The Governance Checklist

At Tata Steel, corporate governance isn't a regulatory Annual operating plans,

embellishment. Rather, it is a corporate DNA which will go budgets and updates
into the making of a turbo-charged megacorp. Capital budgets

Looking at him dressed in indigo-blue jeans and a casual half- Quarterly results of the
sleeved shirt, it's hard to tell that Jamshed J. Irani has slept for all company
of three hours the previous night. His face, chubby and calm, Minutes of all meetings of
doesn't betray the slightest hint of fatigue, or turmoil, that the various committees
managing director of Tata Steel must be experiencing. Barely five
hours earlier, at three in the morning, he's flown into Mumbai from Remuneration of senior
the steel major's sprawling works at Jamshedpur. But it's not the executives
long hours that must be stressing out the workaholic Irani. Rather, Legal issues and notices
it's the unpleasantness of the task carried out over the previous 16
hours that must weigh on the soft-spoken 65-year-old's mind. Safety and environmental
issues
India's oldest steel manufacturer, you see, is going through a Default in loans, and bad
painful phase of restructuring. Last year, it decided to do debts
something it has never done in its 94-year history: sack its officer-
level employees. Under a Performance Ethic Programme (pep), Issues of public liability
Tata Steel has identified 1,200 officers it wants to either repurpose Any new joint ventures or
or let go. And Irani had spent the previous day at Jamshedpur, collaborations
personally explaining to the distressed employees-most of whom
have never dreamt of a life outside the corporate cocoon in Transactions involving the
Jamshedpur-why the move is an issue of organisational survival. corporate name
With that, he also signalled the formal rollout of the dreaded Labour issues, including
programme. 'Tough times call for tough decisions,' says Irani wage pacts and VRS
poker-faced, sitting on a sofa in his upmarket apartment on
Mumbai's Marine Drive. Sale of subsidiaries or
investments
If there's consternation inside and outside the industrial township,
Foreign exchange exposure
it's for good reason. Even before the first stake was driven into the
soil of Sakchi (later renamed Jamshedpur) on February 27, 1908, Non-compliance in
the idea was to create an industrial island, one that none of its shareholder service
tribal workers would want to leave. In fact, in a letter to his son
Dorabji, the founder Jamsetji Nusserwanji Tata actually listed what all the new steel factory must
have (right from wide roads to quick-growing trees to places of religious worship) for those who
toiled for the new mill. The ensuing managements more than delivered on the founder's vision,
even setting up poultry and dairy farms, besides schools and hospitals.

The utopia called Jamshedpur worked fine as long as its benefactor could work on a cost-plus
basis. But liberalisation of the sector in the early 90s suddenly made supporting a workforce of
78,000 and a township of several lakhs well nigh impossible. Coupled with the downturn in steel,
profits slid rapidly. Between 1996 and 1999, net profits crashed from Rs 56 crore to Rs 28 crore.
It wasn't until last year that manic cost cuttings and improvements in efficiencies helped profits
rebound to Rs 43 crore. This year, profits are expected to be significantly higher than the previous
year's.
Governance For Competitiveness
Having just finished its expensive Rs 7,000-odd crore modernisation drive, and having just
resolved the touchy succession issue (Irani retires in July and will be succeeded by Tata Steel
lifer B. Muthuraman), the challenge ahead is to put the steelmaker into a new orbit of growth; a
double-turnover-every-four-years target set by none other than chairman Ratan Tata himself.
Says Irani: "We have very good systems in place. What we need now is a good organisational
structure."

A lean and flatter structure is needed not just for competitiveness. When Muthuraman moves to
the top slot in another two months, he will do so at the cost of other senior executives such as
Tribidesh Mukherjee, Executive Director (Operations), and S. A. Vandrevala, Executive Director
(Sales & Marketing), who were also in the running. Therefore, organisationally, two issues will
become critical. One would be to create a set up that balances centres of executive power
internally and, two, to strengthen the board's strategic role in not just overseeing the
management's performance, but also in ensuring continuance of the hallowed Tata values.

To take care of the first issue, a flatter corporate structure has been proposed. There will be a
principal executive officer and a chief internal auditor under the managing director, three deputy
managing directors (one each for steel, allied businesses, and administration), and two vice-
presidents (one for finance and the other for human resources). But a company which has just
won the National Award for Corporate Governance (it beat companies like Infosys, which won the
award last year), must now marry the seemingly irreconcilable objectives of maximising
shareholder wealth (and thus focusing more and more on the core business) with social welfare.
Says S. A. Sabavala, a long-time director on the board and a confidante of the Tata family: "Let
us not forget that our job is much bigger than making steel. Wealth created must go back to the
community."

