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Anger is threatening to boil over on Friday

by | May 20

Anger is threatening to boil over on Friday at Luxembourg’s Luxexpo centre as Arcelor, the bigEuropean steelmaker, holds its annual meeting, writes John Plender. Irked by questionablecorporate governance practice – part of an attempt to shore up its defences against a bid from therival Mittal Steel – dissident shareholders have turned the gathering into a referendum onArcelor’s board.Yet ironically, the row has served to distract attention from equally pressing governance issues atMittal Steel itself. The Dutch-based company is listed on Euronext in Amsterdam and on the NewYork Stock Exchange and is controlled by Lakshmi Mittal and his family. Since the currency of thebid, first mooted in January, is expected to be 75 per cent in Mittal paper, corporate governancecould have a crucial bearing on the outcome.A trawl through Mittal Steel’s voluminous filings with the US Securities and ExchangeCommission, its articles of association and the governance disclosures on its website suggests thatits existing governance arrangements – which Mittal says would remain in place after a takeover –raise questions that may worry investors.The FT has discovered that a number of the company’s independent directors have close businessties to the Indian billionaire. It is among findings that, taken together, suggest Mr Mittal isdestined to remain a de facto monarch in his own industrial kingdom unless an improvement inthe 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 currently own 67.2 per cent ofthe A shares, which carry one vote, and all the B shares, which have 10 votes. Overall, Mr Mittalcontrols 98.3 per cent of the votes. To assuage concerns about the voting structure he has said thatthe 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 conferred on outsideshareholders in Mittal Steel’s articles of association will remain academic as long as Mr Mittalretains a voting majority. Shareholders controlling one-hundredth of the capital or €50m can, forexample, seek to influence the conduct of the company’s business by putting an item on the agendaof a general meeting. Yet there is little point in trying when Mr Mittal can reject a resolution by asimple majority.Even if he reduces his voting control to below 50 per cent, the board can still decide not to placeGovernance may impede Mittal’s pursuit of Arcelor | Financial Times https://www.ft.com/content/adab205e-d61b-11da-8b3a-0000779e23401 von 4 06.01.2019, 19:33such items on the agenda if it believes that do so “would be detrimental to the vital interests of thecompany”. The articles contain no definition of vital interests. So the directors have limitlesslatitude in exercising their discretion. Other powers conferred on outside shareholders by thearticles, such as those relating to the appointment and dismissal of directors, are similarlyvalueless 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 themodel often works well, since there is no divorce between ownership and control of the kind thatplagues quoted companies with dispersed ownership. Yet the outside investors’ share in thecorporate bounty is at the discretion of the inside shareholders unless there are protections in lawand in the company’s governance rules to prevent the insiders extracting private benefits of controlat outside shareholders’ expense.The most important areas of protection concern the integrity and transparency of accounts,governance arrangements that apply across all subsidiaries, the existence of genuinely independentnon-executive directors and good rules to prevent the abuse of conflicts of interest. A key questionfor 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 USaccounting principles and from this year Section 404 of the Sarbanes-Oxley Act, which requiresmanagement to assess and report on the effectiveness of internal controls. This potentially offersimportant reassurance in a business that operates in many developing countries with weakproperty rights and poor accountancy.Mittal’s Form 20F filing with the SEC says there are no significant differences between its currentcorporate governance practices and those required of US domestic companies under the NYSElisting 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 operatingsubsidiaries. Yet the Mittal website disclosures on corporate governance say nothing about whethersubsidiaries have to apply and enforce the listed parent’s governance rules, what governanceinformation has to be disclosed to the board by the operating companies and what rights the nonexecutive directors have to extract information from the subsidiaries. The management board rulesare described as being those of Mittal Steel International NV, not those of the quoted parentcompany, Mittal Steel NV. There are obvious errors and omissions in the website’s draft text of therules.When the Financial Times raised these issues with Mittal Steel, a spokesperson admitted that amistake had been made and there was no such company as Mittal Steel International. The ruleswere Mittal Steel’s. As for the group-wide governance arrangements, she pointed out: “Eachoperating unit has its own board of directors, which includes independent external directors andunit board guidelines that determine what can be approved by the unit board and what needs to beGovernance may impede Mittal’s pursuit of Arcelor | Financial Times https://www.ft.com/content/adab205e-d61b-11da-8b3a-0000779e23402 von 4 06.01.2019, 19:33referred 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 opaqueexplanation of group-wide governance. And investors have access to limited governanceinformation on the operating companies except where, as with Mittal Steel South Africa, they arequoted.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. Thereare no longer any class B directors since the term of office of Malay Mukherjee, Mittal Steel’s chiefoperating officer, expired last year – incidentally implying that the only source of information forthe nonexecutive 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 combinesthe roles of chairman and chief executive, his son Aditya Mittal and daughter Vanisha MittalBhatia. The six non-executives are class C directors, with more limited rights to represent thecompany than the A directors. They are unquestionably poor relations, elected for one-yearrenewable terms, while the family directors are elected for four-year terms. In effect, they serve atMr Mittal’s pleasure. And while five of the six are described as independent, some have closeoutside business links with Mr Mittal.On the key audit committee, for example, the chairman is Narayanan Vaghul – also chairman ofICICI Bank, India’s second largest bank, of which Mr Mittal is a director. Alongside him sits AndrésRozental, a distinguished Mexican former diplomat: he is president of the Mexican Council onForeign 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 apart-owner. So whatever the box-ticking position on independence, Mittal Steel is open to theaccusation of cronyism in the boardroom.Where conflicts of interest are concerned, the company’s board rules offer detailed definitions,reporting requirements and processes. But in many circumstances falling outside legal andregulatory requirements the chairman has wide discretion to decide whether a potential conflict ofinterest is indeed a conflict and whether it should be published in the annual report. Where apotential conflict involves the chairman, the board is required to discuss the issue without himpresent. Here the questions about the independence of the non-executives could be a matter ofconcern, especially in relation to Mr Mittal’s ability to run private businesses in competition withMittal Steel.When Mr Mittal put together his public and private steel interests in the merger that created MittalSteel in 2004 he entered into a non-competition agreement with Mittal Steel, whereby he could notrun private steel interests in competition with the quoted company without the consent of the auditGovernance may impede Mittal’s pursuit of Arcelor | Financial Times https://www.ft.com/content/adab205e-d61b-11da-8b3a-0000779e23403 von 4 06.01.2019, 19:33committee. According to the Form 20F SEC filing, this runs out on June 30 2007. Asked whetherthe agreement would be extended, a Mittal spokesperson merely stated that “non-competition isalso part of article 3.4 of our management board rules which clearly stipulate the principle of noncompetition by a director of the company”.The article in question is much less detailed in defining what constitutes competition than the legalagreement entered into in 2004 and makes no reference to audit committee consent. Whether thisamounts to a weakening of the constraint, though, is moot, given the business and financialconnections of the directors on the audit committee with Mr Mittal. But the issue of noncompetition does matter, since Mr Mittal was criticised over potential conflicts at a time beforetheir 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 thosealready announced, which include expanding the board to include a majority of independentdirectors.If the new directors are genuinely independent and competent, that will be something. But forshareholders in Arcelor, currently preoccupied with their own board’s shortcomings, the nextquestion will be whether Mr Mittal’s remarkable business record, and the strategy he outlines inthe forthcoming bid documents, outweigh the risks in a questionable governance structure.Governance may impede Mittal’s pursuit of Arcelor | Financial Times https://www.ft.com/content/adab205e-d61b-11da-8b3a-0000779e23404 von 4 06.01.2019, 19:33
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