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There's an old chestnut that directors need to be cultivated like mushrooms: fed horse-manure and kept in the dark.

The joke doesn't mention who exactly is supposed to feed them the excreta and pull the wool over their eyes, but it's evidently the managers. They're the ones best positioned to neutralize the board of directors by stuffing irrelevant information down their throats and hiding the information that really matters, to best advance their own interests.

Happily for the directors at Bezeq (TASE: BZEQ), and many other companies in Israel, the conclusions of Yoram Danziger's report on the conduct of the phone company's board of directors and management, came four days before the Winograd report on the government's and army's conduct during Second Lebanon War. After hearing what Winograd had to say, the nation wasn't really interested in what Danziger was bellyaching about.

But it should have been. What Danziger was writing about, was how the Bezeq board and management handled stock option grants to executives, and how subsidiary Pelephone Communications handled its accounts.

The picture Danziger painted wasn't much of an improvement over the image of management feeding the directors with horse-manure and leaving it in the dark.

The Danziger report, all 87 pages of it, should be required reading for every director and manager at every company that counts in Israel. Not because its main topic is the gigantic pay package for the top people, but mainly - because it exposes the Israeli board of directors in all its nakedness.

Don't think the report applies only to Bezeq. The only reason the management and board at Bezeq were exposed with their nasties dangling in broad daylight, as it were, is because of the vigor of the Israel Securities Authority, which forced the board to appoint an examiner and publish the findings.

Anybody familiar with the controlling structure of big Israeli companies, and the culture of the board, knows that what Danziger found at Bezeq is much the same at too many other major companies.

Minute by minute

Their lucky break is that the Israel Securities Authority didn't act against them with the verve and speed that it applied in Bezeq's case.

If the Securities watchdog had forced publicly traded companies to publish the minutes of their board meetings, the information presented to the directors, and the logic underlying their decisions, Jacob Gelbard could not have been the only chief executive forced to quit. And hundreds of directors in Israel would now be covered in cold sweat.

The Danziger report shows how Gelbard manipulated the board, acted improperly, attended at meetings from which he should have recused himself, and bent the directors' arms.

The man in the street wonders: why him? Why is Gelbard the only one tossed onto the sidewalk? What happened with other Bezeq managers, and directors, who approved the stock options and grants? Did Gelbard try to obtain terms beyond what the controlling shareholders - Haim Saban, Apax and Mori Arkin - were willing to pay?

Almost certainly not, that isn't the thing: the thing is not the failure of the management. It's the failure of the board of directors that is supposed to oversee the management.

Disappointed in Apax

The root of the evil at Bezeq is the root of evil at many Israeli companies. It's that the most important decisions aren't made by the official company organs - management or board. They are made by the controlling shareholders.

They conclude employment terms with executives. They rule. They decide on the company's strategy, and then they hand down their decisions to technically be approved by the managers or board.

Haim Saban is one of the most successful businessmen originating in Israel, but he's used to operating through privately owned companies. Even though he only owns 13.5% of Bezeq, he feels like the company is his own private property, say business-sector sources.

More surprising, or disappointing, is the way the Apax fund's role in the Bezeq fiasco. Apax is one of the most successful private equity funds in the world. It was supposed to bring its rich international experience as well as proven ability at improving companies, and also - the highest culture of corporate governance.

Apax has representatives on the boards of dozens of the biggest companies. It is supposed to know all about ethics, standards, transparency and fairness. Yet in this, the biggest external investment in any Israeli company, it flopped.

Saban does not sit on Bezeq's board. Like most Israeli tycoons, he keeps a distance from the board, and the tremendous legal responsibility that a board seat involves. But at the end of the day, his is the word.

Or as Danziger put it, "My inspection gave me the impression that the company's policy, in some issues, is not set at board meetings but at meetings of the representatives of the controlling shareholders, at which the company CEO delivered routine reports and the issues were discussed in depth."

A rubber stamp twitches

One of the Bezeq directors, Yigal Cohen-Orgad, spoke up at a board meeting at the end of 2006: "The board of directors receives reports from management, but is not a factor in the process of decision-making, which is managed by the controlling shareholders and the management outside the board."

Was Cohen-Orgad the only one who felt that the board had become a rubber stamp for the owners and management? Probably not: the directors at Bezeq and elsewhere must have known who called the shots and what their real role was.

But few reached conclusions. Few quit. Few demanded explanations from the shareholders. Most preferred to sit like potatoes at the board meetings, reveling in their power and prestige, not to mention paychecks.

The Winograd Report revealed the full extent of the government's breakdown in making decisions. The Danziger Report reveals the true flaccidity of the Israeli board of directors.

Every regulator and legislator, every person with a finger in the capital market, should read the Danziger Report from first to last word and ask himself, out loud, exactly why the board of directors of the fifth-biggest company in Israel was so flawed.

We feel that one of the most immediate conclusions is that the Israel Securities Authority's diligence regarding Bezeq must be repeated, and much more frequently, regarding the other big companies in the land.

Other conclusions should apply to the institutional investors that manage other people's money, regarding intervention in decision-making processes at the companies in which they invest our money.

The treasury's capital markets commissioner, Yadin Antebi, has already started to address this: he wrote to the institutional investors - provident and mutual funds and insurance companies - that have holdings in Bezeq, demanding that they use the tools at their disposal to protect their clients' money.

Last but not least, is a discussion of the common Israeli phenomenon of the "shadow board". The billionaires and tycoons stay away from the board meetings but pull the strings. They leave no spoor, or explanations behind them. That, they leave that for others.