It's precisely because of this inherent dilemma that companies across the world define corporate
governance variously. For instance, in the US, the focus of governance is on enhancing
shareholder wealth. In a country like Japan, the governance universe is larger and covers all
stakeholders, meaning shareholders, employees, suppliers, customers, and the community. At
Tata Steel, as Irani explained, corporate governance is defined as "making proper use of and
being accountable for the rights and values that have been reposed in the corporate body by
shareholders". Even to the casual observer, it is clear that Tata Steel will increasingly want to
outsource most of the social services it currently provides. In fact, there are even plans of setting
up a joint venture to turn part of the 200-acre Jubilee Park in Jamshedpur into an amusement
park, rides and all. Says Mantosh Sondhi, former steel secretary and a Tata Steel director for a
quarter century: "(The company has) to cut down on facilities it itself provides, but at the same
ensure that workers get the benefits they have been getting."

Last year, the Securities and Exchange Board of India asked A.V. Birla Group's Kumara
Mangalam Birla to frame a draft policy on corporate governance, with an aim to enhance financial
and operational transparency in corporate India. Most of the recommendations made by Birla,
who's also on the Tata Steel board, have been made mandatory.

In the case of Tata Steel, however, some key recommendations had been in place historically.
Like the audit committee, which was set up way back in 1986. But the need to put down a formal
structure of governance on paper-a process that began four years ago-rose as much from Tata's
own desire for a strong board as regulatory compulsions. Says Irani: "We were doing a lot about
good governance, but there was a need to do more."

Governance For Globalisation

As against the Sebi mandated four board meetings a year, Tata Steel does eight-two every
quarter. There's also a Committee of Boards which vets and debates all management proposals
before they reach the 17-member board. As the shareholder's watchdog, the board looks at all
key issues such as financial performance, capital expenditure, executive remuneration, and
labour and legal issues. The meeting's agenda is pre-circulated to the board (except quarterly
results) so that the actual meeting only lasts for a couple of hours. There are two officers who
report directly to the board, bypassing the managing director. They are the internal auditor and
the ethics counsellor. While board meetings have traditionally been transparent, the board
veterans say that there's more of issue-based discussion and participation. "In my days, company
leaders were gods... everyone had to agree with them," says Sabavala.

An above-average governance practice will be critical as Tata Steel mulls going global. Currently,
it is looking at diversifying into ferro chrome and titanium, high-margin, high-demand segments.
The ferro chrome business will likely come up in Australia, simply because the cost of power is
just a fifth of India's. That apart, Tata Steel is game to invest in any other business the group as a
whole might want to promote. Says Muthuraman: "Tata Steel is not a steel company. We'll do
whatever is necessary to meet our growth targets (of doubling turnover every four years)."

The current churning at the company, then, is aimed at bringing in people who share the belief.
Which is why it isn't just downsizing; it is repurposing people and where the required talent is not
available internally, it will hire from outside. According to Muthuraman, the growth path up until
2010 has already been defined. Therefore, a good governance system will help with fund raising
in international markets, should Tata Steel decide to either list itself on foreign stock exchanges
or raise debt. Agrees P.L. Sanjeev Reddy, a former bureaucrat and part of the panel of judges
who rated nominated companies on 18 parameters for the National Corporate Governance Award
this year: "The quality of corporate governance will certainly be a competitive differentiator in the
global marketplace."

Yet, there is nothing competitive about corporate governance in India. Few companies have
bothered to define the responsibilities of their board of directors, and fewer still have any formal
structure in place. In fact, a study conducted by the US-based Conference Board reveals that
corporate governance is still a lip service in India. Says Poonam Barua, Regional Director of The
Conference Board: "There's a long list of checkpoints to evaluate the effectiveness of corporate
governance, but most Indian companies are not even aware of it." Neither is the concept of
corporate governance itself fool-proof. For example, it requires companies to have independent
directors on the board. But such directors have limited powers; in any case, they are nominated
by the chairman or other directors. Says P.K. Kaul, an IDBI nominee on the Tata Steel board:
"There's only so much independence an independent director can exercise. Eventually, it boils
down to what kind of values the management and the promoters have."
Luckily for Tata Steel, its values were spelt out by a pioneering visionary-cum- philanthropist
almost a hundred years ago. The challenge now is to make them last for another hundred
years...and more.