Reining in the Tycoons

‘Concentration Committee’ makes a host of recommendations for economic restructuring, but reformers and activists say it’s not enough.

By ZIV HELLMAN
Bank Hapoalim 521 DONT USE (photo credit: NATI SHOHAT / FLASH 90)
Bank Hapoalim 521 DONT USE
(photo credit: NATI SHOHAT / FLASH 90)
The last of the tent-dwellers protesting socioeconomic conditions on Tel Aviv’s Rothschild Boulevard were finally evicted in early October. But there was a palpable sense in the air that with summer fading into autumn, university classes just around the corner and the first rains in the skies, Israel’s summer of discontent was undergoing a metamorphosis.
The mass street marches and tent encampments have had their run. The natural arena for the next phase of the struggle for structural economic change, in the eyes of many, will be in the Knesset, where the mettle of the protest movement will be tested by the legislative achievements it can attain.
The current moment, however, was one in which various committees were slated to issue reports providing the government with recommendations for reforms and new directions to be taken in economic restructuring. Much attention was focused on the Trajtenberg Committee, commissioned by Prime Minister Benjamin Netanyahu in response to the summer protest marches, and which submitted its report on September 26.
On September 19 another committee, the Committee on Strengthening Market Competitiveness, often called in short the “concentration committee” issued its interim conclusions, marking the start of the committee report season. The concentration committee was actually established long before the protest movement but studied one of the central complaints of the protesters, regarding the concentration of economic power by “tycoons,” as Israel’s economic titans are generally termed.
The concentration committee’s main recommendation centers on a proposed separation wall between financial and non-financial holdings by prohibiting large non-financial corporations from controlling financial institutions. It also calls for reforms in corporate governance, chiefly through greater minority shareholder participation in major decisions and increased authority granted to outside corporate directors, in an effort to weaken the powers currently wielded by Israel’s “economic pyramids.”
The committee’s report was made public at a press conference attended by Netanyahu, Finance Minister Yuval Steinitz and Bank of Israel Governor Stanley Fischer. The attendees praised the report, promising to work towards legislative implementation of its recommendations, which they assured the public would increase competition for the benefit of consumers. Netanyahu even went so far as to claim that average Israelis would, as a result of the reforms, pay less “in the supermarket.”
Haim Shani, the Finance Ministry’s director general, who co-chaired the committee with Eyal Gabai (director general of the Prime Minister’s office between 2009 and this year) was more cautious, stating that “this won’t influence the price of cottage cheese next week, but the recommendations will have an effect on the business sector in the longer term.”
Some observers, however, are less impressed with the committee’s interim report, predicting that the tycoons in the stratospheres of wealth will make every effort to shake off the latest attempts to confront their concentration of economic clout.
“Fighting against economic concentration is a good thing, but this is too little, too late,” says Avia Spivak, professor of economics at Ben-Gurion University and co-chairman of a committee of economists associated with the social protest movement. “If the government shies away from imposing regulation where it is needed, it is not going to see results.” (See “Dental Cleaning vs. Root Canal,” page 3.)
Others go further, saying that the proposed changes are too tepid to make a real difference.
“Unfortunately the recommendations do not do enough to change the rules of the game,” says Ron Werber, co-founder of the Israel Civic Action Forum, a non-governmental organization that ran a public campaign last year in favor of the Sheshinski Committee’s recommendations to increase tax rates on natural resource extraction. (See “Battling for Sunken Treasure,” March 14). The forum intends to conduct a similar campaign calling for legislation to reduce economic concentration.
“But the monied interests will be fighting against even these recommendations. We are preparing for a major battle, to fight against the erosion of the recommendations. I can promise you things will get very interesting in this regard in a couple of months.”
The appointment of the Committee on Strengthening Market Competitiveness by Netanyahu’s government, nearly a year ago in October 2010, did not occur in a vacuum.
Concern had long been spreading in economic, legal and political circles that the economy has been undergoing an accelerated trend of economic concentration, with an emerging small group of families and individuals holding control of so many diverse corporations in different but interacting industries that the trend itself could pose a threat to current and future economic growth – to say nothing of the possibility that concentrated wealth may also give a coterie of “tycoons” outsized political clout. (See cover story, “The Power of the Rich,” April 11).
These concerns were bolstered by several studies confirming the existence of a wealth concentration trend. A study by Bank of Israel economist Konstantin Kosenko revealed that half of the banks and insurance companies in the country are affiliated with only about 20 families, with the same set of families controlling companies that generate about half of the national Gross Domestic Product. The OECD also issued warnings based on studies it conducted revealing that “three-quarters of Israeli-listed companies [of a total of 640] are controlled by family or individual interests.”
