FIGURE 7.1More investor protections associated with greater access for firms to equity marketsand faster stock turnover34 Doing Business <strong>2009</strong>Perceived Overviewdifficulty in access to equityTurnover of stocks traded (%)Most75Starting a businessdifficultFIGURE 7.1Dealing with construction permitsMore investor protections associated with greater access for firms to equity markets50 and faster stock turnoverEmploying workersPerceived difficulty in access to equityTurnover of stocks traded (%)Registering property25 Most75Getting creditdifficultLeastdifficult050LeastMostLeastMostprotectionprotectionprotectionprotectionEconomies ranked byEconomies ranked by25Paying taxesNote: Relationships remain significant at the 5% level when controlling for income difficultper capita. Economies are ranked on the perceived difficulty 0strength of investor protection index, quintilesLeaststrength of investor protection index, quintilesTrading access to equity, across with borders 131 being the most difficult. See Data notes for details. LeastMostLeastMostSource: Doing Business database; WEF (2007); World Bank, World Development Indicators protectiondatabase.protectionprotectionprotectionEnforcing contractsEconomies ranked byEconomies ranked byClosing a businessstrength of investor protection index, quintiles strength of investor protection index, quintilesProtectinginvestorsFIGURE 7.3Note: Relationships remain significant at the 5% level when controlling forFIGUREincome per7.4capita. Economies are ranked on the perceived difficultyin access to equity, with 131 being the most difficult. See Data notes for details.Accelerating reforms in Eastern Europe & CentralSource: DoingAsiaBusiness database; WEF (2007); World Bank, World DevelopmentTop 4 reformIndicators database.featuresNumber of reforms strengthening investor protectionsin protecting investorsby Doing Business report yearReforms including feature since DB2006 (%)Investing in DB2006 Costa Rica DB2007 can be a DB2008 risky protections for DB<strong>2009</strong> investors explains up to rankings on the index with 29 and 28 ofbusiness. Diego, a Costa Rican entrepreneur,Central is Asia well aware of that: “Why would trast, Accelerating company reforms characteristics in Eastern Europe explain 12 & Central Increased ate disclosure Asia disclosure of requirementsa related-party transac-73% FIGURE of 7.3the decision to invest. In con-30 possible points, both require immedi-47%Eastern Europe&(28 economies)NumberI buy shares in a company if I know its only between 4% and 22%. 1 of reforms strengthening investor protectionsThus both by Doing Business tion report and year of the conflict of interest (tableOECD33%high management income can approve large transactionseconomies) between interested parties without terest Eastern in Europe reforms strengthening investor transaction by the other shareholders.governments DB2006 and businesses DB2007have an in-7.1). They require prior approval of the12 DB2008 DB<strong>2009</strong>Defined duties for directors(24& Central Asia12East ever Asia disclosing them to its shareholders?” protections.(28 economies)They enable the 22% shareholders to hold the& In Pacific10Costa Rica, as in many other countries Without investor protections, equityhigh income markets fail to develop and banks tion voided if it damages the company. 12directors liable and to have the transac-(24 economies)OECDRegulated approval of related-party transactionsaround the world, minority investors areLatin America(24 economies)& not Caribbean protected against self-dealing—the become 6 the only source of finance. The And in 13% New Zealand shareholders can(32 use economies) by company insiders of corporate assetsfor East personal & gain.size (24 economies) for lack of financing, and economic deciding whether to sue.result: East Asiabusinesses fail to reach efficient Allowed inspect shareholder all internal access documents before& Pacificto corporate documents 10MiddleNorth Africa6Companies grow by raising capital growth is held back. Research in 22 Note: A reform Vietnam may include shows several the reform benefits features. of reforms6 to strengthen investor protections.(19 economies)Latin AmericaSource: Doing Business database.