Why the Market Is Mad at a Rich CEO

In the case of Israel Corporation and its CEO Nir Gilad, there is apparently no connection between failures and financial reward.

His friends have been saying lately that Nir Gilad, CEO of Israel Corporation, feels frustrated.

A lot of Israelis feel frustrated: the poor, those who make the minimum wage, the unemployed. But their frustration is banal and easily understood.

Nir Gilad is another story. What does he have to feel frustrated about? Why is a CEO who has earned NIS 90 million in six years frustrated?

A search for the source of his frustration reveals that Gilad is unhappy that he has today become the Israeli stock market’s alpha pig. Not only is he unhappy about this dubious title; he does not understand why he has been given it.

How has he, of all people, received the questionable honor of becoming the emblem of all the ills of executive pay? Are there no other CEOs who have failed to deliver the goods? Are there no other CEOs around whose salary level is questionable and grossly inflated? Is it so hard to find CEOs who rob their clients, employees and investors in broad daylight?

To be sure, one surprising element in Gilad’s being coined the premier pig of the stock market, is that the public doesn't have any contact with the Israel Corporation.

Generally speaking, the public gets mad at companies that gouge it on products and services. That's what happened to major Israeli dairy manufacturer Tnuva, which faced a consumer boycott on one of its flagship products, cottage cheese, because of anger over its high price. That is what happened to the country’s mobile operators before competition was forced on them, and that what happens to the banks from time to time.

But why is anyone angry with the Israel Corporation? Most of its value derives from exporting raw materials, not gouging Israelis. What's wrong with charging non-Israelis through the nose and thereby bringing dollars into the country?

In fact, in contrast with the IDB group that has invested its energies in all sorts of financial tricks and gambles over the past few years, the Israel Corporation has actually undertaken initiatives and investment projects intended to create jobs: Better Place, the now bankrupt revolutionary electric car company; the establishment of a power station in the Negev region; and a massive investment in Israeli chipmaker Tower Semiconductor. Although the Israel Corporation also has had a string of stunning business failures, it has invested in the Israeli economy in order to create jobs and promote growth, and not just to engage in mere financial acrobatics.

But a closer look at the position of the Israel Corporation in the Israeli capital market, at the centrality of its subsidiary Israel Chemicals, and at Gilad himself shows there are indeed reasons why he is perceived as the Israeli stock exchange’s alpha pig. Thus, an explanation will be given here that might help Gilad and perhaps a few other CEOs understand a thing or two:

1. Gilad spent many years in the Finance Ministry, reaching the post of accountant-general, a position he occupied from 1999 to 2003. One of the accountant-general’s responsibilities is the state’s assets. With Gilad in the post state sold two assets to the Israel Corporation. It sold 26 percent of Oil Refineries (BZN) for NIS 568 million and sold the remainder of the state’s holdings in Zim Integrated Shipping Services.

Gilad was involved in these two transactions, which were widely criticized; the criticism grew when Gilad joined the Israel Corporation in 2006.

Crossing the line that separates working as a government employee and being responsible for the state’s assets, and working for the very same tycoon who purchased those state assets, looks bad from any perspective.

It makes the public feel that the game is rigged. The circumstances under which Gilad crossed that line screamed out in the banner headline: This might be legal but it does not look right.

2. If this were a case simply of a government employee joining a tycoon, the move might have been acceptable. But when one takes a close look at the Israel Corporation over the past few years, a number of reasons for the public’s rage can be found.

Let’s start with the fact that it is a holding company. The stock market takes a rather dim view of holding companies because of the massive, exorbitant salaries of its top executives. In fact, holding companies are one of the stock exchange’s chief ills — the damage they do outweighs their beneficial effects. In the case of the Israel Corporation, its exorbitantly paid top executives are also responsible for its fiascos, like Better Place, Zim and Tower Semiconductor.

Who should be blamed for these failures? Idan Ofer, who is the Israel Corporation’s largest shareholder and last month announced his resignation from its board of directors? The CEOs of its companies? Or both Ofer and the CEOs? Perhaps there is a conspiracy of silence between the owner, who made problematic investment decisions, and the CEOs who fail in the execution of those decisions; perhaps, in the context of this conspiracy of silence, no one is paying the price for failure. Although Shai Agassi, Better Place’s founder and former CEO, paid the price for the company’s failure, what about Gilad and Ofer? Are they immune? Are they perhaps covering up for each other’s gross blunders, and are the investors paying the price?

