13/01/2017 12:07 PM IST | Updated 13/01/2017 1:03 PM IST

N Chandrasekaran As Tata Sons Chairman: Tata Has To Give Him The Support That Mistry Did Not Get

What he will bring to the Tatas and what awaits him there.

Hindustan Times via Getty Images
N Chandrasekaran and Cyrus Mistry during the Annual General Meeting of Tata Consultancy Services.

The child is the father of the man, wrote William Wordsworth. The sentence has been interpreted to mean that what you are as an adult is often the result of what you learnt in childhood. So one should invest in childhood to deliver a good adult.

In the Tata context, the proverb has acquired a more direct and important meaning. When the group appointed N Chandrasekaran as head of its nodal holding company Tata Sons, the first non-Parsi to head India's biggest business group, it essentially affirmed that it will be served best by the business prodigy it had personally nurtured.

Tata Consultancy Services (TCS), which Chandrasekaran led with distinction since 2009, is the one company that the parent owned and nurtured fully from birth. And the fact that it is today being asked to part with its boss to rescue the parent from ignominy speaks volumes about the child that is now capable of fathering the parent.

In a fundamental sense, TCS, which Chandrasekaran converted into India's most valued company (market value: Rs 4.5 lakh crore), has always been the tail that allowed Tata Sons to wag the rest of the group's dogs. Over 90 percent of Tata Sons' dividend income comes from TCS. It is thus apposite that the man from TCS should be the chosen one to put the fizz back into the group's fortunes.

In picking Chandra, the Tata Sons selection committee is essentially acknowledging the grave mistake it made in 2012, when it chose Cyrus Mistry to head the group. That was a monumental boo-boo for three reasons.

First, you don't pick your biggest minority shareholder, who may have his own agenda, to run your group. Mistry had direct 19 percent minority interest in Tata Sons, and the interests of a shareholder are different from those of someone who is purely a professional manager. A professional CEO is the agent of the promoter; a co-promoter is both agent and sibling. A perfect setting for conflict.

Danish Siddiqui / Reuters
Tata Sons chairman-designate Natarajan Chandrasekaran.

Second, you don't pick an outsider with his own profile to run the group at a time when Ratan Tata had no intention of walking off into the sunset. You needed someone who had his trust and respect and who was widely respected within the group. This is not to dismiss Mistry's own entrepreneurial and leadership skills for the job, but the trust factor was probably missing right from the outset.

Third, you don't pick a boss from an industry (construction) whose values are quite different from those of the Tata group. Again, this is not to suggest Mistry did not understand the Tata ethos, but the fact remains that he was not from the Tatas. The rest of the group's businesses would have viewed his entry with some trepidation. The Tatas needed a widely respected insider, not an unknown quantity.

In contrast, Chandra ticks all the right boxes to head Tata Sons. He has headed the Tatas' most successful business and creator of value. He has Ratan Tata's blessings. He is down-to-earth and will not ruffle feathers unnecessarily. He is the right age, 53, which means he will be there as Tata Sons helmsman for the next 15 years and more, assuming he delivers. His experience at TCS would have given him insights into not just software, but almost all industries that are served by TCS. In short, he probably knows what drives business success in more industries that almost anyone in the Tata group.

But most important, his selection may be vital to rescuing the group from the needless legal tangles it has gotten into by ousting Cyrus Mistry unceremoniously. Chandra's first job will be to see if he can use his good equation with Mistry to steer the group away from an endless legal conflict that can benefit no one: neither Mistry nor Tata Sons.

He has headed the Tatas' most successful business and creator of value. He has Ratan Tata's blessings. He is down-to-earth and will not ruffle feathers unnecessarily.

Apart from ending the fight with Mistry, Chandra's big challenges remain the same as those facing his predecessor.

#1: The group has huge debts, and paring its size means shrinking the group, by divesting large parts of the loss-makers. As at the end of March 2016, the Tata Group had a net debt of about $25 billion, but its capex and cash flows were roughly equal at $9 billion, according to figures Mistry gave out in a September 2016 interview to a house publication. This means the surpluses needed to pare down debt can only be generated by flogging the losers, especially in the steel and telecom sectors.

#2: Chandra has to put in place a clear capital allocation plan for group companies. Currently, the cash guzzlers get frequent infusions of capital from both the mother ship and other group companies, but this model of trying to keep all companies afloat for sentimental reasons is not sustainable in a world where competition is fierce. Throwing good money after bad is not going to help the Tatas grow their better businesses, including TCS. These capital allocation norms obviously need the blessings of Ratan Tata, especially since he has some pet projects in automobiles and airlines, but outside these personal interests, Chandra will have to draw red lines on who will get more investment and who will have to fend for himself. Mistry was trying to do the same, but this is where the trust deficit up-ended him.

#3: Chandra also cannot afford to take his eyes off TCS, which has now appointed a new CEO in Rajesh Gopinathan, hitherto the company's Chief Financial Officer. The problem is that the software services industry has entered a period of uncertainty and structural change. It has to change its business model from pure labour arbitrage to more value-added areas, where linear growth is not going to be easy. The future is in digital technologies, products, platforms, artificial intelligence, cloud computing, and robotics, and automation will ensure that large parts of the plain-vanilla coding jobs that TCS has been a champion in will vanish over time. Gopinathan will have to manage this transition, but Chandra has an even greater stake in his success because TCS is the key to the overall group's own long-term growth. Chandra cannot afford to focus only on Tata Sons. He has two full-time jobs, and neither of them can be sacrificed for the other.

The bottomline is simple: if anyone can fix the house of Tatas, it is Chandra. Ratan Tata has made the right choice. But if Chandra is to succeed, Tata has to give him the kind of support that Mistry did not get.

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