Anatomy of the unspoken word

Loss is inevitable when opacity obscures both government policy and price-sensitive corporate development

Ratan Tata (left) with Cyrus Mistry. File photo courtesy PTI.

This year’s Nobel for economics—on contract theory—continues the Sveriges Riksbank’s quest to reward investigations into information asymmetry, especially its role in contracts, markets and incentives. Theory suggests that asymmetry of information leads to imperfect markets, including adverse selection and moral hazard. While perfect markets are chimeras, restricted to theoretical constructs, communication and information flows play a definite role in reducing imperfections.
Two recent events highlight how lack of communication, or not saying the right word at the right time, can lead to sub-optimal consequences, especially for minority shareholders.
The first is the corporate putsch playing out on prime time. The sudden, unseemly ouster of Cyrus Mistry as Tata Sons chairman, and the subsequent two-way flow of accusations and assertions between him and his predecessor Ratan Tata, highlight how things can go terribly wrong when leaders do not communicate. In fact, the hazy chain of events suggests that breakdown in communications lines led to this abrupt, indecorous turn of events. As a result, the share prices of most listed Tata companies have suffered.
The first thing that strikes any observer is the perception gap between what Ratan Tata wanted from his successor and what Mistry, in turn, understood and delivered. While conversations between the two during the passing of the baton remain private, it is abundantly clear that either Mistry misunderstood his covenant or Ratan Tata was not explicit in describing the role. Ironically, and rather late in the day, both are indulging in excess communication, mostly through the media.
Consequently, there is soiled laundry on display. Leaving the allegations aside, there is sufficient evidence to suggest that Ratan Tata’s and Mistry’s paths to corporate excellence diverged sharply and there were no attempts to make them meet. Mistry also expresses incredulity at the board “replacing” him for non-performance, especially after directors had lauded his performance. He also claims that while he was promised a “free hand”, some directors would leave in the middle of board meetings to seek Ratan Tata’s guidance.
The other side brushes these contentions aside; but it does maintain that Mistry has been on the Tata Sons board for a decade and was, therefore, party to some of the business decisions that he is now questioning.
All these point to a much larger, and grievous, communication gap. Neither Ratan Tata nor Mistry thought it fit to publicly discuss the controversial issues before they blew out of proportion. As a holding company of numerous listed companies, the Tata Sons board should have ensured adequate discussion and disclosure. For example, instead of lavishing Ratan Tata with public commendations, Mistry should have warned shareholders of the impending write-offs that he so direly predicts now.
The second incident of crossed wires is a direct outcome of the government’s multilateral trade strategy. A recent news story, citing unidentified people, said that the Indian negotiating team at the World Trade Organization’s (WTO) recent Oslo mini-ministerial had decided to oppose attempts by rich countries to introduce the promotion of global value chains (GVCs).
Indian negotiators fear that developed nations will sneak in issues like intellectual property rights, investment safeguards, competition laws under the garb of discussing GVCs. India, and a host of other developing countries, want WTO to first settle the pending Doha agenda before taking up new issues. Unfortunately, the Indian government’s ensuing communiqué about the meeting does not reveal whether GVCs came up for discussion at all. And even if they did, how the Indian side reacted.
Conversely, the whole episode might end up muddying the government’s policy stand on GVCs. India has been a proponent of GVCs, especially increasing the share of small- and medium-sized enterprises in GVCs. The government views GVCs as a device to increase domestic and foreign investment in manufacturing. The commerce ministry’s annual report for 2013-14 spells it out: “The business and trade segments of e-commerce and global value chains provide an opportunity to compete at par with other world economies and expanding our technology base.” But in the absence of proper communication, there is a lingering doubt over the government’s stand: Does it want GVCs or is it opposing their entry? Lack of clarity in economic policy hurts everybody because it affects investment decisions and stifles employment generation.
A similar lack of communication besmirched India’s reputation when WTO members met in July 2014 to vote on the trade facilitation agreement. India was the only country to oppose the deal and was subjected to global condemnation, despite having valid reasons for blocking the agreement. What made it doubly intriguing was the fact that India was principally on board with the idea and had already implemented many of the measures listed under the agreement. The problem: India did not communicate adequately with WTO fellow travellers or explain its stand lucidly. Western media, taking the cue from political leaders, labelled India a game-spoiler. Outcome: Global decision makers still look at India askance.
Both examples lead to one indisputable conclusion: Loss is inevitable when opacity obscures both government policy and price-sensitive corporate development.
This article originally appeared in Mint on November 2, 2016. It can also be read here.

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