DOING BUSINESS 2009 - JOHN J. HADDAD, Ph.D.

70 Doing Business 2009The index ranges from 0 to 6, withhigher values indicating the availabilityof more credit information, from eithera public registry or a private bureau, tofacilitate lending decisions. If the registryis not operational or has coverage of lessthan 0.1% of the adult population, thescore on the depth of credit informationindex is 0.In Turkey, for example, both a publicand a private registry operate. Bothdistribute positive and negative information(a score of 1). The private bureaudistributes data only on individuals, butthe public registry covers firms as wellas individuals (a score of 1). The publicand private registries share data amongfinancial institutions only; no data arecollected from retailers or utilities (ascore of 0). The private bureau distributesmore than 2 years of historical data(a score of 1). The public registry collectsdata on loans of $3,493 (44% of incomeper capita) or more, but the private bureaucollects information on loans ofany value (a score of 1). Borrowers havethe right to access their data in both theprivate and the public registry (a score of1). Summing across the indicators givesTurkey a total score of 5.Public credit registry coverageThe public credit registry coverage indicatorreports the number of individualsand firms listed in a public creditregistry with information on repaymenthistory, unpaid debts or credit outstandingfrom the past 5 years. The numberis expressed as a percentage of the adultpopulation (the population aged 15 andabove according to the World Bank’sWorld Development Indicators 2008).A public credit registry is defined as adatabase managed by the public sector,usually by the central bank or thesuperintendent of banks, that collectsinformation on the creditworthiness ofborrowers (persons or businesses) in thefinancial system and makes it availableto financial institutions. If no public registryoperates, the coverage value is 0.Private credit bureau coverageThe private credit bureau coverage indicatorreports the number of individualsand firms listed by a private credit bureauwith information on repayment history,unpaid debts or credit outstanding fromthe past 5 years. The number is expressedas a percentage of the adult population(the population aged 15 and above accordingto the World Bank’s World DevelopmentIndicators 2008). A privatecredit bureau is defined as a private firmor nonprofit organization that maintainsa database on the creditworthiness ofborrowers (persons or businesses) inthe financial system and facilitates theexchange of credit information amongbanks and financial institutions. Creditinvestigative bureaus and credit reportingfirms that do not directly facilitateinformation exchange among banks andother financial institutions are not considered.If no private bureau operates,the coverage value is 0.The data details on getting credit can befound for each economy at http://www.doingbusiness.org. This methodologywas developed in Djankov, McLiesh andShleifer (2007) and is adopted here withminor changes.Protecting investorsDoing Business measures the strength ofminority shareholder protections againstdirectors’ misuse of corporate assets forpersonal gain. The indicators distinguish3 dimensions of investor protection:transparency of related-party transactions(extent of disclosure index), liabilityfor self-dealing (extent of directorliability index) and shareholders’ abilityto sue officers and directors for misconduct(ease of shareholder suits index)(table 12.7). The data come from a surveyof corporate lawyers and are based onsecurities regulations, company laws andcourt rules of evidence.To make the data comparable acrosseconomies, several assumptions aboutthe business and the transaction areused.Assumptions about the businessThe business (buyer):• Is a publicly traded corporation listedon the economy’s most importantstock exchange. If the number ofpublicly traded companies listedon that exchange is less than 10, orif there is no stock exchange in theeconomy, it is assumed that buyer is alarge private company with multipleshareholders.• Has a board of directors and achief executive officer (CEO) whomay legally act on behalf of buyerwhere permitted, even if this is notspecifically required by law.• Is a food manufacturer.• Has its own distribution network.Assumptions about thetransaction• Mr. James is buyer’s controllingshareholder and a member of buyer’sboard of directors. He owns 60%of buyer and elected 2 directors tobuyer’s 5-member board.• Mr. James also owns 90% of seller,a company that operates a chain ofretail hardware stores. Seller recentlyclosed a large number of its stores.• Mr. James proposes to buyer thatit purchase seller’s unused fleet oftrucks to expand buyer’s distributionof its food products. Buyer agrees.The price is equal to 10% of buyer’sassets and is higher than the marketvalue.• The proposed transaction is partof the company’s ordinary courseof business and is not outside theauthority of the company.• Buyer enters into the transaction. Allrequired approvals are obtained, andall required disclosures made (that is,the transaction is not fraudulent).• The transaction is unfair to buyer.Shareholders sue Mr. James andthe other parties that approved thetransaction.(c) The International Bank for Reconstruction and Development / The World Bank