Corporate Governance: Advantages and Disadvantages of Family-Owned Board Structure

Running Head: CORPORATE GOVERNANCE
CORPORATE GOVERNANCE
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Answer 1
The takeover of Arcelor by Mittal Steel in 2006 created a number of Scepticism about the
impact of family owned business and the degree of influence that it can impose on the corporate
governance structure (Plender 2006). Based on the empirical studies it can be stated that there are
both advantages and disadvantages that the corporate governance or the board structure can face.
As far as the post-merger board structure of Arcelor-Mittal is concerned, it can be stated
that the degree of loyalty was increased because Mittal is a family based business enterprise and
the takeover helped the organisation to include its family members into the board of directors of
Arcelor-Mittal. According to Xi et al. (2015) it can be opined that the family owned board
structure brings loyalty because the family members know each other and it exhibits their
dedication to achieve the common goals. Moreover, the built-in support system based on
teamwork and solidarity has become easier for the family owned businesses in the form of long
term stability, loyalty and shared values (De Massis et al. 2016).
Apart from that Hatak et al. (2016) advocated that the family owned business is
responsible to create a flexible environment among the board members as most of them belong
to the family and have good relationship between each other. It also reflects a positive impact on
the decision making process of the board of directors. It is definitely an important aspect to set
up better corporate governance framework. Moreover, Gallucci, Santulli and Calabrò (2015)
pointed out that the family owned business is highly useful in delivering proper work schedules,
judgements and even important to try share the mistakes in a positive manner. As a result of that
a steady business development can be made through the family owned business and smooth
decision making process.

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There are huge disadvantages of family owned board structure in the present business
case scenario. Mihic, Arsic and Arsic (2015) articulated that investors were questioned the
values and intention of the governance of the organisation because the family driven board prone
to fulfil the interests of the family at first. As a result of that it becomes a severe problem for the
investors to get the degree of fulfilment of their interests and profits. As a result of that a sense of
disbelief can be created among the investors and important shareholders. For Arcelor-Mittal, the
same problem would be witnessed as the investors were not sure about future stability and
intention of the company.
Besides this, another important problem can be identified in the form of conflict
management. The study of Roth, Tissot and Gonçalves (2017) proved that family business
generally witnessed succession problem where each of the family members demanded their right
to become the chief executive of the organisation. Any kind of dysfunctional behaviour can be
expected to be seen in case of family business. Henceforth, the instability of the management can
bring down the entire company. Moreover, clash of interests with the stakeholders is also
responsible to generate clash of interests where the stakeholders tried to question the authority of
the family and its ability (Luan et al. 2018). It can bring a hostile business situation that no
longer in a position to run successfully. In case of Arcelor-Mittal the same clash of interests
could be a fatal for its existence in the highly competitive market.
Subsequently, a question is arose about the transparency and efficiency of the family
driven board. Al-Janadi, Abdul Rahman and Alazzani (2016) mentioned that appointing the
family members in the higher echelon of the company proves to be a practice of partiality where
suitable and more deserving employees of the company are deprived. It is negative for a
successful business where the employees does not feel free to work and the causing deterioration

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in organisational performance. Furthermore, from the research of Aguilera and Crespi-Cladera
(2016) it can be stated that the family driven board structure never provide a transparent and
equal treatment in decision making. As a result of that it becomes a severe problem to identify
the real picture of the future of the company. Breaking rules is a very obvious outcome of family
driven board structure. For Arcelor-Mittal those kind of threats cannot be overlooked.
Answer 2
There are several determinants that can push an institutional investor to contribute in the
organisation both financially and physically. In respect to holding 43.5% of the voting equity by
Mittal family, there are immense changes in the decision of the institutional investors. For
instance, McCahery, Sautner and Starks (2016) opined that institutional investors were counter
balancing force that prevented the management to retain monopoly in decision making. The
institutional investors are big business houses who are investing money in other companies for
making their own profit. Henceforth, in case of any threat from the management that can disrupts
the business extensively, the institutional investors try to manage the situation for the long term
sustainability of the organisation. In this regard, their influence on the corporate governance will
help them to pursue their interests of profitability. The institutional investors push the corporate
governance of the respective company to go for long term planning so that it can be leverage for
the institutional investors to gain more profit. This is identified as the basic purpose of the
institutional investors in corporate governance.
In case of retention of majority of the voting equity by the Mittal family proves that
corporate governance of the organisation is highly influenced by the vision and interests of the
Mittal family. As a result of that it can also be expected that the paradigm of counterbalancing