The Committee on Increasing
Competitiveness
Main Recommendations
February 2012
1
The Committee’s Mandate
The Committee was appointed in October 2010 by the prime minister, the
finance minister and the governor of the Bank of Israel
The Committee’s Mandate: To examine the effect of the present structure of the
economy on the level of competitiveness in the various sectors of the economy, on
its financial stability and on its economic efficiency, and to recommend advisable
policy measures, with emphasis on the following topics:
1. Necessary steps for reinforcing corporate governance at public companies
2. The issue of control of real companies over financial companies
3. Applicability of the antitrust policy
4. The issue of control at public companies by means of a pyramid holding
structure
5. To examine stepping up the conditions for business groups in acquiring
government assets and obtaining licenses and concessions
2
Committee Members
•
Haim Shani , Committee Chairman
•
Prof. Eugene Kendall, Prime Minister’s Office, Head of the National Economic
Council
•
Prof. Shmuel Hauser, Chairman of the Israel Securities Authority
•
Prof. David Gilo, Antitrust Commissioner
•
Gal Hershkovitz, Budget Supervisor, Finance Ministry
•
•
•
Dr. Karnit Flug, Deputy Governor, Bank of Israel
•
Prof. Oded Sarig, the Finance Ministry, Supervisor of Capital Markets,
Insurance and Savings
•
Attorney Avi Licht, Ministry of Justice, Deputy Attorney General
•
Dr. Gitit Gur Gershgoren, Chief Economist, the Israel Securities Authority
Dudu Zaken, Supervisor of Banks, Bank of Israel
3
The Work of the Committee
•
Inviting the public to express its position before a draft was formulated
•
Examining staff work and research on the Israeli and global economy
•
Holding dozens of plenary sessions and many meetings of small teams
•
Receiving approximately 100 position papers from private individuals and organizations
•
Holding two rounds of hearings in which it heard approximately 60 people, including experts and
academics, representatives of the third sector and organizations and bodies representing
interested parties
•
Obtaining an expert opinion from Prof. Arye Bebchuk of Harvard University
5
Method for allocating State Assets and Rights
6
Recommendations
The functions that are in charge of the procedures for the
allocation of State rights and assets (sale of assets to private
entities, granting of concessions, licensing, BOT), will be
obligated to consider as part of the allocation process
considerations of competition in the sector and the
decentralization of control in essential infrastructures
Preventing the transfer of control of State assets to the hands of few
7
Assimilation of Considerations of
Competitiveness in the Various Sectors
1. A prerequisite for the allotment of rights by the State will be
consulting the Antitrust Commissioner whenever the value of
the right or the asset is in excess of NIS 150 million, or in
lower values wherever the economic value of the asset does
not reflect its significance to the public (Section 1.1)
8
Assimilation of Considerations of Centralization
in the Control of Essential Infrastructures
2.
A prerequisite for the allotment of rights in essential infrastructures (as shall be
defined by law) will be consulting an Advisory Committee whenever at least one of
the following rules is met (Section 1.2):
A. The purchasing group controls at least 50% of the essential infrastructures that
are relevant to the allotment
Or
B. The sales turnover of the purchasing group in Israel is over NIS 6 billion
•
Members of the Advisory Committee: Director General of the Ministry of Finance
(Chairman), the Antitrust Commissioner, the Economic and Fiscal Deputy Attorney
General and the Chairman of the National Economic Council
•
Examples of Essential Infrastructures: water, energy, communications,
transportation, healthcare and natural resources
9
Examination of the Real Financial Holding
Structure
10
Real Financial Holding?
