“The corona crisis may be reflected in a devaluation of inputs in corporate governance in general in public companies,” the entropy consulting firm warns in a report distributed this week to its clients, which assesses corporate governance and corporate responsibility in companies traded in the Tel Aviv 125 index.
According to the report, “Many organizations are experiencing significant business damage as a result of the Corona crisis and are undergoing streamlining processes and business changes that undoubtedly impair the organization’s ability to carry out controls as they have been done before.” The current situation is affected and there is a growing fear of performing actions that are not in the interests of the stakeholders. These periods are characterized by various easing of regulatory guidelines and a reduction in inputs invested in risk management processes, in order to become more efficient. ”
Entropy notes that “While it is only natural in these periods to streamline expenses derived from regulatory, risk management and corporate governance guidelines, investors must at the same time ensure that this streamlining does not directly or indirectly harm stakeholders. This is even more true in real companies.” “Corporate governance is less reliant on dedicated regulation as is customary in the banking, insurance and financial industries.”
In recent weeks, a series of events have surfaced that have raised issues of corporate governance in large public companies. The most prominent of which concerned two large insurance companies – Clal and Migdal. In general, chairman Danny Naveh tried to lead a move to oust the CEO who eventually came to his post and the intervention of the capital market commissioner Moshe Barkat in what spawned an audit report by retired judge Yoram Danziger appointed by Barkat.
In Migdal, a struggle is taking place between the controlling shareholder Shlomo Eliyahu, who is trying to oust the current chairman Nir Gilad, and at this point was stopped by Commissioner Barkat. The Securities Authority recently forced Brack N.V. to disclose the identity of a buyer of one of its projects that turned out to be a factor related to the controlling shareholder in the company, contrary to the company’s original claim, in what created a confrontation between the company and institutional investors.
Corporate governance in 60% of large companies is unsatisfactory
According to Entropy, the data in the current report updated for July 2020 still do not weigh the potential risk from the corona crisis, but found that only 49 companies out of the Tel Aviv 125 index (39% of companies) present a reasonable ranking or higher in corporate governance.
According to the report, the banks, insurance and finance companies are characterized by a high level of corporate governance, with over 50% of the companies operating in the field receiving a reasonable rating or higher. The proportion of companies with a high rating of a reasonable rating or higher in the real estate and industrial sector is lower and stands at 43% and 47%, respectively. The high-tech, holding, trading and services, energy and gas industries are characterized by a relatively low level of corporate governance.
The report notes that “examining the current state of affairs of corporate governance aspects of the Tel Aviv 125 Index companies over the past three years, the situation seems to be stagnant. The fear is that due to the current crisis it will cause a future decline in corporate governance resources.” “.
There is no risk management policy
The report also shows that most of the non-financial companies traded in the leading index do not have any risk management policy, when the corona crisis is supposed to sharpen the risk management aspect in business companies. The Entropy method “raises a fundamental need to change priorities and the perception of risk management in the business world, and in particular in the real estate company.” This is when the report shows that there is a large gap in the adoption and implementation of policies and risk management processes between non-profit companies and financial companies.
Regarding stakeholder transactions, the report shows that the average number of stakeholder transactions in the TA 125 index companies decreased slightly in 2019 compared to 2017, but did not differ from 2018. Looking at the industry, however, there is a decrease in the number of stakeholders in the energy, gas and oil, trade industry. And services and in the real estate industry although their number in 2019 is still high relative to the average companies in the index.
With regard to the transparency and distribution of dividends, the report shows that a significant portion of the Tel Aviv 125 index companies, which are traded and services, industry, holdings and real estate, distribute dividends frequently and on an ongoing basis. But since the activities of some of these companies have been significantly affected by the crisis, it will be interesting to see the situation next year. Regarding transparency – the insurance industry and the real estate industry are characterized by high transparency in everything related to presentations and conference calls with investors, while holding companies are characterized by low transparency in these aspects.
The ESG still needs improvement
While in the area of corporate governance the report raises a reasonable level of conduct among large companies, in terms of corporate responsibility (ESG which focuses among other areas in the areas of social responsibility and the environment) there is still a lot of work to be done. According to the report, “Most of the Tel Aviv 125 index companies are characterized by a weak and need for improvement, which indicates a lack of corporate responsibility.” In fact, only 26 of the companies are at a reasonable level and above. In the areas of holdings, trade, services and energy, the level of corporate responsibility is relatively low. The real estate industry, the most significant in the Tel Aviv 125 index, which is characterized by weak corporate responsibility and needs improvement, stands out.
According to Matti Aharon, a partner in corporate governance at Entropy, “The issue of corporate governance has been in a state of stagnation in recent years. “The risks involved. In the long run, it is dangerous for investors. The crisis creates further validity to the issue of risk management. Since many companies are streamlining processes, the crisis also raises concerns about a reduction in resources invested in corporate governance.”