"They're throwing the baby out with the bathwater", "This is nationalization", "Nothing like this is being done anywhere else in the world", "A trespass on property rights" - we will be hearing a flood of clichés like these from now until next summer, as the recommendations of the Committee for the Promotion of Competition in the Economy (better known as the "Concentration Committee") go through the legislative process, from anyone whom the recommendations will hurt.
Some of the complaints are correct. The corporate governance chapter in the committee's report is nothing less than a ticking time bomb that will embitter the lives of controlling shareholders in gap companies (companies in which, because of the ownership structure, a shareholder with a small stake has a high proportion of the voting rights, giving de facto control), and will make day to day management of such a company much more difficult, transferring a great deal of power from controlling shareholders to minority shareholders. It's true that this is a blow to the controlling shareholders. Let's say it clearly: it's a disproportionate blow, and very problematic.
However, these controlling shareholders, or at least some of them, brought the establishment of the committee and its eventual recommendations on themselves. With behavior that often bordered on bullying, and by riding roughshod over everyone else, they have for years treated these companies as they were their own private property, deprived minority stakeholders of their rights, put through dubious party at interest transactions, appointed cronies to senior posts, and showered excessively large salaries on favorites.
These majority shareholders forgot that they were dealing with public companies, to which different rules apply, forgot that there is such a thing as corporate governance, and that they could not do just as they pleased. In short, they didn't give a damn about anyone.
What's more, in recent years, the majority shareholders have fiercely opposed any attempt to restrict their power. From approval of senior managers' salaries by a shareholders'' meeting, to appointment of external directors by minority shareholders, to raising the blocking minority from a third of disinterested shareholders to half, any proposal to boost the ability to exercise control over their problematic behavior resulted in a counter-attack by lobbyists and interested parties, which often succeeded in undermining it.
Now the pendulum has swung to the other side. Instead of compromising and agreeing to minor restrictions that they could live with, controlling shareholders will now be faced with draconian restrictions that will hit them hard and impair their ability to manage the companies. They refused to compromise on an external director to represent the minority; now they will have to run to a general shareholders' meeting to approve every material transaction. In a series of tough, painful recommendations, some of them over the top, the committee has tried to send a message to controlling shareholders: Enough is enough. Calm down, you've gone too far.
Another small matter for the attention of controlling shareholders wherever they are: there is no regulatory arbitrage, no such thing as different rules of corporate governance for different companies. That is unsustainable over time. If after the new rules succeed in reining in the controlling shareholders in gap companies, they continue in their oppressive ways in regular companies, we will soon see the rules being extended, and demands that they should apply to every publicly traded company.
Published by Globes [online], Israel business news - www.globes-online.com - on October 27, 2011
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