Israel Securities Authority (ISA) chairman Zohar Goshen is implementing a strict new policy on executive pay. The policy is based on aggressive intervention in the market, strict observance of the rules of corporate governance in companies, increasing transparency and deepening institutional involvement.
At the moment Goshen does not have most of the authority that he wants. But he is working to get it, that is to say demanding rules of maximum transparency. The ISA has sent letters to 48 companies in which substantial problems were found in their reports and handling of executive salaries. This list of companies does not include those who do not reveal enough and they will be dealt with separately.
The 48 companies are far from a negligible percentage of public companies so this is not a marginal phenomenon but a rotten norm that has become entrenched. Put simply, when it comes to executive salaries there are public companies that overstep the mark, mainly medium and small companies. It is this problem that Goshen plans dealing by doing battle with the companies and exposing them to everybody.
Goshen will demand that the companies explain how exactly they approve salaries for their senior executives and reveal their corporate governance. He means leaving no stone unturned and asking difficult questions, and when you look you always find. From past experience, these things do not end well. Where directors sat down and improperly approved executive salaries, other flaws will be found. Wherever corners are cut in corporate governance, shortcuts will be found in other sectors too. Executive pay is the tip of the iceberg of flawed corporate governance.
Goshen plans doing nobody any favors. It has begun with letters and will continue with further reports to the Tel Aviv Stock Exchange and then everything is possible - from stopping bond offerings and imposing fines on companies to repaying salary and class actions.
On the three previous occasions that the regulators went to battle with companies in recent years: at Bank Hapoalim (LSE: 80OA; TASE: POLI) bonuses were given back; at Israel Discount Bank (TASE:DSCT) an options plan was cancelled; and at Bezeq Israel Telecommunications Company Ltd. (TASE:BZEQ) senior executives were ousted.
Goshen does not plan stopping at just the companies. He also intends dealing with the accounting firms that guard their clients. Every problematic financial report is an annual audited report. And behind every report is an accountancy firm with a respectable partner wearing a suit and tie and earns millions of shekels annually. He is the one that checks and signs the due diligence of the report. All the leading accountancy firms are involved. These firms will have to account to Goshen and would be advised to start sweating.
Published by Globes [online], Israel business news - www.globes-online.com - on June 29, 2010
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