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

DATA NOTES 71Table 12.7What does protecting investors measure?Extent of disclosure index (0–10)• Who can approve related-party transactions• Disclosure requirements in case of related-party transactionsExtent of director liability index (0–10)• Ability of the shareholders to hold the interested party and the approving body liable in case of relatedpartytransactions• Available legal remedies (damages, repayment of profits, fines and imprisonment)• Ability of shareholders to sue directly or derivativelyEase of shareholder suits index (0–10)• Documents and information available during trial• Direct access to internal documents of the company and use of a government inspector without filing asuit in courtStrength of investor protection index (0–10)• Simple average of the extent of disclosure, extent of director liability and ease of shareholder suits indicesSource: Doing Business database.Extent of disclosure indexThe extent of disclosure index has 5components:• What corporate body can providelegally sufficient approval for thetransaction. A score of 0 is assigned ifit is the CEO or the managing directoralone; 1 if the board of directorsor shareholders must vote and Mr.James is permitted to vote; 2 if theboard of directors must vote and Mr.James is not permitted to vote; 3 ifshareholders must vote and Mr. Jamesis not permitted to vote.• Whether immediate disclosure ofthe transaction to the public, theregulator or the shareholders isrequired. A score of 0 is assigned if nodisclosure is required; 1 if disclosureon the terms of the transaction butnot Mr. James’s conflict of interestis required; 2 if disclosure on boththe terms and Mr. James’s conflict ofinterest is required.• Whether disclosure in the annualreport is required. A score of 0 isassigned if no disclosure on thetransaction is required; 1 if disclosureon the terms of the transaction butnot Mr. James’s conflict of interestis required; 2 if disclosure on boththe terms and Mr. James’s conflict ofinterest is required.• Whether disclosure by Mr. James tothe board of directors is required. Ascore of 0 is assigned if no disclosureis required; 1 if a general disclosure ofthe existence of a conflict of interestis required without any specifics; 2if full disclosure of all material factsrelating to Mr. James’s interest in thebuyer-seller transaction is required.• Whether it is required that anexternal body, for example, anexternal auditor, review thetransaction before it takes place. Ascore of 0 is assigned if no; 1 if yes.The index ranges from 0 to 10, withhigher values indicating greater disclosure.In Poland, for example, the boardof directors must approve the transactionand Mr. James is not allowed to vote (ascore of 2). Buyer is required to discloseimmediately all information affecting thestock price, including the conflict of interest(a score of 2). In its annual reportbuyer must also disclose the terms of thetransaction and Mr. James’s ownership inbuyer and seller (a score of 2). Before thetransaction Mr. James must disclose hisconflict of interest to the other directors,but he is not required to provide specificinformation about it (a score of 1). Polanddoes not require an external body to reviewthe transaction (a score of 0). Addingthese numbers gives Poland a score of 7on the extent of disclosure index.Extent of director liabilityindexThe extent of director liability index has7 components:• Whether a shareholder plaintiff isable to hold Mr. James liable fordamage the buyer-seller transactioncauses to the company. A score of 0 isassigned if Mr. James cannot be heldliable or can be held liable only forfraud or bad faith; 1 if Mr. James canbe held liable only if he influencedthe approval of the transaction orwas negligent; 2 if Mr. James canbe held liable when the transactionis unfair or prejudicial to the othershareholders.• Whether a shareholder plaintiff isable to hold the approving body (theCEO or board of directors) liable fordamage the transaction causes to thecompany. A score of 0 is assigned ifthe approving body cannot be heldliable or can be held liable only forfraud or bad faith; 1 if the approvingbody can be held liable for negligence;2 if the approving body can beheld liable when the transaction isunfair or prejudicial to the othershareholders.• Whether a court can void thetransaction upon a successful claimby a shareholder plaintiff. A score of 0is assigned if rescission is unavailableor is available only in case of fraud orbad faith; 1 if rescission is availablewhen the transaction is oppressive orprejudicial to the other shareholders;2 if rescission is available when thetransaction is unfair or entails aconflict of interest.• Whether Mr. James pays damagesfor the harm caused to the companyupon a successful claim by theshareholder plaintiff. A score of 0 isassigned if no; 1 if yes.• Whether Mr. James repays profitsmade from the transaction upon asuccessful claim by the shareholderplaintiff. A score of 0 is assigned if no;1 if yes.(c) The International Bank for Reconstruction and Development / The World Bank