The Real Test Is Implementation

The recommendations of the committee appointed to look into economic concentration will not solve the problem, but they are a step in the right direction.

The interim recommendations of the committee appointed to look into economic concentration won't revolutionize the Israeli economy, but they would produce changes in the right direction by increasing competition. The recommendations would not do away with pyramid-type corporate control, but they would make it more difficult for controlling shareholders at the top of the pyramids to continue doing as they please at the expense of the public at large.

Israel's economy is much too concentrated. The 10 largest business conglomerates control 41 percent of the value of the country's publicly-traded companies. That is a result of pyramidal control structures that enable an investor to control dozens and even hundreds of companies lower down the pyramid with a relatively small investment of capital.

Israel's pyramids contain multiple levels. By international standards, they are among the tallest in the world. Nevertheless, the committee did not recommend dismantling them.

Instead, it proposed that their power be curtailed, in an effort to allow new forces to emerge. This would improve the allocation of capital in the economy and raise the level of competition. Once this happens, the economy will grow more quickly and the cost of living will go down.

The committee's most significant step was its proposal to separate substantial holdings in the financial sector from those in the nonfinancial sector, in an effort to avoid conflicts of interest between those who lend money and those who borrow it. This would require several major investors to sell their financial holdings (or their nonfinancial holdings ), leading to a decrease in their economic power.

If the committee's recommendations are adopted, life for those who control the corporate pyramids will be tougher. Oversight of their businesses will be stricter, minority shareholders will have more power, and the antitrust commissioner will be able to block certain transactions. The companies' boards of directors will be more independent, and will find it harder to carry out transactions that mainly serve the controlling shareholders' interests or to approve excessive salaries for senior executives.

It's not at all clear, however, that any of this will happen, because one can now expect the controlling shareholders to exert massive pressure on the committee members, the cabinet and the entire Knesset to soften the recommendations. Because the proposals are restrained rather than extreme, the cabinet and Knesset ought to approve them as is. For the sake of Israel's citizens, both the committee members and the politicians must withstand the pressure.