The Israel Securities Authority is about to require public companies to increase the information they publish about the salaries of executives, controlling shareholders and parties at interest The Securities Authority may also tighten the accountancy rules applying to compensation for these individuals, so they cannot minimize the value of benefits in reports to external parties.
Securities Authority officials says companies currently include many types of benefits in a single basket, without distinguishing between salary, bonuses, other benefits, vested shares, and options. As a result, investors receive only partial information.
The Securities Authority added, "In recent years, there has been a widespread feeling among the public that controlling shareholders in companies are 'withdrawing' huge compensation from companies that are unrelated to the companies' apparent performance. This compensation, naturally, comes at the expense of the companies' ordinary shareholders.
"This impression has been validated by financial studies conducted in the past decade. These studies found that when a public company's management includes its controlling shareholders, the company's executive salary policy is influenced by the executives' ability to withdraw excessive benefits from the company at the expense of minority shareholders, and the company's resources are misused."
The Securities Authority is clearly hinting that it agrees with claims about excessive pay for controlling shareholders, especially when they also serve as corporate officers. Nevertheless, the Securities Authority lacks the authority to prevent these payments, although it apparently hopes that disclosure of the details will make it easier for institutional investors and ordinary shareholders' ability not to provide the necessary authorization for these benefits.
The Securities Authority added that linking executive compensation with company performance created a "built-in threat to accurate reporting", hinting at concerns that reports might be cooked, in order to justify managers' bonuses and options. The Securities Authority believes that greater disclosure will enable the public to assess the fairness of compensation arrangements and their effect on a company's management and results.
Securities Authority officials added that it was difficult to calculate the size of benefits companies awarded their officers, especially in the form of options, since the regulations do not have uniform methods for the calculations. The Securities Authority is therefore considering requiring the use of international accountancy standards in order to create a common denominator for calculating the value of the benefits.
In response to a question from "Globes", the Securities Authority said that as part of the greater disclosure, companies would be required to explicitly state the names of the top five salary-earners. Some companies do not disclose who these people are or what they do, leaving this to guesswork by the readers of the company's financial reports.
Published by Globes [online] - www.globes.co.il - on July 26, 2004