In addition to the general phenomenon of economic clout in the hands of relatively few groups and individuals, the proliferation of pyramid structures has been underscored as being particularly troubling. The existence of only a small number of major economic players might be naively explained in the Israeli context by considering the fact that the economy is a relatively small one on the world stage that is, moreover, geographically isolated from its main export markets, but pyramids constitute a deliberate effort by individuals to leverage vast control with relatively small initial investment. Pyramids are constructed step by step, when one company purchases a controlling share in another company, which in turn buys control of yet another company, and so on in a chain.
By strategically clever leveraging, this can be achieved at relatively small initial expense, with most of the “heavy lifting” conducted by instructing companies at various pyramidal levels to seek corporate credit for profitable acquisitions.
Moreover, the biggest borrowers in the country are also the wealthiest individuals. Studies indicate that as of 2009, six of Israel’s biggest business groups had taken one quarter of all credit extended to businesses in the country. They used this borrowed money to buy controlling interests in companies, enabling them to appoint both the ranks of corporate management and a majority of board members. Co-ownership of commercial companies and financial institutions makes obtaining credit all the easier for tycoons.
Many of the committee’s recommendations are intended to deal with these phenomena, most obviously those involving separation of ownership and membership in the boards of directors between large corporations and significant financial companies.
A “large non-financial corporation” is defined by the committee as a company whose annual sales turnover exceeds 8 billion shekels, or whose total balance sheet figures are greater than 20 billion shekels, while a significant financial company is one overseeing investments of 50 billion shekels or more.
Based on these criteria, several Israeli tycoons will be directly affected by legislative adoption of this recommendation: Nohi Dankner, owner of the IDB group, a conglomerate whose holdings include the Shufersal supermarket chain, the Cellcom mobile telephone company, and Clal Insurance; Zadik Bino, whose holdings also include both the Paz Gas energy corporation and the First International Bank of Israel; and Yitzhak Tshuva, who owns the Delek energy and real estate conglomerate, along with Phoenix Insurance.
The cutoff figures the committee adopted were based on the size of Israel’s economy, with 8 billion shekels for a non-financial corporation representing 0.5 percent of the country’s total non-financial business sales, and 50 billion shekels in investments for a financial concern equal to 2.5 percent of the total amount of money that the public currently has invested. Those numbers, however, have led to an interesting round of speculation in the financial media as to which tycoons might find themselves exempt by dint of coming in just under the wire.
For example, how Mozi Wertheimer, who owns both the Mizrahi Tefahot Bank and Coca-Cola Israel, will be affected is unclear, since Coca-Cola Israel’s annual sales turnover is not in the public domain. The Apax group, which holds both Psagot Investments and Tnuva, may receive a pass, if Tnuva’s annual sales this year total less than 8 billion – which may happen, ironically, because a popular protest boycott of Tnuva’s cottage cheese, intended to force the company to lower its prices, cut into its sales figures.
The obituary pages may also play a role in determining the ownership of some companies: the patriarchs of the Ofer Group, Sammy Ofer and Yuli Ofer, both passed away in recent months. How their assets are divided among several inheritors will be watched closely to see if the asset disposition triggers the committee’s recommendations.
In addition to the much discussed separation of financial and non-financial holdings in conglomerates, the committee issued a long list of recommendations. These include granting greater authorities to members of boards of directors appointed to guard the public interest; requiring that the opinions of minority shareholders of publicly traded companies be taken into account in major decisions, including executive salary terms; regulation over the appointment of members of boards of directors in subsidiaries by controlling owners of companies; bolstering the powers of the Antitrust Authority; and requiring the state to take into account increasing market competition considerations when selling state assets and resources.
The recommendations that the committee issued on September 19 are only its interim conclusions. The public, including corporate owners, have been granted several weeks to respond and submit comments to the committee, after which the final report will be presented to the government. The government will then be called upon to decide whether it accepts or rejects the final committee recommendations.
Those provisions the government accepts will become proposed legislation, to be voted on in the Knesset. Even if the Knesset adopts into law the committee’s recommendations in toto, many of their provisions can be expected to go into force in a gradual manner. For example, the committee recommendations grant corporate owners four years to decide whether they prefer to hold on to non-financial companies or financial firms, in cases in which they are forbidden from holding both.
David Gilo, a member of the committee who is also an assistant professor of law at Tel Aviv University specializing in antitrust law and has served on the Israel Antitrust Court, is, perhaps unsurprisingly, quite pleased with the committee’s conclusions.
