Corporate Governance in Arcelor Mittal Merger

This report discusses the post-merger board structure, advantages and disadvantages, and the impact of institutional investors on corporate governance in the Arcelor Mittal merger.

CORPORATE
GOVERNANCE

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Contents
Introduction............................................................................................................... 1
Post-merger board structure........................................................................................... 1
Advantages and Disadvantages of this structure...................................................................2
Institutional investors significant contribution in the firm’s governance with such higher powers to
one family................................................................................................................. 3
Positive and negative impact on the effectiveness of pre-merger Mittal steels..............................4
Conclusion................................................................................................................ 5
References................................................................................................................ 6

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Introduction
Corporate governance has a significant role in the management of operations and avoiding
any kind of legal obligations. In this environment, it is critical that firm chooses the best
possible strategies for managing the corporate structure within the firm. Merger helps the
firm in improving their resource which again has impact on the corporate governance of the
firm due to which they can improve their ethical standards. Arcelor and Mittal Steels have
been in one of the biggest mergers which required corporate governance to be defined more
precisely (Zarin and Yang, 2011). This will allow the companies to gain competitive
advantage over the rivals and allow that companies do not lose their market share. On the
basis of Financial Times, this report is going to showcase post-merger board structure along
with the advantages and disadvantages of this board structure. It also assesses the fact that
whether institutional investors will be able to put any significant contribution to the
governance of the firm when the 43.5% of voting equity is with Mittal family. This report
will also discuss the positive and negative impact on the effectiveness of the pre-merger
board structure when compared with post-merger board structure.
Post-merger board structure
In 2004, the merger between the Arcelor and Mittal steel made them one of the biggest steel
producers in the world. This was done by Mr Mittal by putting together his public and private
steel interest. It was because of this merger that that Mr Mittal was unable to run his private
steel interest without taking permissions from the audit committee. Bringing change in the
board structure he added more numbers of independent directors in the list. 43.4% of the
shares of the company were with Mittal and his family. He is the chief executive of Mittal
and also the chairman of the board of directors (Financial Times, 2006). After the merger he
became non-executive president of this merged firm. In this new board structure there were
18 new members which consists of six members from Arcelor, six from Mittal steels, three
are the big shareholders of the company and three are the employee representatives. Joseph
Kinsch has the responsibility of the non-executive chairman but now he is the Chairman. Mr.
Mittal holds roughly 10 times than anyone else in the firm. His son Aditya Mittal is the chief
financial officer in this board while the chief executive role was given to the person named
Guy Dolle.

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Advantages and Disadvantages of this structure
Board structures plays a critical role in the success of the organisations and since every
structure has its own set of advantages and disadvantages hence selection of the board
structure must be done according to the chances they have in the market.
Advantages of post-merger structure:
 Since merger made the Arcelor Mittal as one of the biggest steel manufacturer even
thrice as bigger than their nearest rival hence it was necessary that numbers of people
in the board is more. Due to increase in the size of the company the business aspects
that needs to be monitored is also large. By adding new board members it became
easier for the firm to make decisions that are long term, sustainable and ethical.
 Equal importance to everyone has been given in this power distribution within the
board. As the numbers board of directors from Arcelor and from Mittal Steels was
similar hence the point of conflict has been neglected. In the board there are three
members who are there for representing people. This allows them to understand the
concerns of the people (Cygler, Gajdzik and Sroka, 2014).
 Company valued all the important and loyal persons attached with the firm as they
understand that it is these people who help the company in moving forward. For
example Arcelor’s French Chief executive Guy Dolle was offered a position of chief
executive of Arcelor Mittal even when he was against the decision of merger of
Arcelor and Mittal.
Disadvantage of the post-merger structure:
 Even after the merger the maximum power remained with an individual Mr. Mittal
which grants him the supreme power to overturn policies and decisions made by the
Board of directors. This did not allowed the board of directors to work freely applying
different set of ideas. In spite of making them independent, the power distribution was
not done effectively.
 Such higher powers in the hands of few people could never allow the companies to
have growth in their business model as the decision making will be limited. It is less
likely that any new ideas will come into the organisation. This might have negative
impact on the operational management of the firm especially in terms of managing
sustainability and ethics.

