Ethics @ Work: Minding everyone's business

If regulators are concerned about the management decisions of a private company, they have a responsibility to step in.

April 23, 2009 22:41
3 minute read.


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The pressure being placed on Bank Hapoalim by government regulators highlights a number of fascinating aspects of ethics and governance, on both the corporate and public scale. Bank Hapoalim is Israel's second-largest bank and one of its largest companies. For the past two years, the chairman of the company has been Dan Dankner, a member of the Dankner family, which together with Shari Arison owns a controlling stake in the company. Bank regulators, including Banks Supervisor Roni Hizkiyahu and Bank of Israel Governor Stanley Fischer, held two meetings this week with Arison to express their opposition to the way Dankner has been directing the bank. Hizkiyahu has used his authority on numerous occasions to block actions intended by Hapoalim. This includes a number of planned foreign acquisitions that would have cost the bank hundreds of millions of dollars. But the most glaring failure in the eyes of regulators was the recent resignation of CEO Zvi Ziv and the appointment, within a matter of minutes, of his deputy, Zion Keinan, as his replacement. Normally, such a critical appointment in such a large company would have been carried out by a prolonged process of search and deliberations by a special subcommittee and the entire board. It is unusual, and even somewhat irregular, for regulatory agencies to become so involved in management decisions of a private company. So we need to examine why the internal management of Hapoalim warrants the attention of two of Israel's most senior regulatory figures. Regulation of banks There are two foci of public interest in the affairs of Hapoalim. One is that Hapoalim is a bank. Banks in every country are subject to extensive regulation since they are the essential infrastructure of the financial and economic system. The accepted thinking is that the failure of a bank cannot be compared to the failure of an operating company. Banks borrow from and lend to thousands of entities, including other banks; bank failures are liable to have a dangerous ripple effect throughout the economy. The consensus on the importance of bank regulation is strengthening; many people blame the extensive deregulation of the US financial markets in the last decade for precipitating last year's financial crisis. Even many of the architects of the deregulation now agree it went too far. If Hapoalim belongs to Arison and Dankner, its importance extends far beyond, and public oversight is called for. Private ownership The second justification for public involvement is a characteristic Israeli phenomenon: a publicly traded company with a privately owned controlling interest. In the United States, only a small fraction of publicly traded companies are effectively in the control of a single private individual or family. (One example would be the roughly 40 percent of Wal-Mart stock held by members of the Walton family. The Ford family has a similar stake in Ford Motors, although the family is so large and diverse that it is questionable if they have a true common interest.) I don't have current figures, but a few years ago a majority of companies listed on the Tel Aviv Stock Exchange had controlling interests. This characterizes Hapoalim as well; according to the TASE Web site, about 25% of the stock is held by insiders, primarily Arison Holdings. It is a distressing inaccuracy that some newspaper accounts describe Arison as the owner of the bank. Protecting the public The law incorporates a number of safeguards to guarantee the rights of minority shareholders (in the case of Hapoalim, the private shareholders are a diffuse majority with limited power to oppose the controlling interest), but the legal mechanism for enforcing these rights is cumbersome. That doesn't mean the government is justified in stepping in every time there is incompetent management in a family-controlled company, but it does mean that there is one more piece of public interest involved. Arison and Dankner are experienced business people, and they probably have good reasons for their decisions. But it's not their own money they're playing with, it's the investments of Hapoalim shareholders and ultimately with the financial stability of the country as a whole. If regulators worry that they are drilling a whole in the hull of Israel's economic ship, they have a responsibility to step in, and Arison and Dankner can't complain that they were only drilling under their own seats. Asher Meir is research director at the Business Ethics Center of Jerusalem (, an independent institute in the Jerusalem Institute of Technology.

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