Draft update of directives on board of directors and on compensation
Supervisor of Banks Mr. Yair Avidan said, “These directives strengthen and fortify the status of the board overall, including its chairperson. These directives implement the basic separation required between the work of the bank’s board as a supervising and policy-setting entity and the functions of the bank’s management, as an executive business entity. These directives are particularly important for clarifying and avoiding the blurring of identities and activities between the functions of management and those of the board, including the functions of the chairperson of the board, especially when the bank does not have a controlling core. In addition, the directives make it possible to pay the chairperson, at a bank without a controlling core as well, suitable compensation for his functions. This is in accordance with a mechanism that does not adversely impact his independence and that does not impose salary limitations or establish the scope of his employment, leaving it for the discretion of the board of directors. As supervisors of the banking system, protecting bank customers and the public interest, we work and will continue to work to strengthen the board’s independence and autonomy between it and the bank’s management and business activity.”
In accordance with the proposed revision to the Supervisor of Banks’ directives, the board is required to define in detail the chairperson’s functions and authorities, such that they do not deviate from the functions and authorities assigned to him by the provisions of the law nor blend his roles and manner of carrying them out with the roles of management. This requirement is in line with the fundamental principles of proper corporate governance, which require a clear and significant separation between the supervising and policy formulating entity, which is the board of directors, headed by the chairperson of the board, and the executive entity, headed by the CEO, in order that the supervision be effective.
In a banking corporation without a controlling core, the board will also have to verify that the chairperson’s functions and authorities, in capability or in actuality, as well as the extent of his connections with the banking corporation’s management, do not serve as some attachment and that they aren’t something that would adversely impact the independence of the chairperson or his autonomy in the banking corporation.
In addition, at a banking corporation without a controlling core, the law imposes on all the directors, including the chairperson, directives that are similar to those imposed on external directors under the Companies Law. Thus, a difficulty arose under the existing legal framework to pay the chairperson of a bank without a controlling core compensation that exceeds the compensation for which external directors are eligible for under the Companies Law and guidelines implemented by its authority. For a banking corporation without a controlling core to be permitted to pay the board chairperson compensation that exceeds said amount, and that is suitable for his post, it was proposed in an amendment to the Supervisor of Banks’ directives to allow this on the basis of the principles established by the legislature for compensation of an external director and adjusting them to what is required of a chairperson in the carrying out of his duties—which is different than and exceeds the requirements of the other board members—by setting up a mechanism that can reduce the concern of some affinity or dependence.
In accordance with the proposed mechanism, the chairperson’s compensation will be determined relative to the average compensation of the other directors, taking into account the additional inputs required from the chairperson in carrying out his functions, in contrast to those required of the other directors, as will be set by the board in line with its discretion. This mechanism strengthens the status of the chairperson as part of the board and is in line with what has always been established in the Supervisor of Banks’ directive, which sets the amount of the chairperson’s compensation, at a banking corporation with or without a controlling core, relative to the manner of compensation of the board of directors at the banking corporation. It also takes into account, among other things, the size of the banking corporation, the complexity of its activities, and the scope of employment of the chairperson of the board.