—either through a bank loan or by attractingequity investors. Selling 3 shares where investors have little recourse In 2005, before Vietnam adopted clearemerging & Caribbeanmarket economies shows thatSub-Saharan(32 economies)Africa(46 allows economies) companies to expand without the against Middle East actions & that damage the company,(19 economies) they invest in a few companies saw 60–100 daily trades with a value oflegislation, its unregulated stock marketNorth Africa6South need Asia to provide collateral and repay bank2(8 loans. economies) But investors worry about getting in Sub-Saharan which they take majority stakes. 2 In $10,000–16,000. That was 3–6 times thetheir money back—and look for laws Africa contrast, good protections for 3minoritytrading volume of the regulated Ho ChiNote: A reform is counted as 1 reform per reforming economy per year.(46 economies)Source: that Doing protect Business them. database. A recent study finds shareholders are associated with larger Minh Stock Exchange. 4 After reform ofthat the presence of legal and regulatory South and more Asia active stock markets.the Law on Securities and the Law on2(8 economies)FIGURE 7.5Vibrant stock markets are not theTop Table reformers 7.1 in 2005–08FIGURE 7.2only Note: A reason reform is counted to introduce as 1 reform per stronger reforming economy inves-petor year.in Where protecting are investors protected—andSource:protections.Doing Business database.Rankings on protecting investorsTanzania started reformswhere not?are based on 3 subindicatorsAverage improvement (index 0–10)of investor protections as part of a largerMost 2008 protected Rank Least protected RankRequirementsLiability of CEOinitiative FIGURE 7.5 to reduce corruption and create on approval and disclosure and board of directorsNew Zealand 1 Micronesia +1.4 172 an Top environment reformers in 2005–08of related-partyin related-party+2.4that inspires the trustSingapore 2 Palau 173 in protecting investorsneeded to do business. 3 transactionstransactionsSuch an environmentstrengthens investor confidence in33.3% 33.3%ExtentHong Kong, China 3 Rwanda 174 Average improvement (index 0–10)Extent of2005of directorMalaysia +2.7 4 Venezuela 175 2008disclosure liabilityCanada 5 Vietnam 176 local businesses and government alike.index index+1.4Ireland 6 Djibouti 177 Economies +2.4 that rank high on the33.3%Israel 7 Suriname 178 strength of investor protection indexEase of shareholderUnited States 8 Swaziland 179 2005have extensive disclosure +2.7 requirementssuits indexSouth Africa 9 Lao PDR 180 and give shareholders broad access toUnited Kingdom 10 Afghanistan 181Type of evidence that can be collectedExtent of Extent of Ease of information both before and during trialsto determine director liability. Newbefore and during the trialNote: disclosureRankings are based director on the strength shareholderof investor protectionindex. See index Data notes liability for details. index suits indexNote: See Data notes for details.Zealand and Singapore, which top theSource: Doing Business database.Source: Doing Business database.Extent of Extent of Ease ofdisclosure director shareholder(c) The International Bank indexfor liability Reconstruction index suits and Development index / The World BankFIGURE 7.4Top 4 reformin protectinReforms includIncreased disclDefined dutiesRegulated app13%Allowed sharehto corporate doNote: A reform maySource: Doing BusinFIGURE 7.2Rankings onare based oRequirementson approval anof related-parttransactionsType ofbNote: See Data n
PROTECTING INVESTORS 35Enterprises, the number of listed firmsclimbed from 41 in 2005 to 193 today—and 107 of these are listed on the Ho ChiMinh Stock Exchange. Despite the recentdifficulties in the Vietnamese securitiesmarkets, market capitalization increasedfrom less than $1 billion in 2005 to morethan $13 billion today.Across regions, Latin America regulatesrelated-party transactions the least,imposing the weakest requirements fordisclosure and approval. Many LatinAmerican economies have commerciallaws that have not been reformed sincethe 1920s. Economies in Eastern Europeand Central Asia have stronger requirementsfor disclosure and approval. Butonce a transaction is approved and disclosed,the company directors are notliable for any damage resulting from it.Economies in the Middle East andNorth Africa, such as Djibouti and Oman,limit access to information. That makes itdifficult for minority shareholders to obtainthe evidence needed to prove theircase in court.Who reformed