Corporate Governance

Entropy's model for the assessment of corporate governance risks of companies

Entropy's model for the assessment of corporate governance risks of companies, launched in the first quarter of 2016, provides a quantitative evaluation of the corporate governance risk of various issuers in the Israeli capital market, as is customary in developed capital markets in the world. The model is available for the use of institutional investors, issuers and other entities in the capital market. Risk indices related to corporate governance of companies are a globally accepted measure for selecting and managing investments by sophisticated investors around the world.

The model aims to assess the risk level of the issuer's corporate governance, based on a system of quantitative and qualitative parameters, related to principles and rules of the corporate governance world, in order to obtain an estimate and assessment of the potential risk level of the issuer, based on the issuer's characteristics and the conduct of the organs in the company and its managers towards the investors and other stakeholders. The assessment is conducted according to four main categories.

The objectives and uses of the model

  • Transparency and creating trust vis-à-vis the investors.
  • Creating a common and simple "standard" language between issuers and investors.
  • Structuring the market learning curve in regards to corporate governance and creating an incentive to improve the understanding of the grade's components in the long run.
  • Pricing of a "Corporate Governance" premium in the investment selection process.
  • Additional and supplemental information regarding the issuer's quality, for use in decision making.
  • Standardizing and effective mapping of the investments portfolio in terms of the corporate governance parameter, as well as creating long term comparison indices.
Regulation and Controlling Entities
  • A market solution for enhancing trust among the parties.
  • A regulatory solution which is not just technical/formal, but also deals with a substantial aspect of the investment
  • A potential tool for a different, positive dialog between the market and the issuers – via encouragement rather than sanctions.
  • Increasing the activities of additional players (foreign investors, private investors).

The model enables:

  • Providing information to institutional investors regarding the issuers' ratings, with an emphasis on examining and managing the investment.
  • Providing information to companies about the investors' perception of the risk level of their corporate governance and insight regarding the changes they have to implement in order to change the market's perception of the company.

Model categories

Board of Directors
  • Board of Directors' structure
  • Committees' structure
  • Board of Directors' work
Remuneration Policy
  • Performance-based remuneration
  • Remuneration's structure
  • Capital components planning
  • Transparency and clarity
Shareholders' Rights
  • Types of shares in the articles of association
  • Poison pills
  • Stakeholders transactions
  • Voting procedures
  • Communication with shareholders
  • The auditing CPA
  • The structure of payments for the CPA services
  • Events and disagreements regarding accounting and auditing issues
  • Other auditing issues

The weights and parameters included in the model are based on information accumulated during Entropy's many years of operation, as well as on the collaboration with an advisory committee comprised of representatives from the academic community and from BDO – a globally leading accounting and consulting organization.

Members of the model committee

  • Prof. Sharon Hannes of the Tel Aviv University, who is an expert in corporate governance and has extensive practical experience in the industry.
  • A team from the Corporate Governance Department at the BDO Consulting Group – managed by CPA Keren Kibovich and partners from the international firm.
  • Content experts from Entropy – a senior team led by Adv. Matti Aharon, who, for the past seven years, has been managing proxy research at Entropy, and prior to that– at Poalim Sahar.

Work method

Entropy strongly believes in transparency-based work. In this context, the firm’s work method is based on the process of collecting information and data on the issuer, which is performed on a regular basis by the project team, based on the issuer's reports and financial statements. The information is managed in a system that contains data continuously collected since 2011. The information is sorted and managed according to the parameters upon which the Model is based and that have been validated by the Advisory Board that accompanied the setup and development process. Prior to publication of the Model’s values, the data on which we relied is transferred to the issuers for verification before their publication.