Differences of opinion within the controlling interest in Israel Discount Bank (TASE: DSCT) led to the decision to remove bank chairman Shlomo Zohar. The main shareholders, Edgar Bronfman and Ruben Schron, are at odds with Edgar’s son Matthew Bronfman, whose standing has steadily weakened. First, father Edgar appointed a minder for him, in the person of Joseph Ciechanover, who in effect supervises the board on his behalf; now, Shlomo Zohar, considered Matthew Bronfman’s man, has been forced to pay the price of the dispute, and has been asked to step down. Within the family, second son Adam Bronfman supports his father, while daughter Holly is not involved.
Zohar reportedly has no intention of resigning at this stage. Sources close to him say he will fight to preserve his good name, and is consulting his lawyers about his next steps. He intends to wait until meetings of the bank’s board and of the shareholders, where the demand for his resignation will be discussed in accordance with proper corporate governance. Zohar (57) has been chairman of Discount since the transfer of control in February 2006, under a five year contract. Yesterday, Zohar said, "My contract ends at the end of 2010. Beyond that, I have nothing to say."
It is thought that if it were a mater of dissatisfaction on the part of the controlling shareholders with Zohar’s work in running the bank, they would have asked CEO Giora Offer to resign as well.
Zohar is very close to Matthew Bronfman, and has worked with him for years, since their days at Blue Square, in the acquisition of Discount and obtaining a banking permit.
Last week, representatives of Bronfman and Schroon were in Israel. They talked to Supervisor of Banks Rony Hizkiyahu, and informed him of their intention of asking for Zohar’s resignation. As far as is known, Hizkiyahu raised no objection. Hizkiyahu refused to answer questions on the mater today. He may well ask the controlling shareholders for an official report of the reasons for their wish to remove Zohar.
The Bank of Israel said in a statement today, “Following the reports about the oral request by the holders of the controlling interest in the Israel Discount Bank to the Chairman of the Board that he resign, the Banking Supervision Department wishes to clarify that it knows of no incident whatever in the bank that led to this request. The Banking Supervision Department is looking into the sequence of events, the conduct of those involved, and the implementation of the proper rules of corporate governance.”
Banking industry sources said today that Zohar was a decent and honest man who had been wronged. He was due to become president of the Association of Banks in Israel next summer.
The acquisition of Israel Discount Bank was Matthew Bronfman’s declaration of independence. The money was the family’s, but the decision to go in was his, with the declared intention of becoming the leading son in the family’s businesses. Edgar Bronfman said at the time, “I and the family stand behind this deal. We financed it, but Matthew is the leader,” (interview in Yediot Ahronot, February 2005). This was after the Bronfman family had licked its wounds from the decision by eldest brother Edgar Jr. to lead it, and the Seagram’s empire, into an investment in Universal Studios and the music division of Warner Brothers, and its merger, some years later, with French company Vivendi. The losses were in the billions of dollars.
The differences between Edgar Bronfman and his son Matthew are an open secret. Edgar Bronfman is uneasy at his children’s approach to business. There are arguments and mutual accusations over problematic investments and over the fact that each of the sons gives less personal attention to running the family businesses.
Edgar Bronfman is also dissatisfied with Matthew’s way of running things at Discount Bank: making visits every so often, but without getting into the thick of things. So it happened that an explicit demand from the Supervisor of Banks from the bank’s owners that they should inject cash, has not yet been met. Edgar Bronfman also has criticisms of the bank’s performance, from its return on equity to its business management.
Schron too is not satisfied. Sources close to the bank’s New York activity say the main disagreement over which Zohar is being removed from his position is connected with the New York business. Discount Bank of New York is highly important in the Discount group, and handles the bank’s largest deals. According to the sources, a disagreement broke out between Zohar and Alan Fishman, an American banker and Schron’s representative on the management team of Discount Bank of New York, which at root is the disagreement between Schron and Matthew Bronfman.
The controlling group is also unhappy with the capitalization of Discount Bank and the Bank of Isreal’s demand that they should inject cash. In the period 2006-2008, Discount grew rapidly, and its credit portfolio grew by 33%. When the financial crisis struck, the bank’s capital adequacy ratio shank to almost 10%, compared with a Bank of Israel target of 12%. At the same time, the capital market dried up, and it was almost impossible to raise debt. Discount CEO Giora Offer has managed to solve the capital problem only in the last few months, when, as the markets recovered, the bank raised NIS 2.2 billion.
The failure to inject cash stemmed from a disagreement between controlling shareholders Matthew Bronfman and Ruben Schron. While Schron was prepared to put his hand in his pocket and produce the money needed to replenish the bank’s shareholders’ equity and strengthen its capital adequacy, Bronfman sought ways of buying time and not playing his part in making up the shortfall. The controlling shareholders now plan a NIS 200 million rights issue, but have not officially informed the Bank of Israel, nor the State of Israel, which owns 25% of the bank, and have done nothing to promote the offering.
A spokesperson for the Bronfman group said, “Relations between the Bronfman family and Ruben Schron were and remain the best possible. There was never any dispute.”
Under his contact with Discount Bank, Shlomo Zohar is entitled to compensation of NIS 7-10 million if he leaves the bank. His basic monthly salary is NIS 198,000. If his service is terminated before the end of the contract (February 2011), he will receive his full salary including benefits for the remainder of the period, and will also be entitled to an annual bonus proportionate to the period he served in the year he is removed. The size of the bonus is limited to 24 monthly salaries. Last year, Zohar received a bonus of NIS 2.3 million. Apart from that, he is entitled to a severance payment of twelve monthly salaries, whether he leaves at the behest of the bank or of his own accord.
This means that if Zohar leaves in December, he will 14 monthly salaries and another 12 salaries as a severance payment, NIS 5.1 million in all. If the bank’s performance is similar to last year’s, he will receive another NIS 2.3 million as a bonus, but since 2009 has been a better year for Discount than 2008, he will probably receive a higher bonus, but not more than NIS 4.7 million.
Published by Globes [online], Israel business news - www.globes-online.com - on November 1, 2009
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