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 This merger needed to be responsible for removal of private interest but due to higher
powers remaining in the hands of Mittal family (Ślusarczyk and Kot, 2011). Due to
this, the company that needed to be working for larger interest again started working
as private interest of Mr. Mittal. Once the company starts working for private interest
it is seen that usually corporate governance issues gets generated which is not good
for the companies in the modern day business environment where the competition s
cut-throat.
Institutional investors significant contribution in the firm’s governance with such
higher powers to one family
Institutional investors such as banks and others always tries to make a significant position in
the decision making body of any firm. Such a high voting equity to family members can have
significant impact on the decision making of the firm where it is not possible for any other
individual or institutions to make decisions. In Arcelor Mittal since the voting rights is with
the family hence decisions could be made without the consent of other members. Institutional
investors have larger experience of managing corporate governance. This is because they are
present in the other company’s board of directors hence they understand the changing nature
of the corporate governance. It is critical for the management of Arcelor Mittal to not
demoralise investors by not giving powers to them (Financial Times, 2006). In today’s time
investors want that in the decision making they should also have their say so that their interest
could also be tackled. Since world’s economy has never been able to go up after 2009, this
can be a huge loss to the company. Institutional investors like Banks who provides loans to
the companies does not want that their loans are going into bad loans due to lack of effective
decision making within the organisation. This also goes true in terms of the fact that
Institutional investors are able to provide better understanding of the corporate governance.
With 43.5% of the decision making powers lies in the hands of family it is highly unlikely
that any new institutional investors will be joined to the company. Since governance of the
company is going tougher and tougher everyday hence it is critical that new and innovative
ideas come into the organisation. But with so less powers in other’s hand it is difficult that
institutional investor to make any significant contribution in the governance of the company.
This is because whatever decision they will make, if it is not liked by the Mittal family then
there is higher chance that it will not be passed. This might hamper the decision making of
the firm. In the time when Arcelor Mittal is facing many governance issues such help from

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the side of the investors could have helped the company to manage ethics in the decision
making of the firm. Such support from the Institutional investors will allow the company to
manage the employee benefits and at the same time it will also allow the company to avoid
any kind of legal consequences. Since private interest has become the priority of the board of
directors hence it was highly difficult that firm manages its interest of all the other
stakeholders. There are people from other parts of the world working in the companies like
Arcelor Mittal (Cock, Lambert and Fitzgerald, 2013). This makes it more important for the
board of directors to manage the corporate governance without significant external help.
Institutional investors will not be able to force the company to make any critical changes that
could help the firm in leading the firm towards effective corporate governance. This might
reduce the interest of the new investors in the company which again can be a challenge for
the company. It is also possible that attached investors of the company will not add new
funds to the firm which again is a challenge for them.
Positive and negative impact on the effectiveness of pre-merger Mittal steels
Financial Times article illustrates that Pre-merger board structure was a more monarch
structure where there were three levels of the Board structure. The first is A share and other is
C share and the B share was eliminated from it. Mittal and his family acquired 67.2% of the
A share which gives them one vote while the other members of the firm has 10 votes.
However approx. 98.3% of the votes might be under the control of the single person that is
Mr Mittal. This made him the de-facto monarch of his own industrial kingdom (Park, Meglio
and Schriber, 2019). 5 out of the six board of directors were also not independent hence
anyone did not tried to make even little points as Mittal can change the resolution with simple
one vote. He also had the powers of dismissing their directors which again scared them to go
against the family’s interest.
Positive impact includes:
 Without significant barriers, decisions can be easily made by the company. Most of
the decisions were made checking the profitability increase chances of the company.
Such facility of making quick decisions also allowed the firm to stay ahead of their
competitors and also allowed the firms to make sure that they are doing ethical
business.

