To Whom Is a Director Accountable?

What is a joint-control shareholder supposed to do when he has lost faith in his CEO and wants to have influence on the bank's affairs?

In September 1999, businessman Gad Zeevi asked the First International Bank of Israel (FIBI) for a loan to buy 20 percent of Bezeq's shares. The bank CEO at that time, Shlomo Piotrkowsky, felt the deal was "too big for Zeevi" because the equity required was beyond his grasp. Piotrkowsky asked for proof of Zeevi's ability to repay the loan, and Zeevi referred him to his lawyer, Yigal Arnon, who was also head of FIBI's board of directors.

At one point Arnon showed Leora Meridor, the head of the bank's credit department, a document from the Swiss UBS bank certifying that Zeevi had hundreds of millions of dollars in that bank. FIBI extended the credit to Zeevi.

How did Meridor feel at the time? Did she see before her Arnon the director who was committed to the good of the bank, or Arnon the lawyer, loyal to his client Zeevi? Did she consider the clear conflict of interests in Arnon's dual role?

Since there is no documentation of the conversation between Meridor and Arnon, one can only guess how she felt. Arnon and Meridor have since left FIBI, but the potential conflict of interests remains valid, not just at FIBI but at all banks.

This case and others like it convinced outgoing Supervisor of Banks Yitzhak Tal to reconsider the relationships between bank board members and bank managers. His conclusions were decisive. A month ago Tal sent the banks a draft of an amendment to the directives regarding deals proposed by a board member. The amendment aims to reinforce the distinction between the board of directors in its capacity as a supervisor and guide in addition to the general manager, who is responsible for the execution of transactions and the levels of execution.

The draft states that a board member shall not approach a bank employee with business initiatives for a banking corporation, or regarding the deals of specific clients, except in the following cases:

1. In exceptional cases, he may turn to the bank general manager so long as the application is documented and concerns initiatives or matters in which the board member has no personal interest.

2. A documented application in writing made at a meeting of the board or its committees.

3. An application concerning ongoing matters, in connection with a board members personal account or that of his spouse or of a corporation they control, when that account is maintained at that bank.

In any event, the directive states that the bank will manage a centralized registry of all such applications. In the explanatory notes to the proposed amendment, Tal states that the amendment was drafted "because of the accumulated experience" but did not mention which incidents convinced him to restrict the involvement of board members in the management of a bank's deals.

It is reasonable to assume that an incident such as the one involving Arnon and Meridor and Zeevi's dealings provided grounds for looking into the issue, but it is not the only one. In the past year there have been at least two other cases involving bank board members.

The more familiar concerned Dan Halperin, a former Continental Bank board member, who brought the bank a string of deals from the Peled-Givony group. Halperin was also board chair for Hayal, a company belonging to the Peled-Givony group. Continental became embroiled in the massive debts of the group and was forced to write off NIS 190 million for doubtful debts.

Less well known was the case of United Mizrahi Bank, owned by the Wertheim and Ofer families, who are in dispute over the controlling share in the bank. The Wertheim group wants to oust the bank CEO Victor Medina, and his relationship with the group is not good.

What is a joint-control shareholder supposed to do when he has lost faith in his CEO and wants to have influence on the bank's affairs? He can either dump him - but not against the objections of his partner - or he can use indirect channels through other senior bank executives. This exposes the bank to improper supervision.

In Mizrahi's case, there is no known problem resulting from the complications in relations between its owners and managers, but the potential exists, and that is what Tal wants to prevent.

The banks of course object to the proposed amendment and have hired attorney Ram Caspi to work toward having the amendment declawed. Caspi contends the amendment could burden board members with basic obstacles to the point of paralyzing their activities. He feels the amendment would deal a heavy blow to the management and functioning of banking institutions.

As usual, the final directive will be formulated after negotiations between the new supervisor, Yoav Lehman, the banks, and their representatives. One would hope that developments such as the credit distress in the economy, which has caused many customers difficulties and encourages the use of "connections" of all sorts, and the privatization of the banks, which has increased the involvement of controlling businessmen in the management of the banks, will tip the scales in favor of the supervisor of banks.