For Israeli Tycoons: New Strings Attached | Israel -- Israeli Current Events

For Israeli Tycoons: New Strings Attached
David Rosenberg

Jerusalem, Israel

Israel's tycoons -- a score of people and families who control vast swaths of the country's $220 billion economy -- face a future of fewer possibilities as the government took its first step on Monday toward limiting their freedom of action.

Long-waited recommendations by a government panel chaired by Finance Ministry Director-General Haim Shani on what is popularly known as economic concentration were unveiled at a press conference in Jerusalem. The measures included rules that will limit the size and scope of business empires, increase the rights of minority shareholders and put a brake of the size of top-executive salaries.

Economic and social issues have pushed their way to the forefront of Israeli politics over the last weeks as calls for social justice drew hundreds of thousands to weekly rallies and protest-tent cities mushroomed across the country. Indeed, the Shani committee addressed such sensitive issues that the press conference was opened by Prime Minister Binyamin Netanyahu, Finance Minister Yuval Steinitz and Bank of Israel Governor Stanley Fisher and was broadcast live on television.

With consumers in a fighting mood and tycoons and policy makers nervous that populist measures might undo Israel's booming economy, the three took pains to emphasize that all sides of the wealth divide would gain.

"This is a blessing for the average citizen because he can go to the supermarket and pay less. There will be less concentration and more competition," Netanyahu told reporters. But he added: "We don't want to hurt the ability of business to expand. Business people drive the economy, create workplaces and are critical for Israel's economy."

The Shani panel was formed in 2010 -- long before the tent cities sprouted -- to grapple with what many regard as the preponderance of power exercised over the country's economy by the so-called business tycoons. They include people such as Nochi Dankner, whose holdings spread across businesses like supermarkets and insurance to Yitzhak Tshuva, who has interests in real estate and energy.

One measure of the extent of concentration is that the market capitalization of the top 10 companies on the Tel Aviv Stock Exchange (TASE), which is the combined value of all their shares, makes up 41 percent of the market's entire value. In Switzerland it's less than 30 percent and in Britain less than 5 percent.

Not surprisingly, shares on the TASE fell on the news even as the country's economic leaders assured the public that the recommendations had been carefully weighed and would be good for the economy.

The tycoons' elaborate holdings and the way they are structured, as pyramids of companies, are often blamed for the high consumer prices that have earned Israeli consumers' wrath. The Shani committee backed that view, saying that the tycoons' holdings and their preference for pyramids created conflicts of interest, discouraged competition and risked succumbing to a financial meltdown.

Among the principal recommendations is a ban on major companies -- defined as having eight billion shekels ($2.2 billion) in sales or a balance sheet of 20 billion shekels ($5.4 billion) -- from also controlling a bank or other financial institution. The ban would extend to tycoons who control a major company personally from owning a financial institution.

"Separating holdings between financial and non-financial companies is essential for creating a more competitive market, as well as addressing the issue of complex structures and pyramids," Steinitz said.

If enacted, the measure would strike at a favorite practice of the country's business chieftains. Danker would be required to sell his giant Clal Insurance unit and Tshuva his Phoenix Assurance business. But Shari Arison, daughter of cruise magnate Ted Arison, will likely be able to keep Bank Hapoalim and her real estate company Property & Building Ltd.

The tycoons will have to contend with more independent boards of directors, with proposed rules requiring that a third of their members be independent outsiders. Top managers' salaries will have to be approved by minority shareholders. Fund managers will be required to take a more active role at shareholders meetings.

Other proposals chip away at the pyramids without actually banning them altogether. Tycoons' freedom of maneuver to buy and sell companies in their pyramids would be constrained as would their rights to create new ones. Access to credit would also be subject to new rules.

The tycoons also face a tougher time winning government contracts. Under the Shani recommendations, officials will have to take into account competition issues when they award contracts for build-operate-transfer (BOT) projects. BOTs are infrastructure projects such as roads or tunnels where the government awards a private company the right to build and operate for a specific number of years before it is handed over to the state.

The tycoons have time to fight the recommendations. The interim report will be handed in in three weeks and another three months will pass, including hearings, before the final recommendations are completed, the committee said. They then have to go to the cabinet and the Knesset, Israel's parliament, for approval.

A second panel, chaired by economist Manuel Trajtenberg and formed in direct response to the social justice protests, is also due to report its recommendations Sept. 29. Media reports have said the panel will, along other things, propose raising the taxes of the upper class and middle class in order to fund new social programs such as compulsory education for 4-year-olds, widening negative income tax in order to prevent poverty in two-salary homes and entitling middle class families to rent control.