Corporate Governance- Arcelor Mittal: a Case Study

This case study analyzes the post-merger board structure of Arcelor Mittal and the role of institutional investors in corporate governance. It also discusses the pros and cons of the merger and the positive and negative aspects of pre-merger corporate governance.

Corporate Governance- Arcelor Mittal: a Case
Study
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Table of Contents
Answer to Question No.1............................................................................................................................3
Assessment of post-merger Board Structure- Arcelor Mittal..................................................................3
Pros and Cons of Arcelor Mittal Merger..................................................................................................4
Answer to Question No. 2...........................................................................................................................5
Role of institutional investor as contributor............................................................................................5
Answer to Question No. 3...........................................................................................................................6
Positive and negative aspects of pre-merger...........................................................................................6
Post-merger Impact.................................................................................................................................7
Bibliography................................................................................................................................................8
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Answer to Question No.1
Assessment of post-merger Board Structure- Arcelor Mittal
The much discussed takeover of Arcelor by Mittal Steel emphasizes the change in the
governance style of the company along with the market for control of corporate and specified
mechanism of this takeover, which took place during the last decade in continental Europe. To
understand and explain these changes, the start of discussion would initiate with the trend of
corporate governance and respective control of corporate in Europe, along with the evolution of
corporate control in perspective of Europe steel market. This analysis would also include the
changes of mechanism observed for this type of hostile takeovers found in Europe. Then the
process would be considered to evaluate the scenario of takeover of Arcelor by Mittal Steel of
India. (Mahaffey, 2009)
The normal culture of Continental Europe showed the listing of few of the firms in stock
exchange with majority held by small stakeholders. On the contrary, major firms of the Europe
have the trend to be listed in stock exchanges with one dominant stakeholder in the form of
either a person or any family. They use to control the majority of stakeholders’ votes. By the
virtue of this voting power, normally, the controlling stakeholder exercises its overall control
without direct possession of large percentage of the corporate. The normal trend of this exercise
of power is through pyramid control of ownership. This type of ownership endorses the concept
of controlling the firm through controlling stakeholder listed in the stock exchange with the
additional ownership of at least any other firm. (Kumar, 2019)
In the article by Guy Dolle published in The Economist on 27th April, 2006, the valid argument is
cited against this takeover of Arcelor by Mittal. The Indian steel giant had not exercised fair type
of corporate governance for minority stakeholders. The Mittal family has the control of 88% of
the ownership of the firm with the empowered voting right of 10:1 votes of their stakes. There
are three members listed in the Board- Mr. Mittal; his son Aditya, who was also acting as the
chief financial officer of the company; and his daughter, Vanisha, who was the member of nine-
member Board of the company. Mr. Mittal would reiterate that post-merger, he will reconsider
the concept of multiple voting rights for stakes. There are serious issues raised about this
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declaration related to the independent acting capacity of external members of the Board. (Degan,
2012)
Pros and Cons of Arcelor Mittal Merger
The pros and cons of Arcelor Mittal merger are distinctive with its features. The most specific
benefit derived from this merger is the enhancement of steel assets’ value globally and Arcelor
Mittal has proved its footing as the big force in this market with no such competition from the
global entities in future. SteelConsult International had inferred that this merger of the global
giants of steel industry is resulting to 14% of total global share of market in future 10 years,
which is compared to other industries and is found very less. It is considered as a deal which
would be responsible for creating global dominance in steel industry in perspective of both tone
and value. This merger would also be responsible to make stability in steel price globally. (Jean-
Louis Schaan, 2010) There is another aspect of this merger in the form of fostering the
consolidation in steel industry globally and enables the competitors of global steel industry to
maintain highest level of performance with efficiencies and economies of industry parameter.
