Governance may impede Mittalâ•Žs pursuit of Arcelor | Financial Times Anger is threatening to boil over on Friday at Luxembourg’s Luxexpo centre as Arcelor, the big European steelmaker, holds its...

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Governance may impede Mittalâ•Žs pursuit of Arcelor | Financial Times
Anger is threatening to boil over on Friday at Luxembourg’s Luxexpo centre as Arcelor, the big
European steelmaker, holds its annual meeting, writes John Plender. Irked by questionable
corporate governance practice – part of an attempt to shore up its defences against a bid from the
ival Mittal Steel – dissident shareholders have turned the gathering into a referendum on
Arcelor’s board.
Yet ironically, the row has served to distract attention from equally pressing governance issues at
Mittal Steel itself. The Dutch-based company is listed on Euronext in Amsterdam and on the New
York Stock Exchange and is controlled by Lakshmi Mittal and his family. Since the cu
ency of the
id, first mooted in January, is expected to be 75 per cent in Mittal paper, corporate governance
could have a crucial bearing on the outcome.
A trawl through Mittal Steel’s voluminous filings with the US Securities and Exchange
Commission, its articles of association and the governance disclosures on its website suggests that
its existing governance a
angements – which Mittal says would remain in place after a takeover –
aise questions that may wo
y investors.
The FT has discovered that a number of the company’s independent directors have close business
ties to the Indian billionaire. It is among findings that, taken together, suggest Mr Mittal is
destined to remain a de facto monarch in his own industrial kingdom unless an improvement in
the bid terms results in his control falling significantly below 50 per cent.
Mittal Steel has a two-tier voting structure. Mr Mittal and his family cu
ently own 67.2 per cent of
the A shares, which ca
y one vote, and all the B shares, which have 10 votes. Overall, Mr Mittal
controls 98.3 per cent of the votes. To assuage concerns about the voting structure he has said that
the ratio of voting to non-voting shares will change from 10:1 to 2:1.
Yet this change in ratio means little in practice – because the powers confe
ed on outside
shareholders in Mittal Steel’s articles of association will remain academic as long as Mr Mittal
etains a voting majority. Shareholders controlling one-hundredth of the capital or €50m can, fo
example, seek to influence the conduct of the company’s business by putting an item on the agenda
of a general meeting. Yet there is little point in trying when Mr Mittal can reject a resolution by a
simple majority.
Even if he reduces his voting control to below 50 per cent, the board can still decide not to place
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such items on the agenda if it believes that do so “would be detrimental to the vital interests of the
company”. The articles contain no definition of vital interests. So the directors have limitless
latitude in exercising their discretion. Other powers confe
ed on outside shareholders by the
articles, such as those relating to the appointment and dismissal of directors, are similarly
valueless if Mr Mittal chooses to exercise his voting power against them.
That said, this is a family model of governance that is familiar to European investors. And the
model often works well, since there is no divorce between ownership and control of the kind that
plagues quoted companies with dispersed ownership. Yet the outside investors’ share in the
corporate bounty is at the discretion of the inside shareholders unless there are protections in law
and in the company’s governance rules to prevent the insiders extracting private benefits of control
at outside shareholders’ expense.
The most important areas of protection concern the integrity and transparency of accounts,
governance a
angements that apply across all subsidiaries, the existence of genuinely independent
non-executive directors and good rules to prevent the abuse of conflicts of interest. A key question
for Arcelor shareholders, in considering Mittal Steel’s bid, is whether the protections are adequate.
At first sight, the picture is acceptable. The accounts are prepared under generally accepted US
accounting principles and from this year Section 404 of the Sa
anes-Oxley Act, which requires
management to assess and report on the effectiveness of internal controls. This potentially offers
important reassurance in a business that operates in many developing countries with weak
property rights and poor accountancy.
Mittal’s Form 20F filing with the SEC says there are no significant differences between its cu
corporate governance practices and those required of US domestic companies under the NYSE
listing standards. Yet closer investigation throws up less comforting evidence.