“The committee recommendations are a very effective method for dealing with the problem of the pyramids,” Gilo tells The Report. “We were very aware of the problem of companies that are publically traded but controlling interest is held by only one person, who gains more than 50 percent control over all the companies in the pyramid. This distortion has to be corrected by returning control to the public shareholders, and that is the main intent of our recommendations, including those giving minority shareholders and public directors greater weight in decisions.”
Gilo rejects suggestions that imposing taxes on dividends, a tool used in the past in the US and in Europe to discourage pyramid formation, should have been considered by the committee. “Our recommendations form a surgical method of uprooting the pyramid problem. Contending with this by taxing dividends is imprecise and can have negative side effects.”
An issue that Gilo has frequently written and spoken about as harming consumer interests in Israel is that of conglomerates with significant presence in several markets.
“That stifles competition, because a conglomerate facing competition from another conglomerate in one market can threaten to hit back in another market. That leads to an equilibrium in which companies refrain from competing, and act in concert like cartels,” he says. “We were very aware of this problem in the committee, and proposed two ways of contending with it. One is to increase the powers of the Antitrust Authority and the Antitrust Court to stop this from happening. Antitrust is very important for fostering competition for the good of consumers. The second is requiring antitrust review whenever a state asset, resource, or even contracting job is offered for sale. Considerations of decentralization and competition will have to be taken into account explicitly, and governments may be liable to be sued in the Supreme Court, if they do not.”
Spivak, a former deputy governor of the Bank of Israel, exudes skepticism regarding the effects that the committee’s recommendations will have. “Even if reducing economic concentration is achieved, that will not mean that the level of competition, or the price level, will change immediately,” he tells The Report.
“And although dealing with concentration is important, and is in the right direction, much more is needed to deal with social problems.”
In Spivak’s analysis, many of the committee’s recommendations, such as those calling for a separation of ownership of financial and non-financial companies, will do more for financial stability than increase competition in the marketplace, which is what ultimately determines consumer prices. What is missing, he says, is a willingness to impose regulation, where it is called for, against market activity that hinders competition. “A government that is serious about this imposes regulations, threatens to impose regulations, or starts with soft regulation with the message that more regulation may follow,” says Spivak. “A government that never dares to do that will not get far. And that will not help consumers end the month [with a positive bank balance].”
Werber, at the Israel Civic Action Forum, also does not hide his disappointment with the committee recommendations, arguing that they fail to go far enough. “It makes little sense to forbid cross-ownership of financial and real assets only when a large enough amount of money is involved,” he tells The Report. “Such cross-ownership should be out of the game no matter how much money is involved. And why wait four years for that to take effect? Across the line, the recommendations [of the committee] are not enough. Directors who are public representatives are usually marionettes of the owners and do not really represent the public interest. There are too many examples of this for me to even start listing them.”
Despite his criticisms, Werber promises that the Israel Civic Action Forum will do its best to get the recommendations adopted as law, on the grounds that doing so will at least constitute a start to reducing the power of the tycoons over the economy. He likes to compare the struggle that he predicts is looming to the fight over the Sheshinski Committee recommendations last year, during which energy companies that stood to lose money if the committee recommendations were adopted as law (which eventually happened) were accused of hiring masses of lobbyists to place intense pressure on Members of the Knesset to vote down the recommendations.
“You can be sure that against the [committee on economic concentration’s] list of recommendations, the monied interests are already preparing an offensive, hiring lawyers, PR consultants, accountants, whatever they need,” says Werber. He predicts that the fight will be fiercer than last year’s.
“The Sheshinski saga will repeat itself, but this time with many more corporations involved [than just the energy companies],” continues Werber. “They [the tycoons] cannot tolerate having their pyramids toppled, and they will fight it, as history shows they have always done in the past. God knows what the legislation will end up looking like when this is over.”
At times, Werber seems to be relishing the possibility of public confrontation over the issues involved. “We are preparing for a major battle, to fight against the erosion of the recommendations, and to get more recommendations added,” says Werber.
“We will conduct briefing sessions with Members of the Knesset, get the public to write to the Knesset, conduct events with thousands of participants, and make full use of the Internet. The last time our website called on people to send emails to the Knesset, 68,000 responded within an hour, causing the Knesset computer system to collapse. But to their credit, the Knesset Members do respond to the public. As in the Sheshinski committee [debate], they will not be apathetic to public opinion.”
The large public protests of the summer give Werber further hope that his organization and others will be able to rally large segments of the public behind their campaign, but he does not expect the streets to be the main focus of activity during the autumn and winter months. “We need to bring the process from the streets of Tel Aviv, Jerusalem and Haifa to the Knesset,” he argues. “The streets will be a backup. But the main arena will be the government and the Knesset, where democratic decisions are made. That is where the focus is going to be.”