Bank on It / One Token Arab Is Not Enough

Appointing an Arab to Bank Leumi's board of directors was a good idea, but a better idea would be to ensure thought diversity.

Earlier this month, right before getting out of Bank Leumi for good, the state attempted a bit of chutzpah.

It tried to leverage its position as a substantial shareholder to put up an unusual candidate for the bank's board of directors: Ziyad Abou Habla, a 39-year-old accountant who specializes in local government.

The move was spearheaded by the state's representatives on the board, including Finance Ministry Budget Director Gal Hershkovitz, Accountant General Michal Abadi-Boiangiu, State Revenue Administration director Frida Israeli and Capital Markets Commissioner Oded Sarig.

They thought the bank's board was too homogenous, with too many of the usual types - professors, attorneys, accountants and former treasury officials, all from Tel Aviv. Being young, outside of the Tel Aviv business milieu and yes, Arab, Abou Habla hit all the diversity marks.

But with just 6% of Leumi shares the state lacked the muscle to force its candidates on the other shareholders. The bank's institutional investors went with accountant Rami Guzman instead.

Banking experience

Their official explanation was that Abou Habla lacked banking and corporate board experience as well as expertise in the Basel II and III conventions that govern international banking. Abou Habla says the real reason the institutionals rejected him is because he is Arab.

This story says several interesting things about what's being called a "bank without a control core," for which Leumi is the guinea pig. This affords a window onto several issues, from bringing minorities onto the boards of publicly held companies to the question of who really controls a bank "without a control core," along with the bizarre behavior of the institutional investors that control our money.

We're soon likely to find more banks and insurance companies without a single controlling party, a format that necessitates checks and balances that can be achieved primarily via a heterogeneous board.

The Finance Ministry hacks liked Abou Habla after reading his opinion pieces in TheMarker. He frequently wrote about discrimination against Arabs in Israel, but also criticized leaders of the community. That earned him points as an independent thinker with an agenda, who focused his criticism both inwardly and outwardly. He seemed an ideal candidate for the board.

It is difficult to prove that the institutional inbvestors rejected Abou Habla solely because of his ethnicity. It would be hard to get a 39-year-old unknown Jewish accountant into the old boys' club of Israel's economy, too.

But it raises the question of whether legislation is needed to make bank boards more diverse.

Quotas are problematic, but they have been somewhat successful in increasing gender equality. In 1993 the state mandated that government corporations must give "appropriate expression" to the representation of both sexes. The Knesset Research and Information Center found impressive results: The number of women on these companies' boards jumped from 7% in 1993 to 44% in 2010. This not only meant that women were represented on boards but also guaranteed the existence of a core group of women who were qualified to sit on the boards of publicly held companies.

At present 18% of board members of Israeli publicly held companies are women, making Israel second only to the Scandinavian states in this regard.

The question of whether to expand the law in order to ensure Arab representation is more complicated.

It would raise the question of whether other minorities should also receive such protection. (What about Mizrahim? Economist Shlomo Maoz raised a ruckus when he called Leumi an Ashkenazi bank. What about leftists, gays or Ethiopian Jews? ).

Integrating Arabs

Beyond that, though, more comprehensive action is needed to integrate Arabs more fully into many aspects of Israeli life.

It may be that the way to get Arabs onto the boards of major banks or publicly held companies involves a social contract that would increase Arab representation in various institutions while at the same time having the Arab community accept the obligation of national service (a trend that has already begun ). This would greatly reduce the suspicion, hatred and stereotypes that block Arabs from Israeli centers of power.

I wouldn't trust Israel's institutional investors to do what's necessary in order to incorporate Arabs into corporate boards. In fact, I wouldn't trust them to incorporate Jews onto these boards, either. The strange fact is that the institutionals don't even trust themselves: They hired a consulting firm to help them decide how to vote at the Leumi shareholders' general assembly, among others, outsourcing independent thought, research and judgment with the Israel Securities Authority's blessing.

By hiring Entropy Consultants the institutionals are building a thought monopoly, the opposite of the crowdsourcing enabled by modern technology. This also describes the group of executives, all cut from the same cloth, groomed in the same institutions, thus entrenching homogenous thought and ignoring the great diversity of Israeli society.

A bank is not an ordinary business, it has great power that is expressed in how it lends money, manages the public's money and influences the economy, and when push comes to shove only the public's money can save it.

Today, more than ever, the banks must take advantage of the full range of collective wisdom and the balance it offers. The customers need it, the economy needs it and the executives at banks without a controlling core need it.