Editors’ Note: Mircea Raianu follows up on last year’s post on the Tata Trusts with historical insights on the corporate scandal that has rocked India and has implicated the nation’s largest philanthropy.

In late October 2016, an extraordinary corporate scandal broke out in India. Tata, the country’s largest, most influential, and most widely respected business group, suddenly fired its chairman, Cyrus Mistry. Throughout its long history, stretching back nearly one hundred and fifty years, Tata carefully cultivated a public image of strict ethical conduct, philanthropic benevolence, and service to the nation. It ostensibly stood apart from the rough-and-tumble world of unfettered Indian capitalism, otherwise stereotyped (not entirely unfairly) as one of internecine family disputes, boardroom backstabbing, and protracted legal battles. That exceptional status seemed to change overnight with Mistry’s shock dismissal. Tata’s hard-won reputation was in tatters – and philanthropy, as it turned out, was at the heart of the scandal.

Mistry took over in 2012, succeeding Ratan N. Tata, who had steered the group through the winds of globalization and a rapidly shifting corporate landscape for two decades. The former chairman had brought over 100 constituent companies, producing everything from salt to steel to software, closer together under the control of the main holding company, Tata Sons. He had also guided Tata’s spectacular overseas expansion, becoming a symbol for India’s success on the world economic stage. When Ratan Tata retired to take up the job of chairing the Tata Trusts on a permanent basis, he left to his successor the difficult task of further streamlining the group’s operations. But Mistry, the first non-family member to ever lead the group, continued to labor in Ratan Tata’s shadow.

The mechanism by which Mistry was removed is arguably more significant than the reasons why. Last year, I wrote on HistPhil about the history of the Tata Trusts, showing how they came to own 66% of the share capital of Tata Sons. In so doing, they supplanted the role once occupied by the “managing agency” – a peculiar form of corporate organization in India, which lasted from the colonial period to the early 1970s. This system concentrated the management of joint-stock companies in the hands of a select few individuals or holding companies. Agents contributed very little capital, while controlling boards of directors and extracting hefty commissions. Managing agencies did help to get new enterprises off the ground and provided much-needed expertise.[1] But amidst widespread accusations of corruption, cronyism, and inefficiency, the system was eventually abolished. Tata Sons, a former managing agency, holds together its sprawling business empire partly through the “glue” of the Trusts.

The contradictions of this arrangement, which had long been a cornerstone of Tata’s model of ethical business practice, have now been exposed. By taking charge of the Trusts after his retirement and remaining involved in day-to-day operations through a back door, Ratan Tata allegedly made it impossible for Mistry to do his job. Refusing to go quietly, Mistry claimed the trustees attempted to influence the management of Tata companies and requested price-sensitive information in violation of insider trading rules (India’s Securities and Exchange Board later dismissed this charge). He believed Ratan Tata set up an alternative power center within the Trust to undermine him. In short, Mistry painted a picture of a complete breakdown in governance, which blurred the boundary between profit-seeking and philanthropy.

On the other side, the trustees who found themselves in the line of fire maintained that the poor performance of the companies under Mistry’s leadership had damaged the financial stability of the Trusts. Since the Trusts’ “main asset” was the stake in Tata Sons, they needed to “ensure that the value of that asset doesn’t go down.” Indeed, soon after Mistry became chairman, the trustees grew nervous about protecting the Trusts’ dividends. The Trusts already had the power to nominate one-third of Tata Sons’ directors. New bylaws passed in 2014, to which Mistry had acceded, granted the board additional oversight over the chairman’s activities – in effect reducing his autonomy. Mistry thought these new powers had been abused. Ratan Tata and the trustees saw themselves as drawing a red line around the group’s philanthropic objectives.

The fallout from the scandal reverberated far and wide. Both the Indian government and civil society took notice. The Income Tax Department began to investigate the Trusts for misuse of tax exemptions, following up on a 2013 report by the Comptroller and Auditor General (CAG). This report alleged that the Trusts were making considerable profits that were not being spent on charitable purposes.

Meanwhile, beleaguered NGOs have come to the defense of the Tata Trusts. Several reputable organizations who have worked with the Trusts, including Pradan, Seva Mandir, Srijan, Action for Social Development, Foundation for Ecological Security, and the Aga Khan Rural Support Programme, expressed their concern that “the current environment might have implications on the Trusts which would have serious consequences on functioning of the civil society actors.” As Prime Minister Narendra Modi continues his “crackdown” on NGOs by restricting foreign contributions, these groups seek to protect domestic sources of funding and support.

Looking ahead, as the Financial Times observes, Tata still faces an unresolved contradiction “between the cash flow requirements of the trusts and the growth ambitions of the holding company.” Mistry suggested cutting some of the group’s losses by shedding unprofitable businesses, but also presided over a reduction in dividends. The ideal solution, of course, would be to enact (and abide by) a clear separation of philanthropy and economy.

As historians, however, we might question the terms of this distinction, and explore how they are set in different contexts. As the rich contributions to the new edited volume Philanthropy in Democratic Societies demonstrate, historians of capitalism must also be historians of philanthropy – and vice-versa.[2] From a comparative perspective, the scenario described in this post is particular to a certain regulatory culture that does not exist everywhere. In the United States, following the passage of the Tax Reform Act of 1969, foundations are barred from owning more than 20% of the share capital in business ventures. In Northern Europe, by contrast, “industrial foundations” are common, owning controlling stakes in well-known companies such as Carlsberg and Ikea. One study has found that this model can work effectively, provided there is sufficient “managerial distance” between the board of a foundation and the holding company it owns.[3] There is a clear lack of such “distance” in the Tata case, and this has deep historical roots. Calls for greater transparency must therefore take into account the full range of changing social, political, and above all economic functions of philanthropic organizations.

-Mircea Raianu

Mircea Raianu is a PhD Candidate in History at Harvard University. He has recently completed a dissertation entitled “The Incorporation of India: The Tata Business Firm Between Empire and Nation, ca. 1860-1970.”

[1] For a highly readable account of the evolution of the managing agency system, see Omkar Goswami, Goras and Desis: Managing Agencies and the Making of Corporate India (Gurgaon: Penguin Random House, 2016).

[2] Rob Reich, Chiara Cordelli, and Lucy Bernholz, eds., Philanthropy in Democratic Societies: History, Institutions, Values (Chicago: University of Chicago Press, 2016). See especially the essays by Jonathan Levy, Olivier Zunz, and Rob Reich.  

[3] Henry Hansmann and Steen Thomsen, “Managerial Distance and Virtual Ownership: The Governance of Industrial Foundations,” SSRN: Social Science Research Network, 2013; ECGI Finance Working Paper No. 372; Yale Law and Economics Research Paper No. 467. https://papers.ssrn.com/sol3/papers2.cfm?abstract_id=2246116 (accessed 9 February 2017).