Shareholders call for transparency in executive compensation
A class action lawsuit brought by USC Gould Prof. Ehud Kamar and Prof. Sharon Hannes of Tel Aviv University against Teva Pharmaceutical Industries Ltd. has resulted in a settlement under which the company will begin reporting its executives’ compensation on an individual basis. The law professors, who are Teva shareholders, filed suit last November over the company’s executive compensation disclosure practices.
The settlement includes fees in the amount of $1,100,000 for the plaintiffs’ attorneys plus compensation for the plaintiffs in the amount of $200,000.
Teva is one of the world’s biggest pharmaceutical companies and the largest manufacturer of generic drugs.
In an article in Bloomberg Businessweek, Kamar and Hannes were quoted saying this would be a highly influential case.
“Teva will change its compensation disclosure practices in a significant way,” Kamar and Hannes said. “We expect other dual-listed companies to follow Teva and also disclose executive compensation on an individual basis.”
Even before the suit was settled, Kamar says, it started to change the reporting practices of dual-listed companies.
“A week after we sued, another Israeli company, Babylon, which was listed on the Tel Aviv Stock Exchange and planned to list also in the United States and to start filing U.S. reports also in Israel, asked its shareholders to approve the move to U.S. reporting,” Kamar said. “The Israeli institutional shareholders’ advisory services conditioned the approval on a commitment by Babylon to continue reporting executive compensation on an individual basis after cross-listing in the United States. Babylon agreed. “
Israeli law requires companies listed only in Israel to disclose the compensation of their top five executives on an individual basis in their annual reports. U.S. law requires the same of U.S. issuers. As for foreign private issuers listed in the United States, like Teva, U.S. law says this:
“Disclosure of compensation is required on an individual basis unless individual disclosure is not required in the company’s home country and is not otherwise publicly disclosed by the company.”
Israeli law changed in 2000 to allow companies listed both in Israel and in the United States or the United Kingdom to file in Israel the financial statements produced under the rules of the other country where the stock trades. Teva’s interpretation of the law led it and many other Israeli companies to stop reporting the individual compensation of the top five executives.
However, Kamar says Teva still had no reason to believe it was exempt from the duty to disclose executive compensation individually.
“Apparently, Teva took the position that the cross-reference between Israeli law and U.S. left it with no obligation to disclose compensation on an individual basis, and disclosed the compensation of all of its executives in aggregate,” Kamar said. “We claimed in the suit that U.S. law requires individual disclosure by default and that the Israeli law does not exempt Teva from this requirement.”
Last year, Teva CEO Jeremy Levin promised that the company would be more open with information. However, according to Businessweek, the 2012 annual report filed on Feb. 12 collectively listed cash compensation for its top 11 executives at $12.7 million and another $4.04 million in stock options.
In a press release following the lawsuit, Teva said the company would adhere to the settlement in the filing of the 2013 annual report scheduled for release in early 2014. The settlement is also subject to approval by the Tel Aviv District Court.
Kamar says other companies should work on disclosing the same information.
“We hope and expect other companies to follow Teva’s example,” Kamar said. “With market capitalization of about 30% of the Tel Aviv Stock Exchange, Teva is by far the largest company in Israel. After thoroughly examining the suit, Teva concluded it was best to change its past course of action. There is every reason to believe other companies will do the same because the same analysis applies to them as well.”
There is much to learn from this case and Kamar says the implications are relevant to students as well.
“My students can take away two lessons from my work in this case,” Kamar said. “The first lesson is to use their own judgment and not to accept an answer that seems wrong to them. That something is done does not necessarily mean it is done right. The second lesson is to dare and venture out of their comfort zone. They have a duty to use their knowledge to do things and to be involved in the society in which they live.”
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