Mittal Steel is a Dutch holding company, with no business of its own. All the assets are in operating
subsidiaries. Yet the Mittal website disclosures on corporate governance say nothing about whethe
subsidiaries have to apply and enforce the listed parent’s governance rules, what governance
information has to be disclosed to the board by the operating companies and what rights the non-
executive directors have to extract information from the subsidiaries. The management board rules
are described as being those of Mittal Steel International NV, not those of the quoted parent
company, Mittal Steel NV. There are obvious e
ors and omissions in the website’s draft text of the
When the Financial Times raised these issues with Mittal Steel, a spokesperson admitted that a
mistake had been made and there was no such company as Mittal Steel International. The rules
were Mittal Steel’s. As for the group-wide governance a
angements, she pointed out: “Each
operating unit has its own board of directors, which includes independent external directors and
unit board guidelines that determine what can be approved by the unit board and what needs to be
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ed to the parent company. These boards meet regularly during the course of the year.”
From the point of view of outside shareholders in the parent company this is a somewhat opaque
explanation of group-wide governance. And investors have access to limited governance
information on the operating companies except where, as with Mittal Steel South Africa, they are
What protection to outside shareholders does the structure of the holding company board provide?
Mittal Steel is unusual in having three different classes of directors, designated A, B and C. There
are no longer any class B directors since the term of office of Malay Mukherjee, Mittal Steel’s chief
operating officer, expired last year – incidentally implying that the only source of information fo
the non-
executive directors from a non-family board executive has gone.
Meantime, the class A directors, who enjoy most of the rights, consist of Mr Mittal, who combines
the roles of chairman and chief executive, his son Aditya Mittal and daughter Vanisha Mittal
Bhatia. The six non-executives are class C directors, with more limited rights to represent the
company than the A directors. They are unquestionably poor relations, elected for one-yea
enewable terms, while the family directors are elected for four-year terms. In effect, they serve at
Mr Mittal’s pleasure. And while five of the six are described as independent, some have close
outside business links with Mr Mittal.
On the key audit committee, for example, the chairman is Narayanan Vaghul – also chairman of
ICICI Bank, India’s second largest bank, of which Mr Mittal is a director. Alongside him sits Andrés
Rozental, a distinguished Mexican former diplomat: he is president of the Mexican Council on
Foreign Relations, whose website reveals Mittal Steel as a leading benefactor. The third member,
Muni Krishna T. Reddy, is a director of Intercommercial Bank of Trinidad, of which Mr Mittal is a
part-owner. So whatever the box-ticking position on independence, Mittal Steel is open to the
accusation of cronyism in the boardroom.
Where conflicts of interest are concerned, the company’s board rules offer detailed definitions,
eporting requirements and processes. But in many circumstances falling outside legal and
egulatory requirements the chairman has wide discretion to decide whether a potential conflict of
interest is indeed a conflict and whether it should be published in the annual report. Where a
potential conflict involves the chairman, the board is required to discuss the issue without him
present. Here the questions about the independence of the non-executives could be a matter of
concern, especially in relation to Mr Mittal’s ability to run private businesses in competition with
Mittal Steel.
When Mr Mittal put together his public and private steel interests in the merger that created Mittal
Steel in 2004 he entered into a non-competition agreement with Mittal Steel, whereby he could not
un private steel interests in competition with the quoted company without the consent of the audit
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committee. According to the Form 20F SEC filing, this runs out on June XXXXXXXXXXAsked whethe
the agreement would be extended, a Mittal spokesperson merely stated that “non-competition is
also part of article 3.4 of our management board rules which clearly stipulate the principle of non-
competition by a director of the company”.
The article in question is much less detailed in defining what constitutes competition than the legal
agreement entered into in 2004 and makes no reference to audit committee consent. Whether this
amounts to a weakening of the constraint, though, is moot, given the business and financial
connections of the directors on the audit committee with Mr Mittal. But the issue of non-
competition does matter, since Mr Mittal was criticised over potential conflicts at a time before
their merger when his quoted interests were significantly underperforming his private interests.
Mittal Steel says it has no plans for further changes to corporate governance apart from those
already announced, which include expanding the board to include a majority of independent
If the new directors are genuinely independent and competent, that will be something. But fo
shareholders in Arcelor, cu
ently preoccupied with their own board’s shortcomings, the next
question will be whether Mr Mittal’s remarkable business record, and the strategy he outlines in
the forthcoming bid documents, outweigh the risks in a questionable governance structure.
