A framework to understand the Tata-Mistry imbroglio

There are competing models of capitalism, stakeholder and shareholder. Japan and Germany used to follow the former, and it worked so well for Japan that America got threatened. Remember, how in the ’80s NTT DoCoMo was the world’s most valued company, Sony Corp had bought Universal Studios and the Japs bought Rockefeller Centre? The US brought in shareholder capitalism, and surged in its economic growth, even as Japan stagnated.

In stakeholder capitalism the interest of various stakeholders is looked after in almost equal proportions. Employees get a lifetime job guarantee. Customers get total quality control. Suppliers are limited and grow along with the customer. Under shareholder capitalism, the interest of suppliers of capital assumes primacy, and others fall into place.

The Tata group, when it espouses the Tata philosophy, leans towards stakeholder capitalism. So, before shutting down units, as Mistry proposed, it seeks first to find ways to make them viable. This is what knits the group together and engenders employee and customer loyalty, thus creatingthe Tata brand.

The Mistry group leans more towards shareholder capitalism. It demands a fair return on capital employed to justify a business. Hence, its plan to shut down units, e.g., the Nano project.

This dichotomy of views helps explain a lot of the discord. Of course, there were other issues; there had to be for such a sudden corporate action.

Some of the Tata companies such as TCS and Tata Industries, have held EGMs which voted Mistry out of directorship.

Others, such as Tata Motors and Tata Power, are holding meetings later this month.

Now let’s apply this framework to look at the recent news about Italy’s largest bank, UniCredit, laying off 14,000 employees over three years, in order to present potential investors with a plan to raise €13 billion to prevent a bank failure. Your view on the move would alter, depending on whether you were an employee or a shareholder.

Both models have advantages and disadvantages. The disadvantage of a stakeholder model is, perhaps, that it does not respond fast enough to changes in a modern world.

The disadvantage of the shareholder model is that it is not humane enough to create loyalty from employees or customers or suppliers. Hence, it doesn’t help create brand value.

Shareholder capitalism, too, has its flaws. It was a focus only on ‘shareholder value creation’ that led to the distortions which caused the 2008 global financial crisis.

Firms, such as Lehman Brothers and Citi, in their quest for growth to satisfy investors, created fuzzy derivative instruments, such as sub-prime mortgage loans and CDOs. These allowed them to increase business with less capital. When the lunacy was discovered, the financial world checked into the asylum.

Central banks then resorted to quantitative easing or QE, to create enough liquidity to enable them to lend to borrowers to create consumption or investment. Neither happened. Instead, the liquidity went to build asset bubbles, driving up both bond and stock prices and driving interest rates into negative territory.

Excesses of any kind are bad, and negative interest rates are laying the foundations for the next crisis. This will be in the impending bankruptcy of pension funds.

(The writer is India Head, EuroMoney Conferences. The views are personal.)