in 2007/08?Twelve economies strengthened investorprotections in 2007/08 (table 7.2).Albania was the top reformer. It adoptedthe Law on Entrepreneurs and CommercialCompanies, which regulates conflictsof interest by requiring shareholderapproval of related-party transactionsinvolving more than 5% of company assets.The law also provides for extensivedisclosure requirements and makes iteasier for minority investors to sue directors.And minority shareholders can nowrequest compensation from directorsfor harm resulting from a related-partytransaction, including repayment of allprofits from the transaction. With thenew law, Albanian company directorshave strong incentives to be responsiveto investor interests.The runner-up reformer was Thailand.After being the top reformer inprotecting investors 3 years ago, Thailandmade new efforts to strengthen minorityshareholder rights, particularly inTable 7.2Greater disclosure—the most popular reform feature in 2007/08Increased disclosure requirementsMade it easier to sue directorsAllowed derivative or direct suitsRegulated approval of related-party transactionsPassed a new company lawRequired an external body to review related-partytransactions before they take placeAllowed rescission of prejudicial related-partytransactionsSource: Doing Business database.the area of director liability. Directorsdamaging the company’s interests canno longer rely on having obtained shareholderapproval of a transaction to avoidliability. If they are held liable, sanctionswill be harsh. They will have to compensatethe company for all damages, payback all profits made from the transactionand pay fines to the state. They evenrisk jail time.Central Asian economies alsostrengthened minority shareholderrights. Tajikistan, Azerbaijan and theKyrgyz Republic brought their companylaws into line with modern regulationsand corporate governance principles.Tajikistan adopted a new joint stockcompanies act. The law defines “interestedparties” and requires shareholderapproval of transactions between suchparties. It also requires interested partiesto immediately disclose conflicts of interestto the board of directors. In addition,derivative suits are now possible: shareholderswith at least 10% of shares canfile a lawsuit on behalf of the companyagainst company directors.Azerbaijan reformed its civil code,and its State Securities Commission adoptednew rules regulating related-partytransactions. The new law defines what ismeant by “related transactions betweeninterested parties” and requires shareholderapproval when such transactionsexceed 5% of company assets. However,interested parties are allowed to voteat the shareholders meeting. The lawalso includes requirements for disclosureAlbania, Azerbaijan, Egypt, Saudi Arabia,TajikistanAlbania, Botswana, Kyrgyz Republic, ThailandGreece, Kyrgyz Republic, SloveniaAlbania, Azerbaijan, TajikistanAlbania, Botswana, TajikistanEgypt, TurkeyTunisiaboth to the market regulator and throughthe company’s annual reports. As in Albania,minority shareholders can nowrequest compensation for damages to thecompany resulting from related-partytransactions.The Kyrgyz Republic reformed itsjoint stock companies act. From now on,shareholders can sue in their own namethe directors who damaged shareholders’interests and request compensationfrom them.Botswana defined related-partytransactions and clarified disclosure provisionsin its Companies Act of 2004,which came into force in July 2007. Establishingthe liability of directors is noweasier: shareholders can file suit againstthem if the transaction proves prejudicialto the company. If directors are held liable,they not only have to cover damages butalso have to pay back all profits made—agood reason to think twice before attemptingto misuse company assets.The Egyptian Capital Market Authoritymade improving disclosure requirementsa priority when it amendedthe listing rules of the Cairo Stock Exchange.The amendments are aimed atincreasing transparency both before andafter related-party transactions are concluded.Such transactions now have tobe assessed by an independent financialadviser before they take place, ensuringthat shareholders will be better informed.The amendments also clarify requirementsfor disclosure through companies’annual reports. In March 2008 Turkey(c) The International Bank for Reconstruction and Development / The World Bank