Benny Landa deserves praise for his part in applying pressure on the Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) board of directors to make changes in the composition of the board, and to rescue the company from the crisis it found itself in following the resignation of former CEO Jeremy Levin.
However, Mr. Landa is not satisfied with the partial implementation of his demands. Following the personnel changes that were made to the board, the reduction in the number of board members and the appointment of another board member with pharmaceutical expertise, and, after the selection of a new CEO, he is asking to dictate to Teva what the composition of the new board should be, and which of the current board members may not continue at the company (“Board members who are urologists, professors, and bankers are not a fit for Teva”).
It is Landa’s opinion that only people from the pharmaceutical industry should serve on the company’s board of directors. Early in his campaign to bring changes to the board, Landa recommended ousting all current members and appointing a new board with eight members, six of them active in the global pharmaceutical industry and, the other two, Israelis. Landa did withdraw this demand, but he did not back down on the disqualification of those who are not from the pharmaceutical industry.
This approach reflects a misunderstanding of the role of the board as part of the corporate governance of a public company - the approach by which the board of directors runs the company is long since obsolete.
The Israel Electric Corporation (IEC) (TASE: ELEC.B22) Articles of Association , which are based on the Companies Ordinance 1921, state in Article 86: "The company's business will be managed by the board"; The Companies Ordinance 1999 states, in section 92 (concerning the powers and duties of the board), that "The Board shall outline the company's policy and oversee the execution of the CEO's job and his activities." This introduction is followed by details outlining the policies and supervisory roles for which the board is responsible.”
The notion that the board would manage the company’s business activities could have suited a period in which it comprised company managers, and there was essentially no distinction between the management and the board. Unlike the custom a few decades ago, most public companies in the US and UK now have “external” board members, with no connection to the company’s controlling shareholder, holding the majority of the voting power on most boards of directors.
Were the old model relevant today, it is possible that there would be room for Mr. Landa’s approach - that those managing the company’s business should be experts in its area of activity, and there would be no room for “urologists, professors, and bankers.” However, according to the accepted models today, the company’s business is handled by the CEO, and his or her senior managerial staff. These managers must have great expertise in the company’s area of business, and the board of directors is responsible for leading and supervising senior management, and ensuring that management advances the company’s goals to benefit the interest of its stakeholders.
Such a board of directors has room for a variety of skills - experienced managers, scientists, doctors, and, yes, also bankers. Some of Israel’s most experienced managers sit on Teva’s board of directors - heads of large public corporations, a former HMO CEO, the former Tel Aviv Stock Exchange (TASE) and Government Companies Authority (GCA) CEO, doctors, scientists, and a lawyer. It is possible that there will be additional changes in its composition, but there is no need to panic. Meanwhile, the CEO is working to strengthen the company’s managerial structure with external parties, who, of course, have experience and expertise in pharmaceuticals.
Mr. Landa also knows who should not be chairman following Phillip Frost’s departure - not “one of us.” If by this he means that the next chairman must be appointed from outside the company, I wonder if there isn’t a suitable candidate among the company’s current board members. I recommend that Mr. Landa suffice with demanding that Teva carry out an organized chairman selection process, as it did to for the selection of CEO.
The process of selecting the new chairman must start with defining the requirements for the ideal candidate, after which there should be a search for candidates who meet them, whether the candidate has made his name outside the company, or is “one of us.”
Mr. Landa is, of course, entitled to voice his criticism, but we should regard it with the appropriate degree of caution.
The author, Prof. Meir Heth, is a former Teva chairman and board member.
Published by Globes [online], Israel business news - www.globes-online.com - on June 25, 2014
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