The Business and Democracy project has three parts:

1.  Corporate Governance

The regime and structure of the corporation in Israel are under critical examination. It is commonly maintained that there is a “corporate democracy” and that corporate law determines the rules of the game in that democracy. But who are the “citizens” of this corporate democracy and who is excluded from it?

Corporations affect on the lives of many intra-corporate communities – stock holders, employees, creditors, and others – and the lives of extra-corporate communities – consumers, suppliers, the environment and more. Each of these communities has different interests, and even the members of the same community are not of one piece. Thus, for instance, there is a built-in conflict of interest within the group of shareholders between controlling stockholders, institutional investors and public stockholders. Each one of these communities, and each sub-group, want to make sure that corporate powers will be exercised in a way that will promote their own special interests. Proper governance of the corporation should be designed  to manage the corporation in a democratic way that directs the use of company resources in consideration of the legitimate interests of all the affected groups.

Indeed, large segments of economic wealth are owned by corporations. The privatization process in Israel transfers the responsibility for important public services to the private sector. Corporations have an increasing influence on the market of ideas. They are key players in determining taste, world view, social and cultural preferences, etc. Consequently, the question of who manages the decision-making process in the corporation becomes extremely important. Whose benefit is it supposed to serve? What responsibility and transparency does it require?

Work on the infrastructure of this project is in an advanced stage. Two books will be published in the coming year: The Ownership of a Corporation and The Purpose of a Corporation, by Prof. Yedidia Z. Stern.

2.  Regulation

There is a tremendous amount of regulation in Israel. Institutions and supervisory authorities that implement a crowded network of laws and ordinances control a considerable part of our lives. There are different opinions as to the very need for certain parts of the regulatory labyrinth, the legitimacy of its declared goals, and its efficacy in achieving these goals.

The project is expected to produce policy papers that will examine the legal and administrative aspects of existing regulatory regimes and to make proposals for their improvement and adaptation to the changing Israeli reality. So far, one policy paper has been published – The Monopolist as Victim: Constitutional Rights in Antitrust Law, by Dr. Adi Ayal. The study takes a critical look at the suitability of the antitrust laws to Israeli reality and the ways they are implemented. It reveals that there are gaps between constitutional declarations with respect to proprietary rights and freedom of occupation, and the prevailing norm and the ways it is enforced. It appears that antitrust laws prejudice the protected basic rights of monopolists. The study suggests legislation amendments that reflect not only the basic assumptions of the laws of competition, but also the new constitutional regime to which the laws of competition are subject.

A policy study analyzing the regulatory array of the Israeli communication market is currently under way and will be published within the year.

3. The Centralization of Capital and Israeli Democracy

Israel’s capital market is comprised of a small number of large players. The average control cluster of a public corporation exceeds 50% of voting rights. This fact has deep and wide ranging implications for the connection between capital and government, the effectiveness of local competition, labor, and credit relations, the market of ideas, etc. However, the judicial system that regulates corporations in Israel is predicated on an American format where the level of decentralization of stocks amongst the community of investors is quite high. That is to say, the prevailing imported norm is fundamentally inappropriate for the regulation of the local market. We are composing policy studies that will discuss the various aspects of this issue and propose amendments.

The first study in the series is currently being written, describing the empirical situation and its inherent dangers. It will be followed by a second policy study that will examine its ramifications for the status and functioning of the institutional investors in Israel, who control the pension, insurance, and savings funds of a large portion of the population.