Once every few years, usually following a scandal, the question of the company board of directors' responsibility is raised - whether it knew and covered it up, or failed by not knowing; whether it took responsibility for the company's results, or served as a rubber stamp for the company's management.
In an attempt to address this issue, Supervisor of Banks Dr. Hedva Ber is planning to shake up the boards of directors at Israel's banks, streamline their work, and increase each director's responsibility. Three months ago, "Globes" reported that Ber had sent the banks draft revisions in a proper banking rules document, including changes in the composition of their boards of directors and the assignment of tasks. At the Bank of Israel Advisory Committee's meeting last Thursday, the banks voiced their objections to the new requirements, and the instructions are slated to take effect soon. As part of this process, Ber is demanding that the number of directors be reduced in order to enhance their feeling of responsibility, while on the other hand the number of bankers on the board will be increased. She is also demanding that at least one board member have technological knowledge, in view of the many changes the banks are encountering in this area.
Ber is also seeking term limits for bank chairmen. She is not dictating the length of the term, but the benchmark will likely be the term of a chairman at a bank without a controlling core - nine years.
Ber marked the bank's boards of directors as an important goal for her term. She is very familiar with corporate governance and board of directors from both the academic side and from the various positions she has filled.
Bank sources responded nonchalantly to Ber's new requirements. "The proposed revisions are more in form than content. The education and experience of a board member are not what matters," one banking source well acquainted with the activity of bank boards of directors said. "If they want to make a real change, so that directors will think independently, they have to limit board members to a single term, so that they won't be dependent on the controlling shareholder or anyone else in order to get selected for another term. In the current situation, the average director wants another term, and therefore prefers not to make trouble."
In any case, just before the new rules take effect, we present here the required changes, compared with the existing situation, and give an idea of what the banks' boards of directors look like now.
The salaries of the directors at Israel's five largest banks cost NIS 37 million in 2015 (the 2016 figures will be published in the banks' financial statements next month). It is important to stress that this figure does not include the salary of the chairman, who is a bank employee. A director receives a fixed monthly salary estimated at over NIS 100,000 a year, but the really substantial money comes from subcommittee meetings. Each bank has a different rate, but the rate is believed to be several thousand shekels per meeting. In the bottom line, the average monthly salary stands at NIS 50,000 per director in exchange for several monthly meetings (and the preparations for them).
The banks' financial statements also provide a look at the number of meetings conducted. For board meetings, it appears that the figure is similar at all the banks, amounting to about 30 meetings a year. On the other hand, there is a great deal of variation between the banks with respect to the work of board committees.
It appears that despite the many committee meetings, the Bank of Israel does not believe that they are particularly effective. As part of the proposed changes, it was therefore decided to enhance the committees' authority, and to enable them to also make decisions, not merely discuss the various topics, as is currently the case. Ber is thereby attempting to relieve the boards' burden, so that they can focus on the banks' more strategic and general matters, while decisions about second matters are taken in the committees, and will be brought back to the board for discussion only in exceptional cases.
The Bank of Israel wants each bank to have 12 directors. In exceptional cases, the banks can ask for permission to increase the number. Reducing the number of directors is designed to bolster each director's feeling of responsibility. The only bank that already meets the new requirements now is Bank Hapoalim (TASE: POLI), which has 12 directors, after former chairman Yair Seroussi resigned and director Irit Izakson left Bank Hapoalim to become chairperson of First International Bank of Israel (TASE: FTIN). Bank Leumi (TASE: LUMI) has the largest board of directors, with 15 members.
Directors at the banks have served in their positions an average of 5.3 years. There is also significant variation between the banks and within them in this aspect. The main finding is that at banks in which a controlling core exists, the average length of time that directors have been on the board is substantially greater than at banks without a controlling core, where yearly selections are conducted for several board positions.
What is preferable: a board with veteran directors, or a board with new directors? The answer is not unequivocal. On the one hand, a veteran director knows the bank thoroughly, and will probably be in no hurry to have it embark on hazardous adventures. On the other hand, new directors come with motivation and energy, and see things from a different perspective than the veterans, who are already identified with the bank's own views. It therefore appears that the best situation is diversity and variance in the seniority of the board members.
There are 34 bank directors with banking experience. One of Ber's main changes in the rules is an increase in the proportion of bankers on the boards of directors from 20% to a third. The Bank of Israel is pushing to increase the proportion of bankers because it believes that a director with a good grasp of banking in its various aspects will be better able to challenge the bank's management with questions and tasks.
Published by Globes [online], Israel Business News - www.globes-online.com - on February 27, 2017
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