Corporate Governance for Managers: Arcelor Mittal Case Study Analysis

This case study examines the corporate governance practices of Arcelor Mittal, focusing on the company's board structure, the roles of independent directors, and the influence of institutional investors. The analysis explores the advantages and disadvantages of a professional board, contrasting the structure with the Mittal family's dominant role, and the impact of institutional investors in ensuring corporate governance. The study uses information from Financial Times to assess the positive and negative effects of the board's structure on its effectiveness, highlighting potential conflicts of interest and the importance of transparency. The case study concludes by emphasizing the significance of corporate governance in a globalized business environment, especially for multinational corporations, discussing the impact of the structure on Arcelor Mittal's effectiveness.

Corporate Governance

Table of Contents
Abstract............................................................................................................................................3
Introduction......................................................................................................................................4
Discussion........................................................................................................................................5
Board Structure of Arcelor Mittal................................................................................................5
Advantages of Professional Board...............................................................................................6
Disadvantages of Professional Board..........................................................................................7
Role of Institutional Investor in Ensuring Corporate Governance..............................................8
Positive and Negative Impact on Board’s Effectiveness.............................................................9
Conclusion.....................................................................................................................................10
References......................................................................................................................................11

Abstract
This report provides an in depth analysis of the role of executive directors in Arcelor Mittal.
Corporate governance is quite essential for any company as it instills confidence in the capital
markets. Involvement of independent directors on board helps in promoting transparency and
fairness in a company. This case is all about Arcelor Mittal and its structure of board and further
the report discusses on the manner in which the independent directors and institutional investors
help promote corporate governance.

Introduction
Corporate governance has become one of the most essential topics in the corporate world of
today. The term corporate governance can be defined as a system that comprises of certain
processes, rules and practices with the help of which the management of a corporate controls and
directs its operations (Fernando, 2009). Corporate governance is all about protecting the interests
of many stakeholders who are associated with it. The stakeholders include shareholders,
financiers, employees, customers, government, management and also the suppliers. With the help
of corporate governance, a company tries to balance the interests of the above mentioned
stakeholders. The management of a company is, therefore, required to play the role of a trustee.
There are various principles associated with corporate governance, of which conducting the
business with integrity and fairness is one of the principles. Apart from this, transparency in all
the dealings is another major principle of corporate governance. Transparency can be brought
about by making all the necessary and appropriate disclosures. Other principles include ensuring
compliance of laws of the place where the company is operating, committing to undertake
business ethically and being responsible towards company’s stakeholders. One of the ways of
ensuring the practice of corporate governance in a company is to appoint independent directors
on the board. Presence of independent directors instills confidence in the market that the dealings
of the company are fair and transparent.
The main issue with the company Arcelor Mittal was the disagreement between Arcelor and
Mittal with respect to the presence of few independent directors on the board. Since the
independent directors in Mittal group were less in number and mostly his family comprised the
board, Arcelor accused the group citing corporate governance reasons. Therefore, in this report,
the structure of board in Arcelor Mittal, pros and cons of such a structure, significance of

institutional investors and their contribution towards corporate governance and the positive and
negative impact on the effectiveness of the board based on the article in Financial Times.
Discussion
Board Structure of Arcelor Mittal
As of 2019, the board of directors of Arcelor Mittal comprises of 9 directors, 4 of which are non-
independent directors and the remaining directors are independent directors. However as per the
data given in the case, the company has 18 directors, 50% of which are independent directors.
Mittal is a company which is operated majorly by family and it still played a dominant role. The
controls were inadequate as majority board members were of Mittal family and there were only
few independent directors on the board. This was the major allegation made on the company by
Arcelor.
As per Tricker and Tricker (2012), there are two types of board, namely, urinary boards and two-
tier boards. Urinary boards are those boards in which there is only one governing body. On the
other hand, in a two-tier board system, there is a presence of independent directors as well as
other members who are there to protect the interests of employees. This combination is called
supervisory board. In addition to this, there is also a management board in two-tier system. When
the number of independent directors are more on the board, then such boards are termed as
‘professional boards’. Independence of the directors is an essential issue to be considered while
analyzing the structure of the board because of the fact that presence of independent directors
changes the strategies to be adopted in the company. The activities undertaken by the company
comprising of independent directors as well would be different from those with only executive
directors (Tricker & Tricker, 2012).

In this case also, Arcelor Mittal had a professional board structure which comprised of equal
number of independent and executive directors. Therefore, consent of independent directors was
supposed to be considered as important as executive directors. However, Arcelor had voiced
concerns about the involvement of family of Mittal as majority in board. In the United States as
well as the United Kingdom and also in some other economies which are considered advanced
than others, boards of majority public listed companies have more number of independent
directors than executive directors. However, some disagree on having more number of
independent directors. Some companies have all executive directors or executive directors in
majority. This was happening in the company led by Mittal. But in order to attract Arcelor, the
company had to change the structure of the board to include independent directors also on board.
Advantages of Professional Board
There are several advantages of having a professional board as they play a significant role in
ensuring the corporate governance in a company. Particularly in modern companies which have a
huge amount of capital and assets, the board has to play some significant roles. The functions to
be performed are usually complicated and are also multifaceted. Some of the advantages of
having independent directors on board are as follows:
 The executive directors are usually from inside the company or someone who is related to
the company. This means the decisions taken by the board might have a possibility of
being biased. Having independent directors can provide an assurance that the dealings of
the company are transparent and fair.
 The opinion of the independent directors help the management in framing appropriate
strategies as their opinion is unbiased. In this manner, the decisions can be taken foe the

