ISA panel: Corporate governance code needed

After a trial period of 1 or 2 years, the code could be made obligatory.

A committee of the Israel Securities Authority on Wednesday recommended implementation of a corporate governance code in Israel aimed at preventing accounting scandals and integrating Israel into the global market. "The code puts in place procedures to provide investors with greater confidence and transparency," said Moshe Terry, chairman of the ISA. "The added level of compliance can reflect directly in the share price of the company, the liquidity of its stock and the cost of capital." The Goshen Committee, which is responsible for formulating a corporate governance code for Israeli publicly traded companies, published its recommendations stipulating changes to the structure of the board of directors, improved disclosure of financial information and establishment of a securities and corporate court. "Company laws in Israel are good but not effectively executed. Israeli court houses lack the experience and knowledge in the field," said Professor Zohar Goshen, chairman of the committee, which was set up about a year ago. Noga Kainan, president of the Israeli Forum of Chief Financial Officers, which represents 500 leading Israeli companies said the most important recommendation was the request for a corporate court. "We need a legal entity, which has the professional understanding for corporate issues," she said. Publicly traded companies initially will be requested to adapt the corporate governance code on a voluntary basis but Kainan believes it could still prove effective. "Although the code might be voluntary, it might still force companies to comply, as non-compliance might suggest that you are trying to hide something," said Kainan. After a trial period of 1 or 2 years, the code could be made obligatory. "Following the recent big accounting scandals such as Enron or Worldcom, global markets have seen the need to implement corporate governance rules. Israel must follow the example to protect the public and prevent conflicts of interest," Goshen said. One of the main problems in Israel, according to Goshen, is that 90 percent of publicly traded companies have a controlling entity that holds more than 50% of the shares - a situation that curbs competition and limits decisions. As such, one of the committee's recommendations seeks to require approval from a majority of shareholders for corporate deals rather than the one-third required until now. The committee also recommends enlarging the number of external directors to at least one-third of the board. Under the Israeli Act, companies incorporated in Israel whose shares are publicly held in or outside of Israel are required to appoint at least two external directors. For reasons of potential conflict of interest, the committee proposes the strict separation of chairman of the board and chief executive officer with the former not holding any other position within the company. Both chairman and CEO would have to take corporate responsibility for financial reports by personally signing off on the appropriateness of the company's financial statements - the equivalent of the Sarbanes-Oxley Act 302 - the mandatory US corporate governance code.
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