3. Had Gilad paid the price for the Israel Corporation’s financial failures, perhaps the public would not have been so enraged. However, in the case of the Israel Corporation, there is apparently no connection between failures and financial reward. None whatsoever, it would seem. In an age of losses due to investment blunders, one could have expected some measure of humility, a bowing of one’s head in admission of mistaken conduct, an expression of sympathy for the grief the investors are suffering, and a willingness to accept a salary commensurate with one’s performance. With the support of the controlling shareholders, Gilad and Israel Corporation chairman Amir Elstein carried out an act of underhanded opportunism on the eve of the coming into effect of Amendment 20 to the Companies Law; the amendment places limits on the authorization of executive salaries and transfers some of the authority to approve those salaries to minority shareholders. Gilad’s salary agreement grants him options worth NIS 25 million.

Furthermore, over the past few weeks a program is being formulated for splitting the Israel Corporation into two separate companies, and the split carries a price tag: a grant of NIS4 million that will flow straight into Gilad’s pocket if the split takes place. The move is intended to increase the group’s worth and it is regarded as a highly unusual business transaction, which will be an elegant way of lining Gilad’s pockets with a few more million shekels. After the intervention of the Securities Authority, Elstein, who received options worth an equal amount, was placated and he decided to withdraw the decision regarding his benefits.

4. What about business achievements? There is nothing that one can say about Zim, which is currently negotiating for a second arrangement regarding its loans. Nor can one say anything about Better Place. BZN is one big question mark because the company has made a huge investment of $1 billion to expand its production capacity and it will take another two years before we will know whether the move proved successful. IC Power — the Israel Corporation’s energy project in Peru and Israel — might have potential, and the joint venture with Chinese carmaker Qoros is still a mystery. Which leaves us with ICL, which is the principal generator of the Israel Corporation’s cash, profits and share value and which uses Israel’s only minerals.

Over the last few years, ICL has prospered and its value has soared thanks both to successful management and the increase in the price of potash — the company’s chief raw material. One of the reasons for the increasing price is the existence of a potash cartel; one crack in the cartel was enough to cause the shares of ICL to plunge by 18 percent in a single day. The crack was produced when Russian potash producer Uralkali decided to dismantle the cartel.

The bottom line is that if you invested in Israel Corporation shares when Gilad became CEO in June 2007 and are still holding on to them, you saw a negative yield of 42.5 percent, or an annual negative yield of 8.6 percent.

P.S. Some of the tycoons who have failed are trying, together with their public relations people, to persuade the public that a hatred for achievers and affluent people is prevalent in Israeli society. As far as achievers are concerned, the definition of the term is somewhat problematic because it is incontrovertible that quite a number of the achievers being subjected to criticism do not by any means deserve that title. And what about affluent people? Ostensibly, Gilad is a good example of someone who accumulated a fortune through very hard work. So why are people angry with him? Is this a systematic resentment? It would be useful to ask individuals such as serial entrepreneur Shlomo Kramer, Waze CEO Noam Bardin and Trusteer founder and CEO Mickey Boodaei — who have earned much more than Gilad — whether they feel any hatred or resentment directed against them.

The differences between Gilad and such individuals are the degree to which public money is used, the gap between performance and reward, the twilight area created when a government employee conducts transactions with a tycoon and subsequently becomes that same tycoon’s employee, and last but not least, sensitivity toward the public’s feelings. One could have expected Gilad to demonstrate a little more sensitivity toward the public’s feelings in the face of his very modest achievements, and to have avoided stating in an interview carried by the media: “I am not sure whether I would have put in such a total effort for a lower level of financial compensation.”

Gilad has justly earned the title of No. 1 pig. The question is whether his frustration over this title will move him to supply the Israel Corporation’s investors with more for their dollar, rather than simply becoming a punching bag for the company’s failures, standing in for its principal shareholder, Idan Ofer, who has already moved to London.

Ofer Vaknin