Governance may impede Mittalâ•Žs pursuit of Arcelor | Financial Times
Anger is threatening to boil over on Friday at Luxembourg’s Luxexpo centre as Arcelor, the big
European steelmaker, holds its annual meeting, writes John Plender. Irked by questionable
corporate governance practice – part of an attempt to shore up its defences against a bid from the
ival Mittal Steel – dissident shareholders have turned the gathering into a referendum on
Arcelor’s board.
Yet ironically, the row has served to distract attention from equally pressing governance issues at
Mittal Steel itself. The Dutch-based company is listed on Euronext in Amsterdam and on the New
York Stock Exchange and is controlled by Lakshmi Mittal and his family. Since the cu
ency of the
id, first mooted in January, is expected to be 75 per cent in Mittal paper, corporate governance
could have a crucial bearing on the outcome.
A trawl through Mittal Steel’s voluminous filings with the US Securities and Exchange
Commission, its articles of association and the governance disclosures on its website suggests that
its existing governance a
angements – which Mittal says would remain in place after a takeover –
aise questions that may wo
y investors.
The FT has discovered that a number of the company’s independent directors have close business
ties to the Indian billionaire. It is among findings that, taken together, suggest Mr Mittal is
destined to remain a de facto monarch in his own industrial kingdom unless an improvement in
the bid terms results in his control falling significantly below 50 per cent.
Mittal Steel has a two-tier voting structure. Mr Mittal and his family cu
ently own 67.2 per cent of
the A shares, which ca
y one vote, and all the B shares, which have 10 votes. Overall, Mr Mittal
controls 98.3 per cent of the votes. To assuage concerns about the voting structure he has said that
the ratio of voting to non-voting shares will change from 10:1 to 2:1.
Yet this change in ratio means little in practice – because the powers confe
ed on outside
shareholders in Mittal Steel’s articles of association will remain academic as long as Mr Mittal
etains a voting majority. Shareholders controlling one-hundredth of the capital or €50m can, fo
example, seek to influence the conduct of the company’s business by putting an item on the agenda
of a general meeting. Yet there is little point in trying when Mr Mittal can reject a resolution by a
simple majority.
Even if he reduces his voting control to below 50 per cent, the board can still decide not to place
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such items on the agenda if it believes that do so “would be detrimental to the vital interests of the
company”. The articles contain no definition of vital interests. So the directors have limitless
latitude in exercising their discretion. Other powers confe
ed on outside shareholders by the
articles, such as those relating to the appointment and dismissal of directors, are similarly
valueless if Mr Mittal chooses to exercise his voting power against them.
That said, this is a family model of governance that is familiar to European investors. And the
model often works well, since there is no divorce between ownership and control of the kind that
plagues quoted companies with dispersed ownership. Yet the outside investors’ share in the
corporate bounty is at the discretion of the inside shareholders unless there are protections in law
and in the company’s governance rules to prevent the insiders extracting private benefits of control
at outside shareholders’ expense.
The most important areas of protection concern the integrity and transparency of accounts,
governance a
angements that apply across all subsidiaries, the existence of genuinely independent
non-executive directors and good rules to prevent the abuse of conflicts of interest. A key question
for Arcelor shareholders, in considering Mittal Steel’s bid, is whether the protections are adequate.
At first sight, the picture is acceptable. The accounts are prepared under generally accepted US
accounting principles and from this year Section 404 of the Sa
anes-Oxley Act, which requires
management to assess and report on the effectiveness of internal controls. This potentially offers
important reassurance in a business that operates in many developing countries with weak
property rights and poor accountancy.
Mittal’s Form 20F filing with the SEC says there are no significant differences between its cu
ent
corporate governance practices and those required of US domestic companies under the NYSE
listing standards. Yet closer investigation throws up less comforting evidence.
Mittal Steel is a Dutch holding company, with no business of its own. All the assets are in operating
subsidiaries. Yet the Mittal website disclosures on corporate governance say nothing about whethe
subsidiaries have to apply and enforce the listed parent’s governance rules, what governance
information has to be disclosed to the board by the operating companies and what rights the non-
executive directors have to extract information from the subsidiaries. The management board rules
are described as being those of Mittal Steel International NV, not those of the quoted parent
company, Mittal Steel NV. There are obvious e
ors and omissions in the website’s draft text of the
ules.
