Too good to fail: purpose-driven business

Since 1868, Tata Group has made a habit of putting communities first, and has thereby grown to a market capitalisation of $141 billion. Something’s clearly working here.

When India’s TATA  TEA  LTD. purchased British brand TETLEY TEA for US$450 million in early 2000 – at the time the largest sum ever paid by an Indian company for a foreign acquisition – the rationale for the deal was clear. Tata Tea would not just gain one of the world’s most iconic brands. It would also transform itself from a sleepy farming operation with a core business of barely profitable tea plantations to a high-margin global distributor of specialty teas and other healthy beverages. Soon after the acquisition, Tata made another logical move. It sold its vast plantations in Munnar, a mile-high, economically underdeveloped community in the Western Ghat mountains of South India, where Tata had been the largest employer for a century.

But the transaction was anything but routine. Instead of working out a lucrative deal with eager investment bankers, bribing local politicians to mollify them, laying off workers, and selling to the highest bidder, as some other Indian companies shedding a moribund business might have done, Tata Tea sold 17 of the 25 plantations to its own former employees. Layoffs were generally limited to one per household, and Tata gave a group of voluntary retirees enough cash to buy equity in the new company that was formed. (That company, Kanan Devan Hills Plantation Company [KDHP], still operates as an employee-owned enterprise.)

Although Tata Tea would henceforth maintain only limited business interests in the area (including some equity in KDHP),  the company  continued its active social role there. It still subsidizes a range of social services and KDHP employee benefits, including free housing for plantation workers, a private school, an education centre for disabled children and young adults, and the newly renovated Tata General Hospital in Munnar. Tata still remains a major customer of KDHP, which helps guarantee a stable supply of tea at competitive prices.

Such gestures of largesse and long-term commitment are not unusual for Tata, the massive, mostly Indian group of companies to which Tata Tea belongs. Roughly 90 companies are part of this conglomerate, or “family” (as many Tata executives prefer to call it). Each is led by its own executive team and governed by its own board of directors. But they are bound together by an interlocking governance structure and a set of corporate values passed down over 142 years from the founder, Jamsetji Nusserwanji (J.N.) Tata. As of 2010, Tata is a $70.8 billion commercial enterprise, employing about 350,000 people in 80 countries, across an eclectic array of industries – including hotels, consumer goods, mining, steel manufacturing, telecommunications, trucks and cars (including the much publicized $2,500 Tata Nano), electric power, credit cards, chemicals, engineering, and IT services and business process outsourcing. Not even General Electric sells such a wide range of products and services.

Since its founding in 1868, Tata has operated on the premise that a company thrives on social capital (the value created from investing in good community and human relationships) in the same way that it  relies on hard assets for sustainable growth. With every generation, Tata’s executives and managers say, they have nurtured  and improved their capability for “stakeholder management”: basing investments and operating decisions on the needs and interests of all who will be affected. For Tata, this means shareholders, employees, customers, and the people of the countries where Tata operates – historically India, but potentially anywhere.

“We may be among the few companies around the world who think and act first as a citizen,” says R. Gopalakrishnan, an executive director of Tata Sons Ltd., the privately held holding company of Tata, and a director of several Tata companies.

Indeed, the primacy of citizenship – a philosophy associated historically with J.N. Tata – continues to be used as a corporate credo: “In a free enterprise, the community is not just another stakeholder in business, but is in fact, the very purpose of its existence.”

If social benefits are one major goal of Tata’s strategies, another is rapid and continuing growth, in as many industries and venues as possible, on behalf of both philanthropic and fiduciary commitments. “We are hard-nosed business guys,” says Gopalakrishnan, “who like to earn an extra buck as much as the next guy because we know that extra buck will go back to wipe away a tear somewhere.”

Prior to the 1990s Indian businesses were protected from outside competition but were also limited by tight government controls. In that environment, Tata’s domestic expansion and diversification positioned the group as one of the two or three largest companies in India. Since 1991, the group has grown dramatically, stimulated by an aggressive $20 billion international acquisition campaign. Revenues rose from $5.8 billion in 1992 to $62.5 billion in 2008, and profits grew from $320 million to $5.4 billion over the same period. In fiscal year 2009, approximately 35 percent of sales were generated at home – roughly two percent of India’s total GDP. Tata’s international acquisitions have transformed it from a company deeply grounded in India into one of the world’s most visible conglomerates.