The CFO of Arcelor Mittal, Aditya Mittal has opined that this merger would result to the
reshaping of global steel business along with strengthened financial achievement of the firm to
support regular investment and respective initiative in growth. He had also believed that this firm
would be able to meet the requirements of the customers in a better style by offering broader
products with the effect of enhanced technological and advanced achievements. (Garg, 2011)
The disadvantages of this merger are there in different forms. This merger had raised the need of
inorganic growth of steel industry with aggression and changed strategies to sustain in such
competition. The stakeholders of steel industry have faced with stiff competition in the form of
Arcelor Mittal. The activities of this firm had shown a tendency of both horizontal and vertical
expansion through its supply chain management. This trend will lead to the belief that global
steel industry may be faced with such hostile type of takeovers. Presently, the thought of
consolidation prevails through this consolidation process globally; but in the future, this type of
merger may lead to improper financial market conditions with oligopolistic-like feature or the
probable vicinity of unique monopoly in high level. (International, 2007)
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Answer to Question No. 2
Role of institutional investor as contributor
As per above discussion regarding the post merger status of Arcelor Mittal Board, it is observed
that Mittal Steel had taken over Arcelor with 43.5% shares. This situation drives to the sole
ownership of the entity named Arcelor Mittal by Mittal and family. The question arises about the
role of institutional investor in corporate governance in the said scenario with positive
contribution to the company. It is evident from the controlling power of the Board, that Mittal
family enjoys 43.5% of voting power of the company. As it is, they are automatically the
deciding power to set corporate governance. The inclusion of institutional investor and the role
of that investor in deciding the corporate governance of the company is a matter of voting power
of the Board. With the immense financial power of Mittal Steel, the company had acquired
Arcelor. (Gow, 2006) The owner of Mittal Steel, Mr. Mittal would not like to leave any such
scope for the others to decide its corporate governance. Hence, he would post his people in the
firm to enjoy the supremacy to control power of the firm. It is not easy for the institutional
investor like bank of financial organization to take part in the management of the company by
taking direct initiative, if they are at all allowed to take part in the Board. (Flash, 2007)When the
merger was done, Mittal Steel had taken over the majority of controlling power by setting three
people of their team in the Board. With the changed constitution of the company, they were set
to enjoy the 43.5% voting power in the Board by exercising their voting rights. It is the duty of
the stock exchange market to look into this situation and would set directive for the company to
allow other investors to take part in the decision making of the Board. When the institutional
investor will come in the scenario, it will be obviously as per the discretion of the Board. The
institutional investor would invest only when the terms and conditions would suit them with the
flexibility and prudence assured by the Board. The institutional investor would assess the
governance of the company with the risk factors prevailing in the operation of the company.
When they will feel that the risks are within manageable control, they will take part in the
management and the Board. But they need proper flexibility of operation to ensure return of their
investment. Even if the company was owned by Mittal with their 43.5% stake, the institutional
investor would like to take part in the management of the company by taking active part in the
Board operation. When the 43.5% voting power of the board is held by Mittal family, it is not
favorable for the institutional investor to exercise their influence in corporate governance
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effectively. The inclusion of institutional investors may be asked by the Board, but with limited
power or no-power in deciding corporate governance. Hence, till the voting equity of Mittal in
the newly formed Arcelor Mittal Group is reduced to the substantial level, the institutional
investor would enjoy no edge of voting power, and thus would not be able to exercise their
power to contribute in corporate governance in effective manner by taking part in Board.
(OECD, 2011)
Answer to Question No. 3
Positive and negative aspects of pre-merger
The main question is to be answered is the pre-merger positive and negative effects of Mittal
Steel Board related to ownership of the company and its comparison with post-merger effects of
Arcelor Mittal. The Mittal Steel has its identity as the public limited company listed in both New
York and Amsterdam stock exchange, Euronext. The company was solely controlled by Mittal
and family with the exercise of corporate governance controlled totally by the family. Corporate
governance is a crucial issue for any corporate to run. With his supremacy, Mittal has the overall
control over Mittal Steel. When Mittal had decided to acquire Arcelor, the same practice is
expected to prevail and the controlling power would exist in the hand of that family only. The
documents of Mittal Steel in the form of article of association and subsequent disclosures related
to corporate governance in their website always highlight their exercised corporate governance
