Was Bank Hapoalim’s CEO Worth NIS100 Million?

Appointed to the helm of the bank by Danny Dankner, Zion Kenan restored Hapoalim to its leading position but under his watch a series of problems undermined corporate governance there.

Ofer Vaknin

Bank Hapoalim CEO Zion Kenan announced on Thursday that he would be stepping down in another half year after seven years and a varied term in office. Kenan, who is 60, is wrapping up a 38-year career at the bank and is leaving it as a very wealthy man, having earned close to 100 million shekels ($26 million) since being appointed CEO in August 2009, including salary, other compensation and severance pay of about 17 million shekels.

Kenan was appointed CEO by the bank’s chairman at the time, Danny Dankner, (who is now serving his second prison sentence) after also getting the support of Dankner’s cousin, Nochi Dankner, the chairman at the time of the IDB group and one of the most influential business people in the country then.

The announcement of Kenan’s appointment, which was not greeted with particular excitement by the Bank of Israel, came at a time when the bank was in a sorry state after losses of about $900 million following failed investments in complicated financial instruments. It also followed the removal by Bank of Israel Governor Stanley Fischer and banking supervisor Rony Hizkiyahu of Danny Dankner as chairman.

At the time, Hapoalim’s major competitor, Bank Leumi, with Galia Maor as CEO, was the country’s leading bank by market value. It took Kenan about two years to stabilize things at Bank Hapoalim, restoring employee morale and building a new management. Relying on its Israeli operations, the economies of scale that its size provided to its customers and its Isracard credit card operations, Hapoalim was again the most profitable of the country’s banks (in absolute terms) by 2011, and the bank with the largest market value.

In the subsequent four years, Kenan cut the bank’s workforce by about 2,000 people pursuant to an efficiency plan that was developed before he took office. He also took major advantage of the scorched earth that Maor left at Leumi for her replacement there, Rakefet Russak-Aminoach. That included dealing with the accounting implications of employee pension obligations, an investigation by American tax authorities and a proliferation of inefficient employees.

These events enabled Hapoalim to increase its lead over Leumi and other banks as measured by market value, profitability, return on capital, the size of the bank’s credit portfolio and efficiency. From his standpoint, Kenan is retiring at a peak for the bank. His expected replacement is his deputy and close associate, Ari Pinto.

Kenan chose to announce his retirement just three days after the Knesset passed a law that bars financial firms from recognizing for tax purposes any executive salary of more than 2.5 million shekels a year.

It’s also possible that the timing of Kenan’s departure will spare him from having to deal with the decisive stages of a U.S. tax authority investigation of the bank for allegedly assisting American clients to evade taxes. In an interview with the New York Law Journal, Caroline Ciraolo, principal deputy assistant attorney general in the tax division of the U.S. Justice Department, stated that Israeli banks are in the sights of American regulatory authorities. The results and timing of the investigation of Bank Hapoalim could have considerable impact on its bottom line in the short run and on its international business strategy in the longer term.

From the bank’s standpoint, the conclusion of the American investigation is also holding up the banking supervisor’s approval of an increase in the dividend Hapoalim pays from 20% of net profits to between 30% and 50%. Approval of the move will allow the bank’s controlling shareholder, Shari Arison, to pay off several billion shekels’ worth of debt to banks and bondholders and to approve a plan to buy a commercial bank in the United States that will serve as a platform to boost its commercial credit activity of recent years.

As the bank’s CEO, Kenan can also claim credit for taking charge in handling the major problems that the bank encountered, and there were many of them. But the list of events that could have tripped him up is long and does no honor to him or to the problematic corporate governance that has prevailed at the bank for years. For example, in 2008, when Kenan headed the bank’s business division, he approved about $3.4 million in credit to the bank’s former chairman, Danny Dankner. An investigation opened on the matter over suspicions of fraudulent receipt and breach of corporate trust ended without any charges due to lack of evidence.

Kenan was also able to evade complications in another case, involving Shimon Gal, who was appointed head of the bank’s business and commercial division and came under suspicion for sexual harassment and other improper conduct toward a female bank employee. There were suspicions that senior bank executives including Kenan were aware of the problem but did not address it as the law required. The case became public in 2014 when, in a surprise move, Gal was forced to leave the bank. Bank Hapoalim retained a retired judge to investigate. She submitted a report to the bank, but it was never made public.

Before the suspicions against Gal became public, the information regarding a purported affair between Gal and an employee was known, in part due to anonymous complaints filed with management and with the supervisor of banks at the Bank of Israel at the time, David Zaken. Kenan, who was a close associate of Gal’s, told TheMarker the case involved just rumors, that he had heard about it from anonymous letters that he had received and from inquiries from reporters and involved malicious gossip. Following the filing of a police report, no evidentiary basis was found for wrongdoing by Gal or any others at the bank. Another problematic issue involved the bank’s failure to take steps against major borrowers who ran into trouble to the tune of billions of shekels in loans. They include Eliezer Fishman, the controlling shareholder of the Globes financial daily and Yedioth Aharonoth newspaper shareholder Nochi Dankner.

Over the past year, it has been Leumi’s Russak-Aminoach who took the heat, particularly from the public, over Fishman’s huge debts. He personally owed the banks more than 4 billion shekels, about 2 billion to Leumi and the other 2 billion to Hapoalim. Russak-Aminoach managed, relatively tardily, to remove Fishman from management and to take control of one of his substantial assets, the real estate company Jerusalem Economy.

In the case of Nochi Dankner, too, Kenan chose to stand on the sidelines rather than taking a position while Russak-Aminoach was alone in trying to strike an arrangement with Dankner that included a write-off of about 150 million shekels of 450 million shekels in debt. The public outcry over the write-off, however, forced her to back down. When it comes to Fishman, Bank Hapoalim claims it is aware of the situation but at this point is not taking rash action “from the gut.”

A considerable amount of Fishman’s debt is the result of an expensive acquisition of shares of Yedioth Aharonoth about 18 years ago on which the bank has a security interest and which are worth considerably less today than when they were purchased.

Hapoalim also had widespread dealings with Nochi Dankner while he controlled IDB, providing him and his IDB group with two major loans, one for 750 million shekels to IDB Development, which was an unsecured loan and another for about 150 million shekels to Tomahawk Investments (the parent of Ganden Investments, through which Dankner controlled IDB Holding). Due to the deterioration of IDB Holding, one of Tomahawk’s subsidiaries, it became insolvent and in a debt agreement being worked out, Bank Hapoalim is expected to recover about a third of what it is owed.

It was not only business tycoons, however, who managed to obtain credit from Bank Hapoalim. Associates of the bank’s management did too. In 2013, for example, Haaretz disclosed a draft report from the supervisor of banks that stated that while Danny Dankner was the chairman of Hapoalim and Kenan headed up its business division, the bank extended credit on favorable terms to associates of the two and of Shari Arison. The Bank of Israel refused to disclose the final report on the subject.

Are Bank Hapoalim and Kenan really afraid to go head-to-head with major borrowers who owe it huge sums? That depends upon who the borrowers are and what vested interests the parties have. There are other instances, for example the case of Shraga Biran of the Alon Group, which prove that when the bank has wanted to, it is capable of acting decisively against major borrowers.