When the Financial Times raised these issues with Mittal Steel, a spokesperson admitted that a
mistake had been made and there was no such company as Mittal Steel International. The rules
were Mittal Steel’s. As for the group-wide governance a
angements, she pointed out: “Each
operating unit has its own board of directors, which includes independent external directors and
unit board guidelines that determine what can be approved by the unit board and what needs to be
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efe
ed to the parent company. These boards meet regularly during the course of the year.”
From the point of view of outside shareholders in the parent company this is a somewhat opaque
explanation of group-wide governance. And investors have access to limited governance
information on the operating companies except where, as with Mittal Steel South Africa, they are
quoted.
What protection to outside shareholders does the structure of the holding company board provide?
Mittal Steel is unusual in having three different classes of directors, designated A, B and C. There
are no longer any class B directors since the term of office of Malay Mukherjee, Mittal Steel’s chief
operating officer, expired last year – incidentally implying that the only source of information fo
the non-
executive directors from a non-family board executive has gone.
Meantime, the class A directors, who enjoy most of the rights, consist of Mr Mittal, who combines
the roles of chairman and chief executive, his son Aditya Mittal and daughter Vanisha Mittal
Bhatia. The six non-executives are class C directors, with more limited rights to represent the
company than the A directors. They are unquestionably poor relations, elected for one-yea
enewable terms, while the family directors are elected for four-year terms. In effect, they serve at
Mr Mittal’s pleasure. And while five of the six are described as independent, some have close
outside business links with Mr Mittal.
On the key audit committee, for example, the chairman is Narayanan Vaghul – also chairman of
ICICI Bank, India’s second largest bank, of which Mr Mittal is a director. Alongside him sits Andrés
Rozental, a distinguished Mexican former diplomat: he is president of the Mexican Council on
Foreign Relations, whose website reveals Mittal Steel as a leading benefactor. The third member,
Muni Krishna T. Reddy, is a director of Intercommercial Bank of Trinidad, of which Mr Mittal is a
part-owner. So whatever the box-ticking position on independence, Mittal Steel is open to the
accusation of cronyism in the boardroom.
Where conflicts of interest are concerned, the company’s board rules offer detailed definitions,
eporting requirements and processes. But in many circumstances falling outside legal and
egulatory requirements the chairman has wide discretion to decide whether a potential conflict of
interest is indeed a conflict and whether it should be published in the annual report. Where a
potential conflict involves the chairman, the board is required to discuss the issue without him
present. Here the questions about the independence of the non-executives could be a matter of
concern, especially in relation to Mr Mittal’s ability to run private businesses in competition with
Mittal Steel.
When Mr Mittal put together his public and private steel interests in the merger that created Mittal
Steel in 2004 he entered into a non-competition agreement with Mittal Steel, whereby he could not
un private steel interests in competition with the quoted company without the consent of the audit
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committee. According to the Form 20F SEC filing, this runs out on June XXXXXXXXXXAsked whethe
the agreement would be extended, a Mittal spokesperson merely stated that “non-competition is
also part of article 3.4 of our management board rules which clearly stipulate the principle of non-
competition by a director of the company”.
The article in question is much less detailed in defining what constitutes competition than the legal
agreement entered into in 2004 and makes no reference to audit committee consent. Whether this
amounts to a weakening of the constraint, though, is moot, given the business and financial
connections of the directors on the audit committee with Mr Mittal. But the issue of non-
competition does matter, since Mr Mittal was criticised over potential conflicts at a time before
their merger when his quoted interests were significantly underperforming his private interests.
Mittal Steel says it has no plans for further changes to corporate governance apart from those
already announced, which include expanding the board to include a majority of independent
directors.
If the new directors are genuinely independent and competent, that will be something. But fo
shareholders in Arcelor, cu
ently preoccupied with their own board’s shortcomings, the next
question will be whether Mr Mittal’s remarkable business record, and the strategy he outlines in
the forthcoming bid documents, outweigh the risks in a questionable governance structure.
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Case Study
ACC93210 – Corporate Governance for Managers (Online)
Assessment 2 – Case Study - Board architecture at Arcelor Mittal
DUE DATE: Monday, Week 5, 09:00 AM
WORD LIMIT: 2000 words
WEIGHTING: 40%
All students are required to submit this assessment via the MNG93210 SCU Blackboard learning site. Hard copy and email
submissions will not be accepted and late submission penalties will apply to assignments that are not submitted on time
via the specified Blackboard site.
The following questions are all based on the Financials Times article ‘Governance may impede Mittal’s pursuit of Arcelor’
and the case study information below.
Case Study: Board architecture at Arcelor Mittal
The merger of steel makers Arcelor and