practice. As per Mittal, the same would be followed in practice for the new company as well, and
this declaration had raised worries within the investors. It is observed by Financial Times that
some of the independent directors of the company are connected with Mittal with their business
relationship. This situation gave rise to the issue of conflict of interest for the directors. Through
the acquisition, Mr. Mittal is proved to be the supreme authority of his own business arena, even
if the bidding restriction would be controlled within or below 50%. The corporate governance of
Mittal Steel endorses the concept of two-tier voting equity structure. They are known as A and B
type shares. While A type shares enjoy voting equity of one vote each share, B type shares enjoy
exercising of 10 votes per share. The present status of A type share possession by Mittal family
is 67.2%. With the endorsement of this corporate governance disclosure, The Mittal family uses
to enjoy controlling power of 98.3% of the votes in the Board. To reduce the concern of voting
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powers with declared structure, Mittal had conferred that the power of voting to non-voting
shares will be changed from 10:1 to 2:1. (Wharton, 2006)
This change of voting power through specified ratio serves academic purpose in practice. The
exercise of voting power by external stakeholders is not feasible due to concentration of
controlling power by Mittal and family. Due to unique structure and voting system of the
company, the normal stakeholders have no scope of exercising their power to determine any
policy decision. (Smitz, 2008)
There are positive and negative aspects of this corporate practice followed by Mittal Steel. The
typical trend of running the business by the family and its members is prevalent in the corporate
governance. This situation endorses the concept of single controlling power. The running of
business depends upon single family and its members and has no such constraints in making
business decision of the company. This practice endorses smooth running of business with single
window system for decision making. The negative aspects are also multi-folded. The decision
making power is concentrated within the family. Hence, no external stakeholders can raise voice
to implement any business policy. The other negative aspects are the accounting practice of the
company; types of directors and their exercising of power; corporate governance related to
endorsement of competition rules; and lack of consent from audit committee. (Times, 2006)
Post-merger Impact
The post-merger scenario of Arcelor Mittal had not ensured the drawbacks of the corporate
practice and governance of the newly formed company. The power of competent directors is not
acknowledged through the corporate governance disclosure of the company keeping the efficient
directors away from making policy decisions of the company. the stakeholders of the company
are already burdened with the shortcomings of the Board of Arcelor, and no scope is left for
them to find the new merged entity perform with prudent practice in the domains of accounting,
corporate governance disclosure and vital decision making of the company without the nod of
the Mittal family. (Alluru et al., 2016)
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Bibliography
Alluru, J.-R., Sankaraman, P. & Tebbe, K., 2016. Mittal’s acquisition strategies. Emeraldinsight, 32(9),
pp.22-24. https://doi.org/10.1108/SD-06-2016-0089.
Degan, R.J., 2012. Changes in governance, the market for corporate control, and the mechanisms for
hostile takeovers in Continental Europe: The case of Arcelor’s takeover by Mittal Steel. Center of
Research in International Business & Strategy , 87/2012, pp.1-38.
Flash, M., 2007. The Takeover of Arcelor by Mittal Steel. Teaching Note. INSEAD.
Garg, S., 2011. Impact of Arcelor & Mittal merger. [Online] Available at:
https://www.projectguru.in/publications/impact-of-arcelor-mittal-merger/ [Accessed 11 September
2019].
Gow, D., 2006. Arcelor's five-set thriller. The Guardian, 27 June.
https://www.theguardian.com/business/2006/jun/27/money.economicdispatch.
International, S., 2007. Consolidation in the global Consolidation in the global steel industry, what does it
steel industry, what does it mean for the Middle mean for the Middle-East? Metal Bulletin. Amsterdam:
SteelConsult International.
Jean-Louis Schaan, R.C., 2010. ArcelorMittal. [Online] Available at:
https://www.iveycases.com/ProductView.aspx?id=37653&CM=true&HID=339 [Accessed 11 September
2019].
Kumar, R., 2019. Arcelor–Mittal Merger: Integrated Case Studies. Reserchgate, pp.355-59. DOI:
10.1007/978-3-030-02363-8_45.
Mahaffey, J., 2009. The Steel War- Mittal Vs. Arcelor. Professional Assessment Evaluation Report.
International School of Management.
OECD, 2011. ISBN 978-92-64-12874-3 (print) ; ISBN 978-92-64-12875-0 (PDF) The Role of Institutional
Investors in Promoting Good Corporate Governance. Corporate Governance. OECD Publishing. doi:
10.1787/9789264128750-en.
Smitz, M., 2008. Value effects surrounding Arcelor-Mittal merger announcements. Grin.
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Times, F., 2006. Governance may impede Mittal's pursuit of Arcelor. Financial ITmes , 27 April.
Wharton, 2006. Aditya Mittal: ‘Arcelor and Mittal Steel is the Best Combination within the Steel Industry’.
[Online] Available at: https://knowledge.wharton.upenn.edu/article/aditya-mittal-arcelor-and-mittal-
steel-is-the-best-combination-within-the-steel-industry/ [Accessed 12 September 2019].
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