Wednesday, May 6, 2009

Stanley Fisher and Bank Governance: What Should Be Done

A curious story is on the newspaper headlines the last few days. Stanley Fischer the Israel bank governor seem to think that some bank executives are not doing the "right things". I am not sure what the "right things" are all about. But with credentials like past vice-chairman of Citigroup and author of the second most used university economic text book (Macroeconomics), Fischer needless to say has some clout. Now Israeli banks are not in as much trouble as the American banks. Israel did not go though the sub-prime loan disaster and even if you had money you could not have found a hedge fund in Tel Aviv as easily as in New York, London or even Paris. Because the economy in Israel is smaller than the American one and because Israelis basically have much less money to invest, we have not seen the downturn of the US or Europe. But still, Fischer feels responsible to the government and the people of Israel.

The case is about Bank Ha'poalim's board of directors' responsibility to stock holders and customers. Fischer is alleging that the board of directors has acted irresponsibly and has asked Shari Aarison the bank's controlling stock holder to fire Dan Dankaner the bank's chairman of the board. The issue is over the sudden departure of the bank's president Tvi Ziv and quick appointment of a new president Tzion Kinan. Why the shuffling, are they using Ziv as a sacrificial lamb? Get rid of the old president now the bank will be in good shape! All this management shuffling came with the last yearly report (2008) of a loss in revenue in the sum of 895 million shekels. This is the first time the bank has reported a loss, and it's a big loss. Apparently Fischer is unsatisfied with the quick firing and replacement of the bank's president. I wonder if Fischer is forcing American banking standards on Israeli executives. I am not making this accusation lightly. It is hard to describe the way things work in Israel until you face this type of situation. Israel and Israeli executives are much less formal in business management than American or European management. This is actually the biggest advantage of the Israeli economy has. Not only is the economy smaller, which makes it flexible and responsive, it is also informal and can do things Americans can't even imagine. To outsiders it seems like a closed private club, elitist at best, discriminatory at worst. Americans quietly accuse Israeli business of being one big fraternity. It seems like you have a better chance to be appointed a bank president by your old army buddy rather than by a committee selecting on merit or experience. Is this modus operandi a reason to intervene?

Fischer may have a point. After all he is in Israel to change the banking system from a small and isolated position to international (i.e. American) standards. If Israel did not to change anything why bring in an American to run the country's central bank? Fischer has history of flexing his muscles when he wants to make a point. A year ago the central's bank employees complained of being underpaid in international and industry terms. Fischer requested raising the salaries of all bank's staff to something equivalent of market and international levels. This meant changing the way the Israeli government paid employees and making the bank's employees salaries much higher than other government workers. Fischer claimed that he simply can not attract high caliber workers with such low salaries. The government postured that the central bank, a government agency, can not expect to pay double or triple of equivalent workers (judges, generals, physicians). In the end Fischer prevailed, not only that he got a nice budget to improve facilities, infrastructure and computing systems. But other government leaders do not have Fischer's clout (or is it chutzpa?)

It is unclear what will happen in this case. Should Fischer, the international reformer prevail and nudge Israel to a more formal business practices? or is Israel's small, flexible and clubby way more appropriate? What do you think? Powered by Qumana

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