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Answered Same DaySep 05, 2021ACC03043Southern Cross University


Akash answered on Sep 08 2021
54 Votes
Arcelor & Mittal
Table of Contents
Introduction    3
Assess the post-merger board structure and discuss the pros and cons before reading the Financial Times article    3
Since the Mittal family retains 43.5% of the voting equity can an institutional investor make a significant contribution to the governance of the company?    5
Discuss the positive and negative impacts on the effectiveness of the (pre-merger) Mittal Steel board after reading the article and compare its effectiveness with the post-merger board.    7
Conclusion    9
References    10
The Mittal Steel business group is a Dutch holding company which means that the company has no operations of its own. The company relishes the advantage of the lower tax rate in the Netherlands. Therefore, many other companies and business groups apply under a Dutch holding company’s name and thus that company becomes the intermediate entity between the government and the other industries. Mittal Steel has announced that it will be taking over Arcelor Steel industries soon. The Arcelor steel company has its production and distribution of its products. Apart from that, this company runs on a different governance practice than Mittal Steel. The report sheds light on various parts of the Mittal Company and its effectiveness on their business before and after the merger.
Assess the post-merger board structure and discuss the pros and cons before reading the Financial Times article
The Arcelor has a very different and much fair governance practice than the Mittal group. It has several heads in the board of directors groups and the employees, as well as the shareholders, are provided with rights to express their perspectives and impact the company’s decision making. The chairman of Arcelor is Joseph Kinsch (Evans & Wallaert, 2016). The board consists of several other independent executive and non-executive entities. In the battle of the hostile takeover, Arcelor raised questions on Mittal steel’s governance practice and unfair voting rights system. They also expressed their doubts about its fairness and its effectiveness. Even though Mittal steel has a much better number in terms of finance and business, yet the questions raised created doubt in the minds of everyone present. The Mittal group has therefore announced that it will be making changes in their practice and will alter the voting rights ratio of 10:1 to 2:1 (Ta
a & Cooper, 2016).
After the merger, the Arcelor Mittal Company became one whole business entity. The chairman Joseph Kinsch of Arcelor remained in the same position post-merger. The new board of directors has eighteen people in total and a major part of them are independent. There are nine independent directors as well as representative directors who will be talking on behalf of the employees and several other directors representing and reflecting the interests and perspectives of the shareholders. But even in this equation, the Mittal family acquired 43.5% of the voting parity in the meetings. Post-merger, the board structure has seen a lot of improvement. But the picture shows that even in this scenario the Mittal family has more rights combined than other independent heads with separate voting rights.
Certain factors work in favor and against having a dependent board structure in full family-owned business. But there are also sparks of having independent board members to run the business and take decisions (Meddeb & Tadjine, 2016).
When an independent entity becomes a part of the board of directors without any previous connection to the family or any authority personally, that person remains bias-free. Thus, the entity becomes capable of looking at things in more refreshing ways and acts on it that will be favorable to the company and will be beneficial to the direct and indirect stakeholders. Their opinions are less likely to be covered by personal beliefs, sentiments or be clouded by any personal agenda. This independent member is capable of dividing the benefits and determining the compensation package for the employees and other board members easily as well. they can consult with an external entity and have a fair judgment on this matter. They can also take the shareholders’ interests into account and leave a fair share of profit for them even though they do not engage in the company’s daily activities ( VASILIU, 2018). An independent presence in the board also means more transparency, integrity and justified actions. When a company deals with another or seeks a business partner or investment on a huge scale, the independent member can validate the company’s activities and its integrity to the other party more easily. On other note, a question always appears in this scenario that whether an independent person knows the business groups separately and together well enough to make important decisions. Mittal Steel was a family-owned business whereas Arcelor is a privately held group. ( HUDÁK, 2018). These two companies have different types of business models as well as unique practices. Therefore, the independent member has to have sufficient knowledge of both pre-merger and post-merger to provide valuable guidance. Moreover, another doubt surfaces in the same way...

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