There is no disputing that the restrictions on directors’ and officers’ remuneration, imposed by Amendment 20 to the Companies Law three years ago, play a key role in this trend. These rules can be summed up simply – the final say on employees’ pay is now vested with the company’s shareholders.
There is a tendency to consider these stringent rules as an Israeli invention. A Tel-Aviv provincial quirk, in contrast to the enviable metropolises of New York and London, where boards of directors still have discretion and freedom to set employee remuneration.
There is however an emerging trend in the United States and England, whereby corporate governance rules pertaining to director remuneration are steadily becoming stricter. Even in these strongholds of free markets, more weight is being given to the global public sentiment that boards should not retain the discretion to set their own remuneration and that relevant information and power should be devolved to shareholders.
Nasdaq – Disclosure of third parties’ payments to directors
As of August 2016, companies listed on the Nasdaq are obligated to report any arrangement under which any of its directors receives remuneration from any party other than the company itself. These ‘golden leash’ arrangements include – for examples - payments made to members of the board by a company’s controlling shareholder, over and above what the public company itself is capable of paying its directors.
The responsibility of disclosure falls on the company itself. Nasdaq’s position is that shareholders should have such information, especially when they are voting on the appointments of board members.
While this disclosure obligation is perhaps new to Nasdaq, in Israel, the statutory obligation to disclose such arrangements has been in place for years. The current debate underway in Israel, however, focuses on the legitimacy of such remuneration arrangements – are they even legal?
This question was raised in February 2015, when Prof. Oded Sarig was appointed as chairman of the board of Migdal Insurance Business Holdings, while he was an employee of Migdal’s controlling shareholder, Eliahu Insurance Company. The Israel Securities Authority held that this arrangement was in line with the Companies Law, there being no restriction preventing companies from appointing directors who are simultaneously employees of the company’s controlling shareholder.
A few months later, in July 2015, the topic of executive remuneration was again on the agenda following the filing of a motion to certify a derivative suit against Idan Ofer, Nir Gilad and other officers of The Israel Corporation. The motion alleged that payment of bonuses by The Israel Corporation’s controlling shareholders to the company’s officers, in recognition of the completion of the split of its businesses, had been invalid; it had placed the officers in a conflict of interest and was illegal.
The motion to certify the derivative suit is still pending, and there is therefore some new doubt as to whether officers are allowed to receive remuneration from third parties.
London – giving shareholders the deciding vote on directors’ pay
According to the Companies Act in England, shareholders are required to vote annually on directors’ remuneration, but the outcome of the vote is nonbinding; the final discretion is retained by the board.
However, in mid-July, England’s new prime minister, Theresa May, announced that she intends to make such vote binding.
This change is part of a series of measures announced by the prime minister to impose more stringent corporate governance rules in England, since, in her opinion, there is a widening and unhealthy gap between the sums companies are paying their employees and their executives. Ironically, it is the Conservative Party that is driving such change – which is causing more concern to certain elements of the local business than does the impact of Brexit.
In Israel, on the other hand, the debate about shareholders’ involvement in directors’ remuneration has a long history. Shareholders’ approval of directors’ remuneration has been compulsory in public companies for over 25 years – put in place after the local banking crisis of the early 1980s and the subsequent outcry over the remuneration and pension package of a certain executive board member, approved by the board itself.
The question in Israel now is whether to limit or revoke directors’ power to set the wages of company employees who are not board members. For the last three years, since the enactment of Amendment 20 to the Companies Law, shareholders have had an active role in approving employees’ wages in general, and the CEO’s remuneration package in particular. The full repercussions of restricting the board’s power are not yet known, but there is room to discuss whether narrowing the application of these rules is warranted.
Does the global trend prove Israel is on the right track?
The fact that the USA and the United Kingdom are now adopting stricter corporate governance rules on directors’ pay should not put an end to the debate here in Israel. The global ‘say on pay’ trend, which affords shareholders more involvement in remuneration decisions, does not prove that the strict Israeli position is the correct one.
Though Israel takes innovative positions in numerous fields, it should not necessarily be the forerunner and trendsetter when it comes to corporate governance. As opposed to legislative hyperactive creativity, a degree of conservativism and moderation is in the best interests of the Israeli economy and TASE.
Therefore, Israeli legislators would be better advised to consider the careful and moderate introduction of new rules overseas, as opposed to the quick and sweeping rules that have been implemented locally. In this regard, it would be advisable to consider offering relief from the existing strict corporate governance rules.
The author is managing partner at Barnea & Co