ACC93210 - Arcelor Mittal: Corporate Governance and Board Analysis

This case study examines the corporate governance structure of ArcelorMittal following the 2006 merger between Arcelor and Mittal Steel. It explores the transition from Arcelor's two-tier board system to ArcelorMittal's unitary board dominated by the Mittal family, highlighting the advantages and disadvantages of this structure. The analysis considers the voting rights distribution, the role of institutional investors, and the potential impacts of the board structure on company management and shareholder interests. The document also refers to a Financial Times article that provides insights into the concerns surrounding corporate governance following the merger, particularly regarding the Mittal family's control and its potential effects on minority shareholders.

Running head: CORPORATE LAW ASSIGNMENT
CORPORATE LAW ASSIGNMENT
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Answer 1:
The present assignment deals with the amalgamation of Arcelor and Mittal in 2006.
ArcelorMittal is the descendant of Mittal Steel, a business enterprise which was formed in the
year of 1976 by Mr. Lakshmi Narayan Mittal. In the year of 2006, the merging of Arcelor and
Mittal resulted into the formation of today’s ArcelorMittal (DePamphilis 2010). It was the result
of a hostile takeover by the Mittals that formed the largest steel plant of the world (Zarin and
Yang 2011). Mittals previously followed a unitary board structure. When the entire governance
of the company is executed by a single body, such type of board is known a Unitary board. The
management board and the supervisory work together as a single unit. A single board looks after
the entire governance. There are usually four types of Unitary board; board with executive
directors, a board with majority of executive directors, a board comprising of majority of non
executive directors and a board comprising only of non executive directors. The Arcelor, on the
other side was formed in Luxembourg. Its board followed two tier board system. In a two tier
board system, there are two secondary boards known by the names of management board and
supervisory board. These two secondary boards are independent of one another while working.
When the two companies merged together, the resultant board of ArcelorMittal had a new
board of 18 members. All such members are non executive, of whom most of the members are
independent. In the newly created board structure, Mittal family retained 43.5 percentages of the
voting rights. It bears the characteristics of a Public Limited Liability controlled by the board of
directors. The board follows the provisions provided in the Article Association of the Company
(Bourne 2016). There are six directors from Arcelor, six from Mittal, three present
representatives of Arcelor share holders and three representatives of employees in the new board

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in the new board. Lakshmi Mittal is the only executive director of the board. The maximum of
the board of directors is non executive. The one who is not the member of the executive team is
known as non executive director.
As discussed above, it appears that the newly formed is a unitary type of board with a
majority of non- executive directors. This category of board is least found in listed public
companies. This type is mainly found in the field of non profitable organizations like charitable
institutions, trusts, health sectors and sports centers. The present board structure shows the
domination power of Mittals in the governing and control of the company.
The unitary category of board operates through a single board only. Hence, it
enjoys certain benefits over two tier model (Block and Gerstner 2016). First and foremost
advantage is the presence of a single governing body and not two distinct ones. The single body
can operate more easily and efficiently without any ambiguity in opinions. All the decisions can
be taken together. The second benefit is easy flow of communications. As both the boards work
as a single body, no permission from one board to another is needed. Easy communication can
result into better working and governance (Maassen 1999). The third one is that all the directors
can participate while taking any important decisions. The non executive directors can put their
suggestions to the executives. The fourth one is that all the members can interact with one
another that will help in a healthy relation and better working of the corporation.
However, there lies some drawbacks of the unitary board too when compared with two
tier board (Jungmann 2006). Firstly the CEO holds a dominating and crucial post in the board.
When there is any contradiction of opinions between the CEO and others, the company will be
affected. In addition to that, the participation of the non executive directors can result into

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increased risk in the liability factor. Finally, personal relation if present among the board
members, it can affect the management of the company. Personal preference, biasness and
partiality are major concerns in one board model of unitary structure.
Answer 2:
In the present case study, it is observed that the Mittal family had retained 43.5
percentages of the voting rights to itself. This indicates that the family enjoys majority of the
voting rights. The rights available to the shareholders to vote on corporate policy concern matters
are called voting rights which also comprises of decisions related to building of board of
directors and decisions for changing in operation of company (Haldane 2015). Such voting rights
are available to the share holders generally. They use their votes in several occasions. Each voter
has only one vote without giving regard to the number of shares they have in the company. They
can utilize their votes at the general meeting of the company. They can cast their votes on any
other meetings held for voting purpose. They can give votes either in person or in proxy.
Shareholders can virtually own the company by possessing its shares. Thus, the Mittal’s family
can take a major position in the decision of the company by using their 43.5 percentages shares.
Institutional investors are those types of investors which are not single persons but big
organizations. They are mainly six types which are commercial banks, mutual funds, pension
funds, insurance companies, hedge funds and endowment funds. It is a non bank structure that
intakes money to buy and sell securities, real estate properties and other assets for investing
purpose as a representative of their members. These types of investors play a significant
character in the domain of financial markets. They are the pillars in security trading (Lawrence
2016). The six categories of institutional investors are described below.