Controlling
shareholder
Pension
fund
Public
monies
Bank
Pension
fund
Bank
Provident
fund
Bank
Financial sector
Controlling
shareholder
Real estate
Food
Commerce
Infrastruct
ures
Energy
Communication
Business sector
11
Potential Problems with the Real Financial
Connection
•
Ineffective allocation of resources
•
Conflict of interests – use of inside information
•
Competitiveness barriers – preventing credit for competitors
•
Business connections between affiliates
•
System-wide risk
 Advantage – controlling shareholder with significant capital (stability)
In the small Israeli economy, separation between big borrowers and big
12
lenders is desirable
Recommendations
1. Prohibiting control or holding in a significant financial entity by a
significant real entity or by the controlling shareholder in a significant
real entity (Section 2.1)
Controlling
shareholder
Or
Significant real activity:
Sales in Israel*NIS 6 billion for a new entity
* NIS 7.5 billion for an existing entity
Or
Significant financial
activity:
Assets - NIS 40 billion
*Credit in IsraelNIS 6 billion for a new entity
* NIS 7.5 billion for an existing entity
13
Recommendations
2.
Restrictions on the concurrent office of directors in a significant financial entity and
a significant real entity (Section 2.2.1)
Significant Financial Entity
Significant Real Entity
Or
3.
4.
5.
*Joint rules will be formulated for all the supervisory agencies that will determine
restrictions on the scope of employment of the chairman of a significant financial
entity in real corporate entities (Section 2.2.2)
The controlling shareholder in a significant financial entity that is a banking
corporation will not be able to control a significant financial entity that is not a
banking corporation (insurance – supplement to the Bachar Committee,
Section 2.8)
Promoting the necessary supplementary legislation as a prerequisite for
implementing the recommendations (Section 2.7)
14
Implementation Mechanisms and Exceptions
Interim Provision:
 The entities will be given another four years to implement the
separation
 Separation at boards of directors within two years
 *Entities that are obligated to undergo a change in ownership due to the Committee’s
recommendations will be given an additional two years to implement the separation of boards of
directors
 *Tax incentives for companies that are required to separate
15
Pyramid Holding Structure
16
International Comparison:
Percentage of the market value of the public companies
The 10 largest groups as a percentage of the value of the
public companies market
70%
60%
Countries that belong to the OECD
41%
Countries that do not belong to the OECD
50%
40%
30%
20%
10%
0%
Data sources:
Processed by the Economics Department of the Israel Securities Authority Faccio & Lang Claessens, Djankov & Lang
* According to Claessens et al, -the rate in Sweden is approximatelyHogfeldt
10%, according to- Hogfeldt, in the year 2000 this
rate was
Claessens
et higher
al.
than 50%
Source: The Economics Department of the Israel Securities Authority
17
Most Companies in Israel have a Controlling
Shareholder
Distribution of Control of Public Companies in Israel
12%
‫ ט‬a controlling
With
shareholder
‫ט‬
‫א‬
Without
a controlling
88%
shareholder
Source: The Economics Department of the Israel Securities Authority
18
The common denominator of major groups
in Israel is that they are incorporated in a
pyramid structure with a controlling
shareholder
19
Potential advantages of business groups
• Inter-company backup where necessary
• sharing of know-how, business relations
• penetration of new areas of business
• Substitute for absent institutions
• Survivability
The pyramid structure is very common in emerging markets
20
Potential problems of the pyramid structure
 Tunneling of resources
Public
 Ineffective allocation of resources
Controlling
shareholder
 Excessive assumption of risks
51%
Public
 Internal (inefficient) capital market
Company A
In capital: 51%
In voting: 51%
51%
 Double leveraging
Public
 Entrenchment
Company B
In capital: 26%
In voting: 51%
51%
Company C
In capital: 13%
The controlling shareholder’s interest is
liable to be different from the interest of
the public companies that he controls
In voting: 51%
21
Potential Problems at the Economy Level
• Impairment of stability
• Meeting in a number of
markets
• Deterring foreign
investors
22
‫ ט‬Gap between Investment and Control in
The
‫ט‬
‫א‬
Business Groups
NIS Billions
Value of capital holdings of all the controlling shareholders
Share market value
Debenture market value
4
1
19
18
17
1
15
14
1
1
11
1
9
8
7
5
4
1
* The value of the debenture market includes corporate debentures, convertible debentures, debentures of private companies in a group and institutional sequence.
‫ א‬holding of capital. The value of issued and paid-up
‫ט‬
‫ א‬estimate of the
‫ א‬value of ‫א‬
In addition, this refers to a direct and indirect
share capital‫א‬was used as an
the market of
debentures traded in an institutional sequence.
