Stop Crabbing and Fight

It is hard to keep track of Ehud Olmert's elusive figure. Apparently wearing his hat as acting prime minister, at the end of last week he issued a proclamation - over the whole first page of Yedioth Ahronoth - that the wages of Israel's top bank executives needed to be capped.
His was quite a dramatic, far-reaching statement, which flies in the face of free markets.
At the same time, apparently garbed in the hat of the finance minister, Olmert supported the very thing he had just proposed to restrict through legislation: executive wages at the banks. The fact is that the State of Israel, via the Finance Ministry, announces that it supports the allocation of stock options to the top brass at Bank Discount. The unprecedented allocation, worth NIS 120 million to a handful of bank executives, was so extraordinary that even the bank management itself realized it had gone too far, and retracted the allocation.

More precisely, the Finance Ministry's accountant-general announced that the state would not vote against the allocation at the general assembly of shareholders. Why? For a very prosaic reason: Bank Discount promised to compensate the state for the allocation, or to put it otherwise: it promised that the value of the state's interest in Bank Discount would not be impaired.

The state did its own math and made sure the allocation wouldn't cost it anything. It didn't care about anything else, such as knotty moral issues arising from such exorbitant remuneration.

Matters could be done more simply, of course. Instead of enacting a law meddling in executive pay at private-sector companies, which would be a unique animal in the annals of law in any country in the free world, the government could have wielded the power it already has and voted against the allocation, by virtue of the shares it retains in Bank Discount.

DIY voting at assemblies

At the same opportunity, the government could have taught the public a lesson in using the rights it has. Any shareholder in any publicly traded company has the power to vote at the assembly of shareholders, using documents available over Internet. To vote is to have influence and in the case of shareholder assemblies, you don't even have to leave the house.

That isn't the public's only power. It also has the right to ask whether directors that approved the executive wages had fulfilled their duty to protect the company's wellbeing, which is not the same thing as protecting the CEO's wallet. One has to wonder what questions the directors asked the executives before approving the multi-million pay.

New rules governing disclosure that the Israel Securities Authority is about to issue will force directors to report what information they had when approving wages. If it appears that wages were approved casually, the board could be sued through class action motions from shareholders.

The public should wield the same powers against people holding the shares for them, namely the institutional investors - provident and mutual funds, pension funds and insurance companies - which voted in favor of the executive wages. How did these institutionals reach the decision? Did it comply with their duty to work for the benefit of the shareholders? If not, the institutionals are also vulnerable to class action motions on behalf of the shareholders.

The State does not need to enact draconian laws that contravene the principles of the free market. The government and public have has ample tools at its disposal to enforce reasonable norms of executive pay at the banks. They just needs to stop crabbing and start doing: make use of these tools! Stop lounging about uselessly and demonstrate a sense of responsibility. That's all.