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 This also helped the firm to have a clear leadership with particular approach towards
their progress. In the time when the management of organisations has become
complex, it has become essential for the management to make sure that they have
clear leadership which has certain set of goals (The Economic Times, 2006).
Negative impact includes:
 Control lies in the hands of few members of the family which again does not allow the
other board members to think innovatively without having fear that they might fail.
This made them less creative when it comes to decision making skills.
 Since corporate governance and ethics is a complex thing to handle hence it is critical
that firm understands the challenges that they are facing and work upon it to make
adjustable changes. This cannot be possible without flexibility in the Board structure
which was missing in the pre-merger structure. It is the idea of the Mr Mittal which
prevailed as last words on the basis of it they make fast decisions (Halff, 2011).
The effectiveness of the pre-merger board structure was poor than that of the post-merger.
This is because the post-merger board structure has the higher chances to have new and
creative ideas that could allow the firm to reduce the chances of ethical misconduct. In the
new structure there was lesser chances of conflict of interest, as each of the stakeholders of
the company got their representation in the board and hence everyone interests is being heard
(Kumar, 2019). This new structure also consist people’s representatives which allow them to
reduce the ethical misconduct against the people as their voice will also be heard. Here
effectiveness was also high because there were place given to the big shareholders of the
company.
Conclusion
In conclusion it can be said that that Arcelor Mittal needed to change its board structure after
its merger. It was also important as the numbers of corporate governance issues within the
firm is also increasing. The institutional investors demands for higher power in the decision
making but with 43.5% in the hand of family, it was not easy for the institutional investors to
make significant contribution in the corporate governance. The post-merger structure was
more effective than pre-merger structure as it provide equal importance to all the
shareholders.

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References
Cock, J., Lambert, R. and Fitzgerald, S., 2013. Steel, nature and
society. Globalizations, 10(6), pp.855-869.
Cygler, J., Gajdzik, B. and Sroka, W., 2014. Coopetition as a development stimulator of
enterprises in the networked steel sector. Metalurgija, 53(3), pp.383-386.
Financial Times, 2006. Arcelor and Mittal agree to €27bn merger. [Online] Available at:
https://www.ft.com/content/ffc47b5e-047b-11db-8981-0000779e2340. [Accessed on 09th
September 2019]
Financial Times, 2006. Governance may impede Mittal’s pursuit of Arcelor. [Online]
Available at: https://www.ft.com/content/adab205e-d61b-11da-8b3a-0000779e2340.
[Accessed on 09th September 2019]
Halff, G., 2011. The 18 Arcelor and Mittal Steel Merger Negotiations. Negotiation
Excellence: Successful Deal Making, p.341.
Kumar, B.R., 2019. Arcelor–Mittal Merger. In Wealth Creation in the World’s Largest
Mergers and Acquisitions (pp. 355-359). Springer, Cham.
Park, K.M., Meglio, O. and Schriber, S., 2019. Building a global corporate social
responsibility program via mergers and acquisitions: A managerial framework. Business
Horizons, 62(3), pp.395-407.
Ślusarczyk, B. and Kot, S., 2011. The consolidation influence on performance results in steel
industry. In Metal 2011: 20th Anniversary International Conference on Metallurgy and
Materials. Conference Proceedings (pp. 1-6).
The Economic Times, 2006. Arcelor shareholders may favour Mittal. [Online] Available at:
https://economictimes.indiatimes.com/industry/indl-goods/svs/steel/arcelor-shareholders-
may-favour-mittal/articleshow/1606268.cms?from=mdr. [Accessed on 09th September 2019]
Zarin, S. and Yang, E., 2011. Mergers & Acquisitions: Hostile takeovers and defense
strategies against them. rapport nr.: Management & Organisation 11: 85.