How an Israeli Supermarket Joined the Likes of Enron and Worldcom

When the rich and powerful screw up: Shraga Biran, Mega’s controlling shareholder, joins the hall of shame of failed corporate titans like Enron's Jeffrey Skilling and WorldCom's Bernie Ebbers - who don’t like taking blame either.

David Rosenberg
David Rosenberg
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Israeli business tycoons sitting on a 2013 panel, the weight of the world not exactly on their shoulders. Far right: Shraga Biran.
Israeli business tycoons sitting on a 2013 panel, the weight of the world not exactly on their shoulders. Far right: Shraga Biran.Credit: Ofer Vaknin
David Rosenberg
David Rosenberg

If we’re to take him at his word, Shraga Biran had nothing to do with the Mega supermarket chain’s descent into debt and distress.

Yes, on paper he owned it – he was the controlling shareholder, but what does that mean? Thanks to the beauties of corporate pyramids, Biran owns 80% of Beilsol, which in turn owns 83% of Alon group, which owns 72.2% of Alon Blue Square, which owned 100% of Mega.

So, Biran may have had control, but it was remote control from quite a distance. In any case, as Biran told TheMarker last week, he never managed the company or even served as a director. And, remember he is a lawyer, not a retail expert, and Israeli corporate governance rules severely restricted him from exercising his authority has controlling shareholder, he noted.

Okay, he did approve pulling hundreds of millions of shekels in dividends out of Mega’s parent company, Alon Blue Square. But most of the rest of the time, he wasn’t around when Mega was going from bad to worse, or so he portrays it. “I didn’t manage the company and can’t take responsibility for things I didn’t do,” Biran said, demonstrating no evident remorse for his absence.

Biran is an extreme case, but he’s not untypical of fallen titans who wash their hands of responsibility for their failing business. They didn’t know what was going on, it was other people, it was circumstances.

Shocked! I am shocked!

"I don't think there was anyone that was as shocked by the -- by the collapse of the company as I was," said Jeffrey Skilling, who was sitting in the corner suite as CEO while Enron grew into America’s seventh-largest company through the use of dubious accounting practices.

“I put those people in place. I trusted them. I had no idea they would do anything like his,” explained Bernard Ebbers, whose WorldCom crashed into a wall of debt. And how could he? After presiding over what was for a time the second-largest long distance phone company in the U.S., he admitted, “I don’t know technology and engineering. I don’t know accounting.” In other words, Ebbers collected $45 million in salary and bonuses over a decade building a company without apparently knowing much about the basics of the business.

Or Fred Goodwin, whose mismanagement of Royal Bank of Scotland forced British taxpayers to fork up a 45 billion-pound bailout. “It’s very simple to blame it all on me and close the book. But it’s more complex,” Goodwin explained.

Nochi Dankner, who left Israel’s IDB group stranded under an avalanche of debt, said, “I don’t deny responsibility for my failures and poor decisions,” yet he fought to the bitter end every effort to wrest control of the holding group from him.

But two buts

To some extent they’re right: No one person can really be responsible for the failure of a giant business.

But there are two buts. One is that none of the corporate chieftains were so modest about sharing credit or their knowledge of the business when their companies were on the way up. That's why, for instance, Skilling was getting $132 million his final year at Enron – the company’s success was a product of his genius.

Jeffrey Skilling, formerly of Enron, having a moment with the press. (Bloomberg, 2003)

The other but is the ministerial responsibility that comes with power. What happens under your watch is yours for better or for worse, even if other people did it.

Mega has amassed losses of close to 760 million shekels ($200 million) over the last four years and has debts of 1.7 billion ($450 million).

Nor can Mega claim to have been taken down by an economy-wide financial crisis; Israeli retail has been declining for years as consumer preference changed from convenience or brand names to low prices. Hobbled by high overhead, Mega was poorly positioned for the sea change in food shopping, and what it do in response was far too little and far too late.

Meanwhile, instead of investing in its core business, the parent company Alon Blue Square went off into forays into mostly unsuccessful new businesses, and took dividends to cover losses elsewhere in the empire.

Mega’s bosses -- David Wiessman in particular who ran the place during more than a decade of one-man rule -- screwed up big time.

Unlike the other corporate screw-ups, Biran wasn’t a CEO. But he was controlling shareholder, and he bears ministerial responsibility for Mega’s problems. If he didn’t know what was going on, which is hard to believe, he should have.

Me play, you pay

Yet the rescue plan originally proposed by Alon Blue Square put the burden of the recovery on everybody but Alon and its owners, including Biran.

The employees agreed to take steep wage and job cuts. Mega’s suppliers, who had been stocking its shelves even as arrears piled up, were asked to wait longer to be repaid for past debt. So were bank creditors. Only when the banks balked did was Alon Blue Square agree to put in significant amounts of its own money.

A Mega branch in Tel Aviv: Not many shoppers. (Photo: Ofer Vaknin)

Biran himself has refused to personally contribute to repaying Mega’s debt, saying (correctly or not) that whatever money has wouldn’t begin to make a dent. In any case, the law correctly protects shareholders of limited liability companies from personal cash calls on corporate debts.

Sir Shraga no more?

CEOs can be fired. Goodwin’s knighthood was taken away from him. If an identifiable crime was committed, as was the case with Enron and WorldCom, people can get jail time. But Biran has no job with the Alon group, Israel doesn’t confer knighthoods, let alone revoke them, and no one is being accused of doing anything illegal at Mega.

Biran has paid a price for Mega’s woes. The value of his Alon Blue Square shares have fallen 55% in the past month and he has given up chunks of his business empire: As part of the deal with Mega’s unions, a third of the supermarket chain’s equity is being transferred to workers. He’s also offered debt-for-equity swaps to Mega’s suppliers.

Is that enough of a price? Justice would say no, because he’s suffering no more than Alon Blue Square’s minority shareholders, who certainly had no say in how the company is run.

Economics, however, would say yes. If shareholders in limited liability companies had to take personal financial responsibility for failures, no one in their right mind would start up a company or invest in the stock market.

But imposing absolute standards of justice and fairness would cost us dearly. Like prime ministers, generals and others wielding immense power, CEOs and controlling shareholders do more damage when they screw up than they can ever possibly make up for. That’s life.

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