good of the entire company and any personal benefits of executive directors can be
controlled.
 The independent directors play a role of a supervisor of the company. Because the
shareholders are diverse in nature, there was a need of a professional who does not
actually participate in the management of the company but keeps an eye on those who
formulate strategies of the company (Dravis, 2012).
 The independent directors can provide both strategic monitoring as well as management
monitoring to the company. Strategic Monitoring means even when an independent
director does not actually participate in decision making but still attends every board
meeting for the purpose of preventing any fatal mistake that might occur. However,
management monitoring takes place only in certain circumstances (Dravis, 2015).
 In case of conflict of interests, an independent director might help in an objective
decision making.
 They serve as a bridge between the company on the board of which they are appointed
and the outside world (Tricker & Tricker, 2012).
Disadvantages of Professional Board
Having more number of independent directors may also present certain disadvantages to the
company. Such disadvantages are as under:
 Their interests might not be real and their opinion might not be useful to the company
because the executive directors know the operations of the company way better than the
outsider panel of directors.
 They might not possess skills, knowledge and experience relevant to the company.
Hence, their decisions might depict conservatism.

 Since, they are not concerned about self-interest they might feel disconnected with the
company. In other words, they might not be able to force the others to work for benefit of
the entire company.
 There is risk involved in the business and hence executive directors work harder than
independent directors.
Role of Institutional Investor in Ensuring Corporate Governance
In order to protect their own interests, the shareholders of the company require access to correct
information and that too in a timely manner. However, sufficient rights must be given to them so
that the shareholders are able to protect their own interests. Institutional investors, which in other
words can be said to be financial institutions which undertake the activity of accepting funds
from third parties for the purpose of investments. Such investments are made in the name of
financial institutions but are done on behalf of those who invested. Examples include pension
funds, insurance companies and also mutual funds (OECD, 2011). Because of the size of the
funds invested by them in the companies, they become a large force in the capital markets of
many countries. In the countries like the United States and United Kingdom, the role played by
institutional investors is quite significant. The role played by institutional investors in ensuring
corporate governance is as follows:
 They play an important role to ensure that the board of the company places the long term
interests of the organization before any personal interest.
 They have the power to make sure that the interests of the shareholders do not get
overridden by the personal interests of the managers. This is because these institutions
represent large number of shareholders and hence, have the ability to keep the working of
the management under control.

 The institutional investors are more effective in dealing with the management than the
minority shareholders and they can ensure that their questions are answered by the
management. Because of their large size, they can voice their concerns and opinions
easily and it becomes harder for the management to ignore their opinions.
 The most important role is played by the institutional investors during the time of crisis in
the company. In this situation, the management of the company often tries to avoid the
concerns raised by small shareholders. However, the presence of institutional investors
can help the shareholders in putting forth their interests.
 The institutional investors make sure that the company operates ethically and follows all
the laws and regulations so that the long term performance is not hampered.
Positive and Negative Impact on Board’s Effectiveness
As per the article in Financial Tomes, there are more negative impacts on the effectiveness of the
board in case the current board structure of the company is adopted. Some of the positive as well
as negative impacts are listed below:
 Personal interests preside over the overall interests of the company when the board is
controlled by one person and his family. The same is happening at Arcelor Mittal, where
the holding of the family is over 50%. And unless the holding is reduced below 50%, the
other shareholders of the company will not have much to contribute in the decision
making of the company (Financial Times, 2006).
 Mr. Mittal, being the majority shareholder will always have the right to reject a resolution
which is not in favor. This means he is the ultimate controller of the company which
reduces the effectiveness of the board.

 The directors can operate at their own discretion without caring about the other
shareholders, if there are no or less independent directors on board.
 Also, since majority shareholding is with one person, the independent directors so
appointed are often some close business associates of the person. This makes the task of
getting any work done in their own favor becomes easy.
However, the structure of board as followed in Arcelor Mittal is quite similar to European
investors as is stated in the article by Financial Times. This model also works well because there
is hardly any sort of difference between control over the company and the ownership. It has a
positive impact over the board since, the decisions are taken faster because there are less
formalities required with respect to permissions to be taken (Financial Times, 2006).
Conclusion
Corporate governance is one of the most pressing issues in the present day world. This problem
precisely appears to be with multinational companies because of the sheer large size of the
organizations. Furthermore, with companies having only executive directors on board focus on
corporate governance becomes all the more essential. Because of this reason, the significance of
independent directors and also institutional investors cannot be undermined. Independent
directors play a role of supervisors to the management. They might not play an active role, but
they offer support to the investors and management in framing strategies of the company. Apart
from independent directors there are institutional investors which help in ensuring that
organization follows transparency and fairness and dealings. Independent directors and
institutional investors instill confidence in the market and hence these two parties serve as
protectors of investors.

References
Dravis, B.F., 2012. The Role of Independent Directors After Sarbanes-Oxley. Chicago: American
Bar Association.
Dravis, B.F., 2015. The Role of Independent Directors in Corporate Governance. Chicago:
American Bar Association, Business Law Section.
Fernando, A.C., 2009. Corporate Governance: Principles, Policies and Practices. New Dehli:
Pearson Education.
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 29 March
2019].
OECD, 2011. The Role of Institutional Investors in Promoting Good Corporate Governance.
OECD Publishing.
Tricker, B. & Tricker, R.I., 2012. Corporate Governance: Principles, Policies and Practices.
Oxford: Oxford University Press.