The Bank Hapoalim CEO Affair: Should the Board Chairman Also Resign?

Behind the decision not to report the sex scandal the board and the authorities stand dozens of people who held their silence; for this to happen there must be a culture which enables it; is this the team to lead Israel’s largest bank?

hapoalim
Sivan Peres

“I apologized to the supervisor of banks and to the board of directors for not keeping them updated in this affair. We will draw lessons and cooperate with the Bank of Israel and the Israel Securities Authority in any investigation of the matter,” said Bank Hapoalim’s chairman of the board Yair Seroussi, who is also the president of the Israel Association of Banks, over the weekend. He was responding to revelations concerning complaints made by a female bank employee against Zion Kenan, who was later to become the bank’s CEO and has since retired.

Whereas apologies are often appropriate in one’s private life, it’s highly doubtful whether they belong in the corporate world of a large bank, one in which more than 70% of its shares and all of the 330 billion shekels ($87 billion) it manages belong to the public. Seroussi’s apology highlights the manner in which he has handled the affair. He knew about the complaint and knew how it should be handled. He knew that a retired judge had been appointed to investigate the affair.

Seroussi also knew that this was the second complaint in two years in which senior bank executives were involved. He knew that this time it concerned the CEO himself. Despite this, he decided not to report it to the board, the Israel Police, the Bank of Israel and the Israel Securities Authority.

By apologizing, Seroussi informed the public that he had erred in his judgment. However, apologies are made when one is late for a meeting due to traffic or inattention. It is less acceptable as a response to a decision not to inform a board of directors or the authorities of what has transpired.

Viewing events at the bank during Seroussi’s tenure over the last seven years shows that there is apparently a host of occasions in which his and the board’s judgment have been questionable. Seroussi, for those who don’t remember, came to Bank Hapoalim’s board of directors as a “stable cleaner,” following the criminal actions and removal of previous chairman Danny Dankner and the resignation of CEO Zvi Ziv. The new brooms, Seroussi and Kenan, hurried to explain that their primary task was to contend with the managerial crisis caused by the Dankner affair and to stabilize the bank.

What happened in practice? Here are some of the things that transpired since then, at least those that are publicly known. CEO Kenan was suspected of approving a loan to Dankner while serving in his previous post as head of the bank’s business department. Following a police investigation it was decided not to prosecute Kenan. Then there were the loans given to Danker, which landed him in jail. Another exposure was the credit given to cash-strapped tycoon Nochi Danker and his IDB Group, after which Tel Aviv District Court Judge Eitan Orenstein asked Bank Hapoalim representatives, during discussions of establishing who controlled the bank, “How do you give credit with no securities?”

That’s not the end of it. At the same time, the granting and rolling over of credit to bankrupt tycoon Eliezer Fishman was exposed, as well as the lack of addressing his debts, even though they had reached a total of 1.8 billion shekels ($470 million) with everyone knowing that he could never repay them. Even now the bank is asking the court to allow Fishman and his children to continue conducting business as usual.

A further affair was the disclosure of how the bank assisted clients in money laundering and tax evasion in the United States, which has cost the bank hundreds of millions of shekels so far, with more pending.

If that weren’t enough, two years ago came the disclosure of a relationship between Shimon Gal, the head of the bank’s business department who was marked as a candidate to replace his friend Kenan, and an employee working for him. At the end of that affair, after the establishment of a committee headed by retired judge Dina Efrati and negotiations with the employee, it was decided to appoint the woman to a senior post at Isracard, a daughter company of Bank Hapoalim.

Now comes an affair involving Kenan, which has ended so far in an agreement to transfer millions of shekels of bank money to the plaintiff’s account, in exchange for her resignation and silence. Kenan has recently left the bank.

Haven’t they learned their lesson?

Even during the previous sex scandal involving Shimon Gal, which was handled by Kenan, questions arose concerning the informing of the board and the bank directors’ decision on how to deal with it. Logically, the board should at that point have adopted a policy of at least reporting similar future cases. It’s not known if this was done, but in any case the result is not heartwarming – either the board instructed the bank to do so and this was ignored, or no such directive was given, with the board hinting that it didn’t want to deal with such issues. Both options are embarrassing.

What about reporting to the authorities, particularly to the supervisor of banks? Seroussi admitted that he elected not to update them either, until the affair was disclosed on Channel 2 News. It’s the same story all over again.

A former senior official at the Bank of Israel’s Bank Supervision Department said Monday that reasonable judgment should have led the chairman to immediately report the complaint when it surfaced, as well as reporting what steps the bank would take in the matter. The official clarified that it is not the supervision department’s role to investigate suspicions of sexual harassment, but the involvement of a CEO of a major bank could impact public confidence, and the department demands of banks to ensure that it is not caught by surprise by public disclosures that could lead to shaking public trust in the banks. Even if the bank’s investigation had shown that nothing happened, it should have reported the suspicions and investigation before the judge made his decision – but this was not done.

If after the Gal affair the Bank of Israel did not clearly inform banks that it requires reports about similar incidents, the Bank Supervision Department’s judgment is also called into question. In any case the damage was done: The supervision department was caught by surprise, along with the public, by a new affair that does not bode well for the bank’s reputation – a second such affair coming on the heels of the previous one.

The decision to handle the complaint against the bank’s CEO in the way it was handled, along with the decision to withhold reporting it, was not made by Seroussi or new CEO Ari Pinto alone. In every large public corporation, especially in a bank, such a process involves many directors and advisers. The chairman and CEO are obviously involved, as well as external attorneys, legal advisers and internal supervisors (who are supposed to be involved). Others involved are the people who ratified the appointment of the plaintiff to a senior position (in the Gal case) or approved giving her millions of shekels on top of amounts stipulated by labor agreements (in Kenan’s case), as well as people at the bank associated with media links and public relations.

In other words, behind the handling of this affair and the decision not to divulge details to the board of directors and the authorities stands a whole apparatus, including dozens of people who knew about the incident but chose to remain silent and not rock the boat. In order for this to happen there must be, at least at Bank Hapoalim, a suitable culture that enables it.

The list of occurrences at the bank in recent years, along with the string of decisions on what and when to report to the authorities and the board, raise complex questions regarding the judgment of the bank’s managers, chairman and CEO. If this was the team that was supposed to bring a new management style and transparency after the crisis around the resignations of Danny Dankner and Zvi Ziv, it turns out that they have fallen far short of these goals.

This raises the question: Is this chairman, who was personally chosen by Kenan, according to bank employees, and is this board, which was left in the dark regarding several embarrassing incidents, really the team that should lead the bank over the next seven years?