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Mutual funds are the most popular type of institutional investor. It is an open ended type
of investment that pulls money from common people and deposits such money into a fund
managed by a manager (Bogle 2015). Such category consists of bonds, stocks, currencies and
other types of virtual securities. Hedge funds are another class of investment methods that use
pooled funds so as to promote high market returns (Agarwal, Green and Ren 2018). Pension
funds are those which are paid by the employees during their service and after their retirement
they get it returned with interests (Anzia and Moe 2016). The employees get their salary
deducted every month by a sum along with contribution from the employer. Pension funds are of
two varieties; benefit fund and contribution fund. Endowment funds are that type of funds that
are collected in the form of donations (Dahiya and Yermack 2018). Such donation types of funds
are used by the religious institutions, universities and other nonprofit organizations to carry their
work ahead. An insurance company is a type that insures the life, health, property, car and others
against damages, injuries, diseases, losses etc. commercial banks are those that provide banking,
investment and lending service to people at large.
It is a very controversial type of topic that whether the institutional investors play any
role in the governing of the company (McCahery, Sautner and Starks 2016). While few believe
that they should interfere in the governance and management of the company, others have the
view that they should not interfere as they have other set of duties to perform.
In the present case of Mittals, the Mittals carry 43.5 percentages of the voting rights.
Thus the institutional share holders occupy the position of minority shareholders. Still they have
affect on the governing of the company. In addition to that, when family members are there in
the board structure, they can have coalition with the institutional investors. The presence of
family members curtails the voting influence of the institutional investors (Palmberg 2015). The

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ideas and opinions proposed by the shareholders are bound to get major support and their
proposals will obviously get executed smoothly. The institutional investors being in less number
cannot contradict their proposals.
Thus in order to allow the institutional investors to play crucial role in the governance of
the company in the presence of other share holders, there shall be some agreement and
legislation by following which the minority shareholders will get empowered to play significant
role. If there is any conflict between the shareholders and investors, a company cannot prosper
efficiently. They must work together for the ultimate benefit of the company. To avoid this, there
must be a balance between the numbers.
Answer 3:
A close perusal of the board structure of the ArcelorMittal and reading of the article of
‘Financial Times’ published on 26th of April, 2006 enlightens us with a very clear and vivid
picture of the newly created board after the amalgamation of Arcelor and Mittal in 2006. The
positive and negative impacts of the board structure are discussed in the following paragraphs.
The advantages of the ArcelorMittal board structure are as follows. The first and
foremost advantage is that the merging has led to better administration of the management and
governance of the company. Before the amalgamation, Mittals was already a tycoon in the steel
industry. After the merging, Mittal continues to hold the main power in it hand. They having
great experience and expertise can manage the board as well as company more efficiently. The
second advantage is that since Mittal hold about 98.3 percentages of the votes, there will be very
less or nil chance of disagreement in any decision taken by the company. Any decision can be
taken without any coalition and disputes among the members. The third point of advantage is

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that the company can be run properly. Any decision can be taken smoothly. Any unnecessary
delay can be avoided. Fourthly, any information can be communicated among all the members at
one go. There will be transparency about all matters among the members.
But like every coin has two sides, such board structure has some drawbacks too. The
negative aspects are discussed now. Firstly, though two separate companies have merged
together forming a single company of ArcelorMittal, Mittal has much more power than Arcelor.
Mittals has the major power o controlling everything in the company. Mittals retain about 99.3
percentages of voting rights that indicate clearly they have the main controlling power. This may
dissatisfy other non family members because their opinions may be ignored or not be given
much importance. The second point is the amalgamation brought frowns in the foreheads of the
investors, because they are much worried as their interests can be vitiated. The third drawback is
that the company governance will depend on the sweet will of the Mittals. There are chances of
disputes between the CEO and the outside shareholders. However, it is observed in a study that
many of the shareholders are in a friendly relationship with the Mittals, thus the Mittals are free
to impose their opinions and thoughts on the shareholders. Fifthly, there is a sense of insecurity
among the shareholders belonging to Arcelor as their protections as the Mittals hold the most
important character in the governance of the company. Sixthly, there lies a concern as to the
protection and security to the outside shareholders of the company. Mittal Steel had three classes
of directors namely A, B and C. there is no in the Group B as the last Chief Operating Officer
expired last year. Thus the only way of getting information for the non executive directors from
the non family origin was not available anymore. On the other hand, the group A directors
enjoyed maximum power as it has Lakshmi Mittal, his son and daughter. The group C has six
non executive directors with very restricted rights compared to group A. Group C directors are

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elected for one year only whereas the family directors are elected for four long years. Thus group
C directors serve at the will of the Mittals. Again out of six, five are independent directors who
have very close outside business relation with Mr. Mittal. Independent directors also called
outside directors are those who do not have any pecuniary interest or any other type of interests
in the company. They only help in the management and governance of the company. They are
independent for name only.
Thus, the board resulted after the merging of Arcelor with Mittal had both advantages
and drawbacks; still it resulted in the creation of the largest steel industry in the world.

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