Another step in increasing transparency of internal procedures: broader reporting will provide detailed information regarding compensation schemes and decision making process within companies, including considerations taken into account and connection between the size of compensation and company’s financial situation. Reports regarding transactions with controlling shareholders will be published in real time in all cases, including where companies claim it to be a regular transaction
The amendment to the Securities Law Regulations, initiated by the ISA, has been approved by the Financial Committee of the Knesset; the amendment requires companies to provide detailed disclosure regarding compensation of Senior Corporate Officers. During the last years, the number of mechanisms determining compensation of senior management, controlling shareholders and others with personal interest in approving agreements with them, has increased and became more complex. The compensation paid to Senior Corporate Officers includes bonuses, share’ based payments, management fee, consulting fees, social benefits, car and cell phone maintenance and so forth. Approved regulations are another stage in the ISA’s initiative to increase transparency regarding decision making processes and activities of “gate keepers” in various public companies.
During the last years, the issue of compensation has been at the center of public debate, particularly with regard to compensations approved by Bank Hapoalim, Bank Discount and Bezeq. Compensations awarded to senior management, in the aforesaid companies, raised questions regarding the approval procedures, transparency of the authorization process, its effect on the companies’ business, management and the discretion exercised regarding the fairness and effectiveness of the compensating schemes.
The approved amendment obligates companies to disclose details of their compensating schemes as part of both periodic and immediate reports. The periodic reports have to disclose compensations approved to the five highest salaries in the company. The company is required to publish a table disclosing the name of the beneficiary (his position, scope of job, holdings in the company’s equity), fees paid for services provided by him (salary, bonuses, share’ based payments, management fees, consultant’s fees, etc.) and all other recompense received by him (interest, rent, etc.) Definition of the term “fees” includes attendant conditions such as, phone and car maintenance, social benefits, allocations for termination of employee employer relationship and any other income ascribed to the salary due to further added elements.
Furthermore, the term “compensation” includes commitment for dispensing compensation, as well as any other money equivalent remuneration, excluding dividends.
The company is also required to address the question of whether the compensation is based on performance or achievement of goals, and whether there are mechanisms for examining these issues. The Board of Directors is required to state its opinion regarding the relationship between the recipient’s contribution to the company and the size of compensation received by him, as well as whether the compensation is fair and plausible.
Immediate reports submitted by companies have to provide similar disclosure regarding wider spectrum of cases, since they do not report about the highest compensations approved in any given company. For example, agreement signed with the CEO regarding the terms of his tenure and employment; agreement signed with a controlling shareholder or his relation regarding the terms of his tenure and employment; reporting obligations when a general meeting is called; transaction, outside commonly accepted provisions, between a company and its principal shareholder; irregular transaction between a company and its executive officer or between a company and an entity in which its executive officer has personal interest; and a private offer in a public company. Considering the timing of the immediate report, submitted concurrently with the agreement, the company is also required to publish information regarding compensation approving mechanism, including the rationale behind the decision. For example, the company has to disclose whether at the time of approving the compensation, the approving body (including company’s internal institutions) had, at their disposal, all the accurate and relevant information pertaining to the approved compensation, whether anyone opposed the approval of the aforesaid compensation and the arguments that were brought forth, information regarding the sums to which the senior corporate officer is entitled according to the compensating mechanism approved for him in accordance with the last annual financial statement and the previous financial statement, and information regarding changes that occurred in the employment terms of the aforesaid corporate officer.
The aforesaid data provides investors with information included in financial reports and affecting them, as well as information regarding the decision making process in the company, considerations taken into account while approving the compensation and the connection between the aforesaid considerations, company’s financial situation and the senior officer’s contribution.
Another amendment approved by the Financial Committee, relates to immediate and annual reports concerning transactions between the company and its controlling shareholder. However, lately, a number of companies have classified significant transactions as regular transactions and did not submit immediate reports on this matter. Classification of transactions as regular or irregular affects their approval process. Immediate reports allow examining company’s considerations for classifying a transaction in real time.
Another amendment widens the scope of disclosure provided in annual financial statements and in prospectuses, regarding all transaction with controlling shareholders. Up until now, companies had to provide description of transaction that weren’t part of their regular business activities in prospectuses, thus avoiding describing irregular transactions (due to their size or commercial terms) as well as regular once which when compiled turned out to be worth millions of NIS.
The amendment also equates disclosure requirements pertaining to annual reports and prospectuses, thus providing investors with an opportunity to get an overview of all annual transactions with controlling shareholders and others with personal interest in them.