For Dual-listed Israeli Companies, Exec Salaries Are a Trade Secret

Listed Israeli firms must disclose the pay to the top 5 people. Unless they're dual-listed in America, that is.

Every company whose shares are traded on the Israeli stock exchange is obligated to publish in its annual report the names and salaries of the five senior executives who rake in the highest salaries. So who are the highest paid executives at pharmaceuticals giant Teva, and how much do they earn?

We can't tell you that.

What about the directors of Partner or Cellcom?

We can't tell you that either.

Alvarion, Nice, Elbit Systems?

Sorry, that information is about as accessible as the truth about what really happened to Prisoner X.

And what about the senior executives of Tower, Gilat, Given Imagining, Alon Blue Square and Formula Systems?

You get the idea.

Some 30 companies traded on the Tel Aviv Stock Exchange don't reveal the names of their top-earning executives, nor do they spill the beans on their options, bonuses and other perks. They get out of it, because they are all dual companies, meaning their shares are traded both on the Israeli stock exchange and on stock exchanged in the United States.

These are not marginal businesses. A glance at the list of the dual companies who failed to make the big reveal in last year's annual report tells us that these are corporations representing one-third of the overall market value of TASE companies. The group includes most Israeli high-tech companies. Teva, at the head of the pack, is particularly conspicuous – a huge corporation in terms of the Israeli stock exchange, valued at over $30 billion.

In doing so, these companies are opting out of the public discussion about the salaries of senior executives at public companies. The vast majority of them will not publish this information in the forthcoming annual reports.

Ever since the social justice protests of 2011, executive pay has come under intense criticism. And while every executive at the bottom of the list of companies on the stock exchange gets a reprimand when he is granted a package of rainy day options, these dual-company leaders are sprawling out on flights between Tel Aviv and New York. No one bothers them, because no one knows how much they make.

Change is a-coming

Two law professors are looking to change this. For several months now, Judge Danya Kareth-Meyer of the economic division in the Tel Aviv District Court has had a request pending from Profs. Sharon Hannes and Ehud Kamar, who are are seeking approval for a class-action lawsuit against Teva. They want the company to be forced the publish the salary of its chief executives, on an individual basis, in their annual report.

The duo is also demanding retroactive publication of salaries from the past 12 years.

Teva has yet to reply to the law suit request and has asked for a number of postponements.

But the suit by Hannes and Kamar, experts on corporate law from Tel Aviv University, has received media coverage both in Israel and the United States. Kamar also teaches at the University of Southern California, and both are also very familiar with U.S. corporate law.

Their lawsuit is also based on the legal opinion of Prof. Jesse Fried at Harvard University Law School, who claims that Teva is obligated to publish the salaries of its senior executives in the annual report it submits in the United States. Fried is an expert on U.S. corporate law, and together with his colleague Prof. Lucian Arye Bebchuk (who was the adviser of the committee on concentration in the Israeli economy), wrote the book that led the harshest criticism of executive salaries on Wall Street – "Pay Without Performance."

Although Teva is the only defendant in the class action suit, other dual companies that fail to reveal their highest paid executives by name are now on alert. TheMarker discovered that several of these companies conducted a legal investigation when they heard about the suit in order to examine their own reporting policy. The annual reports of most of the dual companies will be submitted in the coming months – some have already published their 2012 reports – but it is not yet known whether any of the companies intend to change their policies.

The hidden salary of dual listing

This is a basic issue, even without the class action of Hannes and Kamar. In order to understand why, we have to go back to 2000 – the year when the Securities Law was amended to include the chapter called "dual listing."

The chapter was designed to prevent the flight of Israeli companies to raise capital on the American stock exchanges. It was written during the peak of high-tech and the American capital market. The idea was to enable companies traded on large and recognized stock exchanges, such as the New York Stock Exchange, NASDAQ or the London Stock Exchange, to register their shares in Israel as well, without requiring them to issue reports in addition to those required by foreign law.

The assumption was that the supervision and enforcement in those countries was thorough enough to protect Israeli investors as well. In effect, in at least some cases, the opposite has turned out to be true. Many dual companies are subject to more lenient rules than would be the case if they were traded only in Israel, and American companies are treated much more strictly in the United States than are Israeli ones.

Speaking with forked tongues

The Israeli Securities Authority is doing almost nothing to change the situation and to compel these companies to reveal their top earners. Their laissez-faire attitude comes as a surprise, especially when considering how active they are on the subject of executive pay in public companies traded only in Israel.

How will we know if the compensation in those companies is commensurate with performance? How will we know whether the compensation mechanism is related to business results? How will we know whether the board of directors approved the salary in a proper procedure?

To put it bluntly, we won't.

The Securities Law could be changed if anyone so wished, but there is no such proposal on the agenda.

Teva's legal DNA

Teva has been traded in Israel and the United States for years. Until 2000 it submitted full reports, including the names and salaries of top executives, as required by both Israeli and American law. In 2001, from the moment it began submitting reports according to the dual listing law, Teva stopped reporting the individual names of the five highest paid executives.

Hannes and Kamar claim in their class-action suit that Teva exploited the U.S. listing in order to cease reporting the highest salaries on an individual basis, although it had done so previously. The professors also claim that Teva's behavior sent a signal to other dual companies that they should follow suit, thus creating the present situation where so many companies fail to report.

If the pair is correct in their accusation that Teva has been shirking its obligation for the past 12 years, why has no class-action suit been filed against it in the United States?

One reason could be that American shareholders are unfamiliar with Israeli law. Another is that there is no money involved in this lawsuit. The professors are not demanding compensation, but only a revelation of the information.

So why is Teva objecting? Well, why wouldn't they? In addition, in a company where control is in the hands of the executives, they prefer not to reveal their salaries. Such disclosure is liable to lead to additional lawsuits. If it turns out that the salaries are or were exorbitant, someone may want to sue them.

Changes in the law from November 2012 demand that public companies reveal the CEO's salary when it is approved by the shareholders, thereby revealing it to everyone. But that affects only the current CEO, and not other executives or former CEO.

We can assume that Teva will fight tooth and nail to prevent the revelation of the information in the Tel Aviv District Court, and if it loses, will appeal to the Supreme Court. Teva excels at conducting legal battles. You could say it's in the company's DNA.

Reuters