Economic power is concentrated in too few hands, increasing the likelihood that some businesses will become "too big to fail," said the government-appointed committee charged with increasing competition.
The panel, generally referred to as the economic concentration committee, submitted its final recommendations to the cabinet and the Bank of Israel on Tuesday.
Many of its recommendations were familiar to the public, as previous drafts had been released, and conglomerates and other parties likely to be affected had been granted hearings to respond.
But this is the first formal recognition that Israel has an economic concentration problem.
The recommendations call for limits on what institutional investors can lend a single borrower or group of borrowers; this would preserve the stability of the institutionals and the public money under their management. Such regulations are already in place for the country's banks.
They also seek to limit existing control pyramids to no more than three levels - meaning the company at the top, its subsidiaries and the subsidiaries of its subsidiaries. They would also block the formation of new pyramids by limiting them to no more than two levels. This applies to publicly traded companies. Control pyramids are currently a popular way for companies to control a wide range of other firms while making a minimal investment.
Furthermore, a corporation would not be allowed to hold both a significant financial institution and significant non-financial company.
The committee also recommends ways to improve corporate governance.
Committee members said the hearings only strengthened their belief that their initial findings were accurate and that they had identified true problems. In some cases, the testimony by interested parties - who presumably wanted to soften the recommendations - actually increased the committee's concerns, particularly regarding controlling shareholders taking advantage of pyramid power.
The recommendations for limiting control pyramids and financial/non-financial holdings are different for existing pyramids compared with those seeking acquisitions in the future. This is because the committee sought to avoid unnecessary short-term shocks while shaping the country's economy, it said.
"The committee's recommendations are based on the determination that Israel's economy is concentrated, in that a limited number of businessmen control a significant portion of financial and non-financial companies through corporate groups," the report says.
"The small number of these groups stands out in international comparisons. These groups' great potential, complexity and leverage raised concerns about the economy as a whole and the strength of the financial system, as well as the protection of individual savers."
Above all, the recommendations are intended to increase competition, and hopefully will increase foreign investment once implemented, said committee members.
The panel is prepared to provide an ongoing analysis because adjustments may be needed in the future, it said.
The goal is to create a dynamic, competitive economy over the long term while breaking up pyramids and minimizing the damage to the economy in the short term. The current state of the economy is dangerous, and the recommendations are intended to fix this, the committee said.
Committee members said they foresaw many of the arguments that big business would have against their recommendations and tried to preempt them.
They also took the current state of the global economy into account when drafting their timeframe.
The concentration committee's recommendations are a follow-up to the Brodet committee recommendations from the 1990s, which pushed banks to sell off non-financial interests. The latest round of recommendations would impose an even greater separation between financial and non-financial companies.
While the committee stopped short of calling for a complete separation between financial and non-financial companies, it determined that limits on acquisitions should apply to non-financial companies with annual turnover of at least NIS 6 billion. For companies that already have both financial and non-financial holdings, the limit should be NIS 7.5 billion.
Financial companies large enough to fall under the limits include those with assets worth NIS 40 billion. For companies that already own a cross-holding, it's NIS 60 billion.
Also, committee members said Israel might want to limit large corporations - financial or otherwise - from holding media outlets. But this subject was not central to the panel's mandate, so instead of crafting specific recommendations, the committee called on the government to examine the issue.
The government should take competition into account during tenders and privatizations, in consultation with the Antitrust Authority, adds the committee.
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