Bank Hapoalim B.M. (“Hapoalim”) will be the last and the largest of Israel’s non-controlled banks to hold its annual meeting in 2020. On the meeting agenda are compensation policy and compensation packages of the board chair and CEO, both appointed within the last year — but unlike at financial institutions in most markets, none of the compensation proposals are expected to have difficulty in passing; since a 2016 law limiting compensation proposals at banks and insurance companies to 35x the lowest-paid employee, most financial sector company CEOs have struggled to clear the NIS 3.5m mark (around US $1 million) in annual income. Consequently, pay proposals at Israeli banks are generally ratified by shareholders without controversy.
Nonetheless, the meeting is notable, with drama arising from the election of directors. One candidate, Stanley Fischer, is a world-renowned economist and former Vice Chair of the Federal Reserve and former Bank of Israel governor. Dr. Fischer is up against two other first-time nominees who have spent their careers at Israeli banks. Another first-time nominee, Esawi Frej, faces a more difficult challenge against two incumbent directors, is a respected ex-parliamentarian and member of the ethnic Arab population who helped draft the above salary cap law, and someone who has consistently advocated for social justice and integration of minorities.
Under Israeli regulations, candidates to serve on bank boards are proposed by an external Bank of Israel committee chaired by a ministerial appointee, and this committee is typically filled by ex-judges, lawyers and economists from the public sector. The bank in question only gets up to 2 seats on the 5-person committee, meaning its board has only a minority voice its own potential members.
This procedure leads not infrequently to public criticism from directors and the economic press alike, over matters ranging from … well, pick your complaint: the lack of transparency over the committee’s procedures, the amount of discretion accorded to members, the lack of public or even shareholder input into choosing the committee members that select bank directors, and, perhaps a most frequent complaint from directors themselves, the collective mindset of the committee. The accusation is regularly made that committee members, drawn from the non-profit world of the judicial, academic or public service, tend to nominate people like themselves, i.e., regulators, academics or people with a legal or economics background, rather than current or retired business leaders.
Earlier meetings in 2020
Candidates proposed at both Discount Bank and Bank Leumi were fairly well-received and moreover appeared cognizant of considerations shareholders might have around diversity and skills experience, presenting highly qualified candidates that challenged shareholders to select the strongest composition.
Skillsets and backgrounds in short supply were clearly catered to by the selection of candidates; an IT/cyber executive and a female ethnic Arab nominated at Discount, which had neither, and candidates with a mix of deep legal and financial industry expertise for Leumi, which had recently lost expertise in these areas.
Over the last two years, the Appointments Committee appeared to have moved beyond the economic press, since the turbulent 2018 nominations at banks Discount and Leumi drew scorn and criticism. Its nominations for directorships at the other non-controlled banks in 2020 were by and large well-received, appearing cognizant of filling potential gaps in diversity of background and skillset.
Stanley Fischer controversy
When it came to determining Hapoalim’s new nominees, however, the process blew up in an unusual way over Fischer’s candidacy. The sole incumbent director representing the board on the Appointments Committee resigned from the committee after his favoured nominee failed to reach the ballot and publicly criticised the external members for overriding their own objective scorecard method used to rate candidates, seemingly with the goal of ensuring that Fischer got onto the ballot.
In comments to the press, the irate director further hinted that the 77-year-old Dr. Fischer, despite being held in high esteem by financial forecasters and regulators, is not what the bank needs right now as it faces technological challenges from newer, leaner entrants into the financial sector: “You need to remember that even a great basketball player like Kareem Abdul-Jabbar may not be suitable to be a great football player. This is the case with Fischer.”
The resulting outcry renewed harsh criticisms of the BoI’s conduct and outsized role in selecting candidates that are finally voted upon by shareholders; with calls to leave the nominating role solely to shareholders.
Further criticism holds that the BoI has never been able to relinquish its belief in the idea that non-controlled banks are more susceptible to crashes, the agency problem, and being unprepared for crises, and therefore plays an over-zealous role in choosing nominees that fit their mould, rather than what is required by the bank, which only gets minority representation on the committee nominating its own future directors.
The final choice will be down to shareholders, but the return of public scrutiny following the embarrassing manner in which the episode played out in the press may renew calls to modify the unique process by which directors are appointed at Israeli banks.