Saturday, December 17, 2016

Squandering a Tradition of Ethical Leadership Instead of Protecting the Accrued Reputational Capital: The Case of Ratan Tata in India

In India, Ratan Tata was a revered figure, dubbed Mr. Clean, until the end of 2016, by which time serious allegations of financial improprieties had cut into the stellar reputations of both the man and the famous company founded by J.N. Tata, who had intentionally applied his Parsee ethic to the founding of India’s first steel company with a zero tolerance for corruption. Generally speaking, strategic ethical-leadership and even the resulting reputational capital depend on the persona of whoever is in charge of a company, and not even family linage can be counted on to perpetuate a culture of ethical leadership and protect a company’s accrued reputational capital.

One of the most serious allegations of financial impropriety in the Tata conglomerate came from Ratan Tata’s chosen successor, Cyrus Mistry, in October, 2016. Citing an internal audit, he reported to Tata’s board that the company’s “airline joint venture, AirAsia, had made more than $3 million in ‘fraudulent transactions’ with two companies.”[1] In a reaction befitting guilt, Ratan Tata ousted Mistry as a result; the rationale—that “the board of Tata Sons lost confidence in him and in his ability to lead the Tata Group in the future”—can be interpreted as implicating even the board, which at the very least was doing Ratan’s bidding rather than protecting the company.[2] Firing the messenger is not the sort of move that protects a company’s reputational capital; rather, the dismissal suggests that the company’s culture was not appreciative of whistle-blowers.  At the very least, the reaction sent a message to potential whistle blowers to keep quiet. The company may actually have been rife with corruption, rather than having faltered in one instance.

In December, 2016, Subramanian Swarmy filed a court complaint calling for “an investigation into allegations from a government report that [Ratan] Tata in 2008 used a front company to apply for a telecommunications license, potentially circumventing the limits on the number of licenses one investor could hold.”[3] At the time, investors were competing for licenses to provide cell-phone service in India. In 2013, India’s Serious Fraud Investigation Office recommended prosecuting Ratan Tata, yet the government did not file a case in court. Besides doubtlessly having government connections, he could take advantage of longstanding reputations of his company and himself—something he could not do in December, 2016.

Mistry doubtlessly believed that the reputational capital of the company was at stake. “Never before has the Tata Group, including the philanthropic objectives of the Tata Trusts, been in jeopardy to this extent and scale,” he said in a public statement in December.[4] Accordingly, he said he had been trying “to protect the Tata Group from capricious decision-making by the interim chairman,” Ratan Tata.[5] Long past were J.N. Tata’s religious (i.e., Parsee ethic)-commercial decisions to provide nice bungalows with yards (after Tata’s son Dorab had viewed the squalid housing conditions of steelworkers in Pittsburgh), and free schools and hospitals in the village he carved out of the jungle for India’s first steel company, Tata Steel.[6] J.N. Tata regarded the company, the first venture of Indian self-reliant steel-making in British India, as playing a significant role in India’s eventual economic and political independence. In contrast, Ratan Tata was doubtlessly chiefly concerned with making money.

What is the lesson we can extract from this case of a mammoth family business? Even family linage cannot guarantee the continued salience of religious ethics—in this case, J.N. Tata’s Parsee environmental and charitable ethics—in the strategic leadership of a company. Put another way, ethical leadership is a function of persona rather than being institutionalizable in nature. So too, a company’s ethical reputational capital can quickly be squandered by a CEO/board-chair even though a company’s reputation might be the sort of thing thought to be inherently institutionalized. Even when a company is handed down to the next generation, diligence is necessary to safeguard the accumulated reputational capital; it cannot be assumed that tomorrow will be like today.

[1] Geeta Anand, “A Clash Atop India’s Tata Empire Has a Titan on the Ropes,” The New York Times, December 17, 2016.
[2] Ibid.
[3] Ibid.
[4] Ibid.
[5] Ibid.
[6] Skip Worden, “The Role of Religious and Nationalist Ethics in Strategic Leadership: The Case of J.N. Tata,” Journal of Business Ethics 47, no. 2 (October, 2003): 147-64.