Corporate boards: Are the mushrooms getting restless?
Accused of being kept in the dark and fed a fungi diet, a raft of lawsuits are giving pliant directors reason to become more activist
As the saying goes, Israeli boards of directors are like mushrooms - kept in the dark and fed with whatever it is that mushrooms need. Other terms for them are "puppets," "yes-men," "rubber stamps," "potted plants" and proteges of controlling shareholders.
Clearly the business lexicon isn't complimentary to board members. One would be hard-pressed to find descriptions such as "impeccable," "courageous," "independent" or "standing by one's convictions."
This is not fortuitous. Boards at the vast majority of Israeli companies consist of people who would never oppose the decisions of controlling shareholders. This is true even when such decisions contradict the best interests of shareholders or creditors, whom the board is supposed to represent.
In an investigation by this newspaper's banking correspondent, a worrying picture emerged. An exclusive club is serving on various boards, despite the conflicts of interest.
No fewer than 12 board members in the banking sector serve in various capacities within the IDB group, one of the largest consumers of credit in Israel. At least nine of them serve on bank committees that decide which companies obtain bank credit. Eight of the 12 received a job at IDB while already playing a role in the banking sector.
The IDB board is a glaring example of a board that raises suspicions that its main interest is to maximize benefits for its members. This is best achieved by staying on best terms with controlling shareholders. In Israel there are boards consisting of friends or family of the controlling shareholder, as well as boards consisting of representatives of banks and other institutions, as well as of businesses needing credit.
Some board members represent the controlling shareholders, while others are external members representing other shareholders. In Israel, this is demonstrated in the many puzzling transactions that are approved, where it's clear the board favors the leading shareholder.
Two examples are the acquisition of Maariv by Discount Investment Corporation and the purchase of Israir from Nochi Dankner.
Questionable approvals at Ampal
At Ampal, controlled by Yossi Maiman, there have been questionable approvals for financing an ethanol production plant in Colombia and for extending a loan to the controlling shareholder, even after it was known that Ampal was in financial straits. At Tau Tsuot, Ilan Ben-Dov's holding company, the board invested in Suny Electronics, also held by Ben-Dov.
The situation in the banking sector is no better. The board at Bank Hapoalim approved a purchase of shares in Turkey's Bank Pozitif from RP, a company belonging to ex-Hapoalim chairman Danny Dankner. The Bank Leumi board granted ex-CEO Galia Maor a non-compete bonus even though as head of Leumi Switzerland she was unlikely to become a competitor.
ank regulators are also looking into why and how Mizrachi's directors ousted board member Beige Shochat, and whether the bank is controlled by its board or CEO Eli Yones.
Another investigative report published last week asked how publicly traded companies in the IDB group received the green light to buy shares in a failing company, a move that was bound to lose money. Controlling shareholders and CEOs admitted that these purchases were carried out "to help a friend in need."
While we all may help friends in need, boards are expected to ensure that such donations don't come out of public funds. In the prevailing culture, controlling shareholders don't seem to have recognized that the companies they control are public, not private.
Otherwise, it's hard to understand why Nochi Dankner, Yitzhak Tshuva, Eliezer Fishman and Shaul Elovitch have all nominated their partners or children as board members in companies they control.
Despite this gloomy picture, there are signs of change in the air. Board members may be considering things more carefully before automatically approving demands by controlling shareholders.
Take Maariv, for example. After Dankner acquired the newspaper, the Discount Investment board repeatedly approved the transfer of funds to Maariv, until Dankner suddenly decided either to sell it unconditionally, close it or put it in receivership.
Apparently, Dankner understood that board approvals for endless transfers of money were no longer guaranteed. Another example of the changing trend is the Partner board. Despite the immense pressure on controlling shareholder Ilan Ben-Dov, the board froze dividend payments. This conforms with the company's needs but runs contrary to the controlling shareholder's interests.
There are other signs of change. Maor has decided to forgo her bonus, even though it was approved by the board. Institutional investors on boards are showing more opposition to controlling shareholders than previously. Thus, in the debt settlement for Delek Nadlan, pressure forced Tshuva to channel more funds to the company. There was also resistance to the debt settlement deal at Ampal, despite heavy pressure by Clal Insurance.
Suits against IDB directors
In the first steps toward the settlement of them all, at IDB, institutional investors are showing strong determination on the board. The simplest explanation is that board members are scared. In the last few weeks, three legal briefs have been filed against companies and boards at IDB. These challenge the Maariv and Israir deals, as well as IDB Holding's dividend distributions over the last few years.
At Ampal there is a pending lawsuit by bondholders against the controlling shareholder. These highlight the risks that board members take when they approve deals that go against the public interest. They can be charged and lose their jobs and reputations.
But not only fear of legal action is at play in board members' bid for independence. The public debate has changed, with a growing understanding of the leveraged business model of the tycoons, who have gambled with public pension funds. The public realized that none of the bodies that were supposed to look after its interests, including trustees, boards and regulators, prevented the reckless and failed investments.
No board member wants to be seen as a party to this irresponsible behavior, or as a collaborator in the pilfering of pension funds.
Whether this trend becomes entrenched will depend on pending legislation in the Knesset designed to prevent conflicts of interest, and on actions by the Israel Securities Authority, the capital markets department at the Finance Ministry, and the supervisor of banks at the Bank of Israel.
They will investigate recent events and sniff out weak boards in an attempt to prevent future crises. The media also has a role to play in its attempt to disclose what really happens at board meetings of the companies that hold and manage our money.