and Larsen & Toubro Ltd, both board-run, professionally managed firms, have been happy to allow their respective chairmen, YC Deveshwar, 69, and AM Naik, 74, to stay as long as they wanted to, and also pick their successors. Both men have done well by their companies and shareholders and are considered great leaders---in 2013 the Harvard Business Review named Deveshwar among the best CEOs in the world in terms of performance---but both have seen potential (or, at the least, rumoured) successors come and go. Still, it has worked out well for these two companies, but things could have, just as easily, turned bad.

They did in the case of Infosys where, through the 2000s and part of the 2010s, the board of the company was happy to allow the company’s co-founders take turns as CEO when it was clear to most outsiders that a non-founder should have replaced Nandan Nilekani as CEO in 2007 when he stepped down. Perhaps the board was overawed by chairman NR Narayana Murthy who believed that each of the eligible founders should have a go at the top job. In 2013, when it was clear that the company was in trouble (in part because of their choice of CEOs), the board turned to Murthy, who had stepped down as chairman in 2011, and convinced him to return to that role. He did, but stepped down again in 2014, making way for two outsiders, former Ashok Leyland Ltd CEO R Seshasayee, who took over as chairman, and SAP AG wunderkind Vishal Sikka, who became CEO.

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Murthy and Ratan Tata, the chairman of the Tata Trusts, who has now taken over as interim chairman of Tata Sons (he is also Mistry’s predecessor in that role) are both modern-day corporate legends. There’s a lot to like about Ratan Tata, the person. He is a geek at heart, loves dogs, and is passionate about cars and planes. He doesn’t flaunt his wealth and still lives in what is essentially a bachelor’s pad. Unlike many of his peers, he does not directly control the holding company of the group that bears his name. He does head the trusts that are the largest shareholder in the holding company, but then, these trusts are also among India’s most enthusiastic givers. For long, Tata was the elder statesman of Indian business and when he stepped back (a bit) after turning 75, there was no ready successor waiting in the wings to step in. It is difficult to step into the shoes of such a person, just as it is difficult to not be in awe of him.

To find someone to replace Ratan Tata as chairman of Tata Sons, the selection committee (and Tata himself) should have followed a process as rigorous and competitive as the one Jack Welch and the selection committee of General Electric Co ran to find his successor. When, in 2011, Ratan Tata named Cyrus Mistry as his successor, it did seem a convenient choice. Mistry represented a family that had a large stake in Tata Sons and had been on the board of the company since 2006. Mistry became deputy chairman of Tata Sons in 2011, and, a year later, was named chairman. Now, four years later, it is evident that maybe his choice was a little too convenient.

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The success of a succession planning exercise depends not just on the successor but also the predecessor. In 2008, after GE reported a particularly bad quarter, Welch lashed out at his successor Jeff Immelt. However, the rant wasn’t as much a criticism of Immelt’s performance as it was a defence of Welch’s own strategies. Maybe there is a little bit of that in this case too.

But there is also something else. In a 2011 article in Forbes soon after Mistry was named Ratan Tata’s successor, my friend and the best (and also most under-rated) chronicler of the Tatas, the late Jehangir Pocha, wrote: “For RNT (Ratan N Tata), Tatas is life; the companies, the family, the trusts and the employees all deeply intertwined into his very being. How else could he have written his first strategic plan for the group from the bedside of his dying mother, almost as a testament and tribute to her?”

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He ended that article by saying: “Tatas has a heartbeat and power of its own. If they (Cyrus Mistry and Ratan Tata) tap into it, and stay true to it, the rest will take care of itself. “

Maybe Mistry didn’t.

R Sukumar is editor, Mint