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The Bank of Israel wants the chairman of Bank Leumi to be appointed only from among the state's representatives on the Leumi board of directors, and not candidates put up by private shareholders. The central bank suggests that the state's representatives on the board be chosen by a state-appointed committee.

Leumi is the last bank to remain under the control of the state. All the banks were nationalized after the so-called "bank shares scandal" of 1982, but the rest have been privatized since then, other than Leumi. The state owns the controlling interest in Leumi, though other shareholders have significant interests. For instance, insurance baron Shlomo Eliahu owns a roughly 10% stake and has ideas of his own about the chairmanship.

The central bank hopes the move will resolve the potential conflict in the event that a board member suggested by a private shareholder is elected bank chairman - which raises the question of whether that shareholder obtains de facto control of the bank.

The Knesset is currently in the process of enacting legislation for the sale of the controlling stake in Leumi. This legislation will include regulations for the structure of the control of the bank, particularly the method used to choose the board, in the event that the bank operates without a controlling shareholder or group of controlling shareholders.

The general guidelines agreed upon by the Finance Ministry and the central bank call for the amendment of the existing law (the Marani amendment) such that any shareholder who owns 2.5% or more of Leumi will be eligible to suggest a candidate to the board.

The candidates will be presented for a vote at the general assembly of the bank's shareholders. Anyone owning 2.5% or more of the bank will have to declare the extent of his holdings.

Each eligible shareholder will be allowed to suggest only one board candidate, regardless of the size of their stake. A state appointed committee will also submit the names of candidates for each board position that comes vacant, such that at least two candidates will vie for each position - one proposed by the committee, and the rest by the shareholders.

The state-appointed committee will have five members: a delegate appointed by the governor of the central bank; a representative of the finance minister; two serving Leumi board members; and the committee's chairman, who will be appointed by the justice minister, in consultation with the president of the Supreme Court.

This amendment addresses the selection of the bank's board members, but leaves the issue of the election of the board chairman open. Thus if the director elected to chair the board was proposed by a specific shareholder, that shareholder might have excessive influence over the bank's operation, to the extent that he could be suspected of effectively controlling the bank, without there ever having been any intention to grant him such control.

The way to prevent such an eventuality is to ensure that the chairman is elected only from among the candidates proposed by the state committee.

Sources familiar with the issue estimate that the central bank will not spell out such a restriction in the law (it is also unclear whether such a restriction would be legal), and instead will lean toward approving only candidates who are not directly associated with a particular shareholder. It is also likely that the state committee will suggest only the most suitable candidates to be board members, thus increasing the likelihood that one of them be chosen to chair the board anyway.

The central bank's preference raises an intriguing question regarding a prominent candidate for Leumi's board - former Bank of Israel governor David Klein, whose candidacy was submitted by Eliahu.

Klein is expected to be voted onto the board by the shareholders, and his election will also likely be approved by the Supervisor of Banks at the Bank of Israel. It is unclear, however, what will happen if Leumi's board elects Klein as its candidate for chairman.

In that case, the Supervisor of Banks would be faced with a tough dilemma of whether to approve him as chairman despite his open ties with Eliahu.