- What do the protecting minority investors indicators measure?
- What is not measured by the protecting minority investors indicators?
- What is new in the protecting minority investors indicator?
- What was changed in 2014 in the protecting minority investors indicators?
- What type of company do the indicators focus on?
- What is meant by “investors” and equity "shares"?
- Do protecting minority investors indicators record the de jure (concerning law) or the de facto (concerning practice) situation?
- Do the indicators advantage common law economies over civil law economies?
What do the protecting minority investors indicators measure?
The indicators measure the protection of minority investors from conflicts of interest through one set of indexes (combined in the extent of conflict of interest regulation index) and shareholders’ rights in corporate governance through another (combined in the extent of shareholder governance index).
The extent of conflict of interest regulation index focuses on one of the most serious breaches of good corporate governance around the world: a related-party transaction. The index measures the protection of shareholders against directors’ misuse of corporate assets for personal gain by distinguishing three dimensions of regulation that address conflicts of interest: approval process and transparency of related-party transactions (captured by the extent of disclosure index), shareholders’ ability to sue and hold directors liable for self-dealing (extent of director liability index) and access to evidence and allocation of legal expenses in shareholder litigation (ease of shareholder suits index).
The extent of shareholder governance index measures shareholders’ rights in corporate governance for listed companies by distinguishing three dimensions of good governance: shareholders’ rights and role in major corporate decisions (captured by the extent of shareholder rights index), governance safeguards protecting shareholders from undue board control and entrenchment (extent of ownership and control index) and corporate transparency on ownership stakes, executive compensation, audits and financial prospects (extent of corporate transparency index).
What is not measured by the protecting investors indicators?
The indicator does not measure foreign direct investment regimes, general investor incentives or broad shareholder frameworks such as proxy rules, nor does it measure the effectiveness of the judicial system against fraud and intentional violations of law.
What is new in the protecting minority investors indicators?
In 2019, the shareholder governance index put a stronger emphasis on capital market development by focusing on the rules and regulations that apply to listed companies offering equity shares to the public. Rules that apply to other company types or to fewer than ten companies offering equity shares to the public are not taken into account.
What was changed in 2014 in the protecting minority investors indicators?
First, the name was changed from “protecting investors” to “protecting minority investors” to clarify what is measured by the indicator—and what is not. Second, three indexes were added to measure protections in matters other than conflicts of interest: the extent of shareholder rights, the extent of ownership and control index and the extent of corporate transparency indices. Third, the ease of shareholder suits index was expanded to measure also the impact of legal expenses as a deterrent to private enforcement.
What type of company do the indicators focus on?
For the extent of conflict of interest regulation index, the case study considers a publicly traded company offering equity shares to the public with a large number of shareholders managed by a board of directors or supervisory board. In addition, it is assumed that one of the members of the board is also a majority shareholder of the company.
If an economy does not have or is not part of an active stock exchange with at least 10 equity listings, the indicator assumes that the company is a large privately held joint stock company with a large number of shareholders.
The extent of shareholder governance index considers laws and regulations applicable to listed companies. Specifically, to score on the shareholder governance index, an economy must have or must be part of an active stock exchange with at least 10 equity issuers offering their shares to the public.
The indicator does not take into account state-owned enterprises, defined as enterprises in which the state has significant control over a company through full or majority ownership.
What is meant by “investors” and "equity shares"?
There are many different types of investors and even more types of investments. The protecting minority investors indicators focus specifically on equity investors who acquire common shares of companies, not bondholders. Of interest are shareholders who have a large enough stake to vote on important decisions and share in losses and profits but not large enough to control the company.
Equity shares are defined as ordinary shares or common stock. The holders of these shares have the right to vote on managerial decisions (for example, to appoint board members) and to receive dividends as well as claims over the residual assets of the company in the event of liquidation.
Do the protecting minority investors indicators record the de jure (concerning law) or the de facto (concerning practice) situation?
The indicators measure the rights and legal protections afforded under the law that companies must abide by (for example, disclosure requirements) and that minority shareholders could exert in court and use as a basis for remedies (for example, breach of fiduciary duties).
Do the indicators advantage common law economies over civil law economies?
Although the underpinning literature and the original survey were written using the legal vocabulary of English common law, the indicator aims to capture the actual effect of legal provisions or their functional equivalents regardless of how they are framed under the legal tradition of each economy. For example, director liability is captured whether it relies on the notion of breach of fiduciary duties (prevalent in economies with a common law tradition) or on the notion of fault (prevalent in economies with a civil law tradition). Similarly, the ability of minority shareholders to gather evidence for a legal action is captured whether shareholders can access corporate documents directly (more common in economies with a common law tradition) or through the appointment of an inspector (more common in economies with a civil law tradition).