‫א‬
‫א‬
* The figures are as at June 30, 2010
1 23
The Economics Department of the Israel Securities Authority
International Comparison
Average Control Premium
Average Depth of Pyramid
Source: Dyck and Zingales (2004)- Private Benefits Of Control: An International Comparison
24
International Comparison –
Number of Layers
Source: Masulis et al. 2011- Family Business Groups around the World: Financing Advantages, Control
Motivations and Organizational Choices
25
Guiding Principles for the Final
Recommendations
1. Preventing the formation of structures that are too leveraged,
complex and big
2. Protecting the shareholder and debenture holder public
3. Simplifying regulation
4. Proportionate intervention in the companies’ ongoing management
and functioning
5. Long-term solution without a major shock to the economy in the
short term
Change in the handling strategy
Clear structural step + easily implemented
regulatory tool
7
Main Recommendations
1. Imposing structural limitations on the number of liabilities
in the pyramid structure
2. Distinguishing between the handling of existing companies
and structures and limitations on future incorporation
3. Restrictions on the scope of credit in major groups
4. Reinforcing the powers of the antitrust commissioner
28
Breakdown of the Recommendations
29
The Present Structure of the Economy –
there is No Limitation on the Number of
Layers in a Pyramid Structure
Controlling
shareholde
r
Control
Public
Public
Holding
Holding
Public Company A
Control
Public Company B
Control
Public
Public
Holding
Holding
Public Company C
Control
Public Company D
30
The Structure of the
Economy in the Future
Two layers of public companies
and debenture companies
Special board of directors
structure for a wedge company
in the second layer
Controlling
shareholder
Public Company A
Additional company regulation
Public in the second layer
Public Company B
And when the controlling
shareholder holds less than
From - 33% of the capital
It will not be possible to acquire a controlling interest in a public
company in the third layer
31
1. Control of a public wedge company in a
second layer
New definition of a wedge company:
Special handling in cases where the controlling shareholder in the
chain holds less than 33% of the capital
Regulation to begin approximately one year after approval of the Committee’s
recommendations (Section 3.8):
1.1
One third of the members of the Board of Directors will be outside
directors
1.2
The approval of the outside directors by the general meeting will
require a majority that does not represent the controlling shareholder or of
anyone who has a personal interest
32
2. Additional recommendations to be completed
within 90 days
2.1 At the end of 90 days, the Finance Ministry will present the government
with a system of tax incentives for companies that sell assets in the wake
of the Committee’s recommendations (Section 3.6)
2.2 At the end of 90 days, the Committee will submit its comments with regard
to public companies that are listed for trade abroad (Section 3.4.3)
33
Interim Provisions with regard to Existing
Pyramid Structures
34
3. Control of public companies in the fourth
layer and above
3.1
Prohibition of control of a public company in the fourth layer and above (Section
3.5.1)
3.2
Four year transitional period
3.3
Regulation that will commence approximately one year after the Committee’s
recommendations about companies in the fourth layer have been approved:
The number of external directors will constitute a majority, less one, of the total
members of the board of directors
The approval of the outside directors by the general meeting will require a majority
that does not represent the controlling shareholder or of anyone who has a
personal interest
Independent directors will constitute a majority on the board of directors
-
3.4
At the end of the transition period, the shares of the controlling shareholder at the
companies that remain in the fourth layer and above, will be transferred to a
trustee
35
Control of a public company in the third layer
The Committee has recommended that there be no public companies in the third
layer in the Israeli economy in the future. In order not to “shock” the economy,
the Committee decided to distinguish between existing companies at the third
level and new companies (Section 3.4)
4.1
Regulation that will apply to existing public companies in the third
layer approximately one year after the Committee’s recommendations have
been approved:
-The number of external directors will constitute a majority, less one, of the total
members of the board of directors
- The approval of the outside directors by the general meeting will require a
majority that does not represent the controlling shareholder or of anyone who
has a personal interest
Independent directors will constitute a majority on the board of
