Corporate Governance Analysis: Arcelor Mittal Merger Case Study

This case study examines the corporate governance aspects of the 2006 Arcelor Mittal merger, focusing on the challenges and implications of the family-owned Mittal Steel's takeover of Arcelor. The analysis delves into the advantages and disadvantages of family-based board structures, highlighting issues of loyalty, transparency, and potential conflicts of interest. It explores how the dominance of the Mittal family, holding a significant portion of voting equity, influenced the decision-making of institutional investors. The study also investigates the pre-merger governance of Mittal Steel, examining its impact on stakeholders and the transparency of its financial arrangements. Overall, the assignment provides a comprehensive overview of the corporate governance dynamics, the role of different stakeholders, and the implications of family control in a major corporate merger, drawing insights from the Financial Times article and related research.

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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

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cannot be followed in course of Arcelor-Mittal. Schmidt and Fahlenbrach (2017) advocated that
the balance of interests in organisation can only be achieved through a transparent and equal
power of the corporate governance of the organisation and its shareholders. This power is
evaluated on the basis of voting rights to motion a decision for greater goods where the interests
of the shareholders and the management will be fulfilled. In case of Arcelor-Mittal majority of
the voting equity has been encapsulated into the hands of the Mittal family. Henceforth, there is
no possibility for the institutional investors to place their interests in the board and influence the
board to fulfil their interests.
One of the major attributes of the institutional investors is to place the interests of entire
shareholders and compels the board to take decision accordingly. In this regard, Huang and Zhu
(2015) found out that minority shareholders are always concerned their own interests only.
However, due to limited holding on the share, there demands are easily overridden by the
management interests. In this scenario, the role of the institutional investors are very important
and deciding factors. They can raise their voice to meet the interests of the shareholders due to
have enough authority over the total shares. This bargaining power of the institutional investors
makes them saviour of the interests and profitability of the shareholders. It is important to get
proper understanding of the role and objectives of the institutional investors. They are not
intended to pursue or suggest any radical changes in the business activity of the organisation.
Rather their interest primarily vests on the continuous flow of financial and operational
efficiency so that they can earn their profit without facing any disruption. Moreover, Hutchinson,
Seamer and Chapple (2015) opined that the very role of the institutional investors were highly
essential for the sustainability of a company because those institutional investors would help the
organisation financially in dire situation.

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Nevertheless, for Arcelor-Mittal there is no scope for the institutional investors to create
much influence on the corporate governance because the majority of voting equity is controlled
by the Mittal family. It creates an uneven power in the hands of the shareholders as they have
less power in the corporate governance to ventilate the interests and concerned matters. As a
result of that there is certainly a doubt about the efficacy and the authority of the institutional
investors in contributing to the governance of Arcelor-Mittal. It can be stated that the powers and
interests of the institutional investors was under high threat in Arcelor-Mittal because of the
monopolistic capitalisation of voting equity in the hand of Mittal family that obstructs the
institutional investors to contribute effectively in the governance of the company.
Answer 3
There are definitely some positive impacts that Mittal Steel was witnessed in its pre-
merger situation. For instance, the Mittal family had a strong control over its management and
ownership. It is identified as a common feature for the family owned business enterprises where
the family enjoyed extensive power over the quoted companies. Sarbah and Xiao (2015)
projected that the having strong control over its management and governance can lead the
company to take decisions in quick time and ensure the success of the company. For Mittal Steel
also it is obvious that the Mittal family took all the important decisions and as a family business
it was quite a success factor for the company. De Massis et al. (2016) argued that from the
perspective of the family business owner the betterment of the company can be acknowledged by
the family only. It means the family is the ultimate authority for taking all the decisions.
Therefore, the objectives of Mittal Steel was coupled with the interests of Mittal family.

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Apart from that safeguarding the interests of the internal shareholders is also considered
to be one of the important aspect for the business organisation in course of managing a family
owned business. In this regard, it is important to know that the internal shareholders are
identified as the family members only. Therefore, for Mittal Steel, the objective of the board is to
ensure the interests of Mittal family at first as the internal stakeholders (Plender 2006). As Mittal
family is the major shareholder of the company therefore securing the benefits of the family was
defined as securing the interests of most of the shareholders. From the research of Hashim and
Amrah (2016) it can be derived that securing the interests of the shareholders put an organisation
in an advantageous position to get financial flow in course of its business activities. It is
definitely a significant aspect for any business companies and the foremost principle to ensure its
financial flow. The result was also portrayed within the success and high profit earning of the
organisation in the competitive market.
Despite of all those positive impact on the effectiveness of the Mittal Steel board, it can
be stated that there are range of potential threats that the company was facing in its business
activities. The most important allegation was arose about the transparency of accounts and
governance arrangements of the organisation. Gallucci, Santulli and Calabrò (2015) advocated
that the role of an organisation is to set its governance independent so that a balance of power
can be developed between the management and the board of directors. However, for family
owned companies there are very little difference between the operation and the governance. For
example, Mittal Steel confirmed that its corporate governance is highly following the USNYSE
listing standards (Plender 2006). However, in reality the subsidiary companies are under the
patronage of Mittal family therefore the independent board members does not have the power to

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extract information about the subsidiaries. Mittal’s Form 20F empowered the secrecy of the
subsidiary companies and made the non-executive independent board members under shadow.
Besides this, the decision making process in Mittal Steel also left a negative impact on
the external stakeholders interests. There are three different classes of directors in the company
but the A class directors enjoyed most of the rights. This A class directors were basically the
family members of Mittal. On the contrary, the Class C directors had limited rights with a tenure
of only 1 year (Plender 2006). As a result of that the future of the external shareholders was
under the threat because Mittal Steel did not want to get them enough benefits that they
expected. As a result of that a clash of interest became inevitable and there was no independent
board member who could mitigate the issue properly. From the research of Al-Janadi, Abdul
Rahman and Alazzani (2016) threat to the interests of external shareholders can be a grave
problem for business organisations in near future. For Mittal Steel also the same problem was
created to gain trust of the external shareholders.

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