Israel Inc’s Families Face Backlash (FT 14/5/10)
Reading the Israeli business press can be a monotonous affair, dominated by a roster of names familiar to everyone in the country. From banking to real estate, energy to industrials, few stories appear that do not include a Dankner, a Tshuva, a Leviev or one of the 20-odd other families that control Israel Inc.
The rising influence – and wealth – of the country’s oligarchs has caused controversy in Israel, a country founded on strict socialist and egalitarian principles. Public anger has been further fuelled by the outsized salary packages and bonuses paid to the families’ boardroom lieutenants.
“There is a lot of emotion right now. The general public asks: How come that 20 families control the economy? Israelis want these families to have less power,” says Omer Moav, economics professor at the Royal Holloway, University of London, and Hebrew University in Jerusalem.
The backlash against the Israeli oligarchs is, however, more than a short-lived outbreak of populist anger. Indeed, concern over ownership imbalances in the economy has become a topic of intense scrutiny in the finance ministry, the central bank and university research departments.
In a recent report, the Bank of Israel noted that “in terms of dispersion of control, Israel is one of the most concentrated developed countries and even resembles a developing country in this respect”. The study pointed out that about 20 business groups, nearly all controlled by families, in turn controlled about one in four listed firms and about half the market share in Israel.
According to Yishai Yafeh, a professor at Jerusalem’s Hebrew University, the presence of large, integrated business groups is useful in the early stages of a country’s economic development, as they are able to compensate for weak state institutions. For a more advanced economy such as Israel, however, the drawbacks are clear, and range from influence peddling to mistreatment of minority shareholders and the weakening of competition.
“If you have the same families facing one another in five different markets, this can facilitate collusion,” says Prof Yafeh.
While hailing Israel’s admission to the Organisation for Economic Co-operation and Development on Monday, Benjamin Netanyahu, the prime minister and a free market advocate, raised concerns about the concentration of economic power. “We want competition. We want to remove the obstacles to competition whether they come from the government or from the private sector,” he said.
Despite the strident rhetoric – and the apparent consensus within the government – it is unclear what specific steps will be taken to clip the wings of the oligarchs. Separating financial from non-financial groups is one option; taxing dividend payments that flow between different parts of a conglomerate is another.
In a separate but ultimately related move, two members of Israel’s parliament, the Knesset, have proposed a plan to restrict what they see as excessive pay for managers. The proposal would cap executive salaries at publicly traded companies at 50 times that of the lowest-paid worker.
Some of Israel’s leading business families have already concluded that it is better to jump than to be pushed. Nochi Dankner, who controls a sprawling holding company called IDB, signalled this week that he was ready to sell the group’s controlling stake in Clal, one of the country’s biggest insurance groups.
Israeli media suggested the move was motivated at least in part by the recent speculation about a break-up of financial and non-financial groups.
Away from the everyday business concerns, some observers have noted the irony in the current debate over concentration of ownership. “During the good old socialist days, things were even more concentrated in Israel because everything was controlled by the state and the trade unions,” says Prof Moav.
Having ditched the socialist experiment for the free market decades ago, today’s Israelis are determined to divide control of their economy between as many hands as possible.