directors
36
Corporate governance of all the public
companies in Israel
37
5. Transactions with Interested Parties
5.1 Adopt or disclose the execution of a competitive process
prior to the approval of a transaction with an interested
party for the sale of an asset, the receipt of operating
services, the purchase of a shelf product or of the receipt
of a loan (Section 3.9.1.1)
5.2 Authorization and supervision by the Audit Committee of
transactions which, although not “extraordinary”, are also
not financially negligible (Section 3.9.1.2)
38
6. Strengthening the position of the minority
shareholders
6.1 The Israel Securities Authority and Ministry of Justice will
work to set up a platform that will enable investors to vote
at general meetings and at meetings of debenture holders
by means of the internet (Section 3.9.2)
39
7. Encouragement of individual enforcement
by the shareholders
7.1 The Israel Securities Authority will expand the financing of
class actions and derivative claims (Section 3.9.3)
40
8. Encouragement of Activism of
Institutional Investors
8.1
The Committee has proposed examining a requirement whereby an
institutional investor will be required to take into consideration the
quality of the corporate governance, inter alia, (insofar as no
commitment as stated has been regulated by law), in the framework of
its investment policy. Institutional investors will also be required to take
the granting of loans intended for the acquisition of leveraged control
(LBO) into consideration (Section 3.9.4.1)
8.2
It is proposed to require institutional investors to determine “warning
signs” that will require taking action vis-à-vis the Committee (insofar as
there is no administrative commitment as stipulated by law) (Section
3.9.4.2)
8.3
It is proposed to introduce supervision and regulation of entities that
advise institutional investors with regard to voting in general meetings
(including from the aspects of eligibility and conflicts of interest) (Section
3.9.4.3)
41
Encouraging Competition
42
Multi-sector Interface
Banking
Group 1
Credit
cards
X
Group 3
Group 5
Group 6
Group 7
Income
real estate
Retail
Natural
gas
Fuel
distillate
marketing
X
Group 2
Group 4
Insurance
Finance
management
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
Desalination
X
X
X
X
X
X
X
X
43
9. Broadening the authority of the Antitrust
Commissioner
The Antitrust Law should be amended in order to address the
problems of competition stemming from a multi-sector interface
that is liable to cause the creation of a cartel-like balance in a
number of sectors (Section 3.10.1)
9.1
The Antitrust Court will be authorized to enforce changes
(structural remedies) in concentration groups
9.2
The imposition of sanctions in administrative enforcement
44
Reducing the Leverage and the Risk in the
Economy
45
10. Restrictions on credit from public
institutions
10.1 The Committee supports the limitations on new investments in
the capital market sector stipulating that a single issuer, a group
of borrowers, the five largest issuers and the five largest groups
of borrowers will not constitute a segment larger than 5%, 10%,
20% and 40% of the managed assets of each fund, respectively
(Section 3.11.1)
10.2 These restrictions will be reexamined at the end of the transition
period and presented to the Knesset Finance Committee
(Section 3.11.2)
4
Principal Recommendations
1.
Separation between holdings in significant real and significant financial activity
2.
Separation between the tenure of directors at real companies and financial companies
(significantly)
3.
Imposition of structural limitations on incorporation in a pyramid structure
4.
Strengthening the powers of the Antitrust Commissioner in handling concentration
groups
5.
Examining the considerations of competition and centralization in the allocation of rights
by the State
Note: All the Committee’s recommendations were made by a majority vote. There is a minority
opinion with regard to a number of sections.
47
The Significance of all the Committee’s
Recommendations
• More efficient allocation of capital in the economy
• Further development of the Israeli capital market
• Allocation of national resources from an economy-centric
perspective
• Increasing competitiveness in the economy
• Reducing the system-wide risk
Complete implementation of the recommendations will be carried out
gradually and will affect the economy in the medium and long range4848
Timetable for Implementation
• Submittal of final report to the government for approval
– Within a few weeks
– The complete recommendations chapter that will be included in the final report is
attached to the press release
• Completion of Legislation
– Transfer to the Knesset for legislation immediately after approval by the
government
49
Thank you
50