Regulator wants financial institution boards with more bite

Dorit Salinger  photo: Eyal Izhar

New guidelines disqualify a controlling shareholder from being chairman of the board, and even require directors to consider the good of customers.

Six months before she is due to step down, Commissioner of Capital Markets, Insurance and Savings Dorit Salinger is removing controlling shareholders in financial institutions from the boards of those institutions. In effect, Salinger is telling Yair Hamburger (Harel Insurance Investments and Financial Services Ltd. (TASE: HARL)), Dov Yelin (Yelin Lapidot), Eran Griffel (Menorah Mivtachim Holdings Ltd. (TASE: MORA), Ran Shaham (Altshuler Shaham) and others to cease serving as chairmen of the insurance, provident fund and pension fund companies they control. Nevertheless, where the controlling shareholder is already chairman of the board, he or she will be allowed to remain so for another nine years, somewhat softening the blow for existing controlling shareholders.

An important draft circular published by the Capital Markets, Insurance and Savings Authority on corporate governance in financial institutions, which focuses on change in the requirements for directors, sets out rules that will mean a complete revamp of the boards of many institutions in the local market. The Authority says that the current situation on boards of financial institutions is far from satisfactory, with directors who rubber stamp decisions of controlling shareholders and management.

The Authority says that its audits have found that "boards lack cumulative expertise in important areas of activity, with directors who do not contribute towards fulfilling the board's tasks, in other words who keep quiet and uninvolved, and directors who are not familiar with their tasks and with the institution's business, and make no contribution to the company," and also that there are "independent directors who have personal connections with the controlling shareholder, and who do not speak up against the controlling shareholder or the management for fear that their terms will not be extended."

The Authority also states that it has found that "a controlling shareholder who is also chairman weakens control mechanisms and makes professional management of the financial institution difficult," and that there are "conflicts of interests in joint sessions of boards of directors of an insurance company and of its holding company."

"The board and its committees are a core issue as far as we are concerned," explains Salinger, adding that "these entities manage a great deal of money and they have great responsibility." She describes the boards of directors as "our first layer of protection," and says that the new guidelines for financial institutions are based on international regulations that are already in place in banking in Israel.

The Authority aims at "bolstering the independence of the board in general, and of the independent directors in particular" at the financial institutions, which altogether manage some NIS 1.5 trillion of the public's assets in Israel, alongside improvement in the standard of directors. The new guidelines, which do not require Knesset approval since they are not in the form of regulations but of a circular, call for "definition of the personal responsibility of a director."

The Authority states in the new guidelines that "a director will take into account among his considerations the good of the financial institution's customers, and will take appropriate steps to ensure that the institution behaves fairly towards its customers and does not systematically act in such a way as to prevent them for exercising their rights." This is as opposed to an obligation to the company alone. This amounts to a unique and material broadening of the Companies Law in a way that will expose directors to sanctions if they do not also act for the good of customers. The Authority sees the good of customers of insurance and other companies as including customer service and dealing with claims.

How will this be achieved? According to the Authority's draft circular, among other things through an independent director being appointed only via an independent search committee, and serving for "six successive years", instead of the current situation of three year terms, while the chairman of the board will not be the controlling shareholder or his associate, and will not serve for more than nine years (there is currently no limit). Personal friendship with the controlling shareholder will also be considered "association".

Salinger has also identified another problem: overlap between boards of holding companies and of the financial institutions they hold, particularly in the case of insurance companies. She now wants separation between the two boards, with no directors in common. The Authority also stipulates that "a person will not serve as a director if his associate holds an important post in the financial institution," a provision that will have far-reaching consequences for insurance companies and investment houses controlled by their founders, which account for a large slice of the institutional market in Israel. Another provision is that "a director will not hold an executive post in the financial institution."

The guidelines also seek to reduce the number of directors on company boards and board committees, since "boards of directors that are too large are not effective." A final provision, of significance for Israeli financial institutions acquired by overseas entities, is that most of the directors on the board of a local financial institution should have an affinity to Israel and know Hebrew.

Financial institutions will have three years to adapt their boards to the new requirements.

Published by Globes [online], Israel business news - www.globes-online.com - on March 4, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

Dorit Salinger  photo: Eyal Izhar
Dorit Salinger photo: Eyal Izhar
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