Protecting minority investors matters for the ability of companies to raise the capital they need to grow, innovate, diversify and compete. Effective regulations define related-party transactions precisely, promote clear and efficient disclosure requirements, require shareholder participation in major decisions of the company and set detailed standards of accountability for company insiders.
What do the indicators cover?
It measures the protection of minority investors from conflicts of interest through one set of indicators and shareholders’ rights in corporate governance through another. The ranking of economies on the strength of minority investor protections is determined by sorting their distance to frontier scores for protecting minority investors. These scores are the simple average of the distance to frontier scores for the extent of conflict of interest regulation index and the extent of shareholder governance index. To make the data comparable across economies, a case study uses several assumptions about the business and the transaction.
The business (Buyer):
- Is a publicly traded corporation listed on the economy’s most important stock exchange. If the number of publicly traded companies listed on that exchange is less than 10, or if there is no stock exchange in the economy, it is assumed that Buyer is a large private company with multiple shareholders.
- Has a board of directors and a chief executive officer (CEO) who may legally act on behalf of Buyer where permitted, even if this is not specifically required by law.
- Has a supervisory board (applicable to economies with a two-tier board system) on which 60% of the shareholder-elected members have been appointed by Mr. James, who is Buyer’s controlling shareholder and a member of Buyer’s board of directors.
- Has not adopted any bylaws or articles of association that differ from default minimum standards and does not follow any nonmandatory codes, principles, recommendations or guidelines relating to corporate governance.
- Is a manufacturing company with its own distribution network .
WHAT THE PROTECTING MINORITY INVESTORS INDICATORS MEASURE
Extent of disclosure index (0–10)
Review and approval requirements for related-party transactions; Disclosure requirements for related-party transactions
Extent of director liability index (0–10)
Ability of minority shareholders to sue and hold interested directors liable for prejudicial related-party transactions; Available legal remedies (damages, disgorgement of profits, fines, imprisonment, rescission of the transaction)
Ease of shareholder suits index (0–10)
Access to internal corporate documents; Evidence obtainable during trial and allocation of legal expenses
Extent of conflict of interest regulation index (0–10)
Simple average of the extent of disclosure, extent of director liability and ease of shareholder indices
Extent of shareholder rights index (0-10)
Shareholders’ rights and role in major corporate decisions
Extent of ownership and control index (0-10)
Governance safeguards protecting shareholders from undue board control and entrenchment Extent of corporate transparency index (0-10)
Corporate transparency on ownership stakes, compensation, audits and financial prospects Extent of shareholder governance index (0–10)
Simple average of the extent of shareholders rights, extent of ownership and control and extent of corporate transparency indices
Strength of minority investor protection index (0–10)
Simple average of the extent of conflict of interest regulation and extent of shareholder governance indices.
Source: Doing Business database.