Israel Rail Faces Governance Crisis Threatening Financial Reporting and Bond Trading
Israel Railways has operated for over two months without external directors, prompting the Israel Securities Authority (ISA) to warn that this situation endangers the company's ability to comply with corporate governance requirements. The ISA cautions that the lack of external directors could impact the approval of financial reports, trading of the company's bonds, and its future ability to raise debt. This warning was conveyed in a letter sent on August 22, 2023, to Avner Flor, chairman of Israel Railways' board, and acting CEO Avshalom Almaliah.
Israel Railways has approximately 70 million shekels in bonds traded on the Tel Aviv Stock Exchange. The ISA emphasized that as a reporting corporation, Israel Railways must adhere to corporate governance rules designed to protect investors and maintain market confidence. The crisis intensified in June when Ruth Dahan Portnoy, an external director with accounting and financial expertise, ended her three-year term. On July 15, Sarah Frish also resigned in protest against the attempted appointment of Yaakov Marciano as acting CEO, citing his lack of required experience. Marciano's appointment was later rejected by the Dotan Committee, and Almaliah was appointed instead.
Since Frish's departure, Israel Railways has had no external directors. The current seven-member board lacks independent directors or those with financial expertise. The ISA noted that without external directors, the audit and remuneration committees cannot convene legally, hindering oversight of significant company decisions. Moreover, the committee responsible for reviewing financial reports cannot meet as required, preventing the company from legally approving its financial statements, including those due by August 31, 2023.
The ISA warned that failure to approve financial reports could raise concerns about continued trading of Israel Railways' bonds and potentially trigger demands for immediate debt repayment, jeopardizing future public debt issuances. Israel Railways has already petitioned the Supreme Court demanding that Transportation Minister Miri Regev and Regional Cooperation Minister Dudi Amsalem, responsible for government companies, explain their failure to appoint external and financially skilled directors as mandated by law.
The ISA now demands urgent action to appoint external directors, underscoring that government companies must comply with capital market laws. Similar demands and penalties have been imposed on other government companies like Israel Aerospace Industries and the Israel Electric Corporation. The letter highlights that the delay in appointing directors has escalated from a governance issue to a significant operational and financial risk, coinciding with the company's need to approve and publish its financial reports.
