Frequently Asked Questions
- What does the Protecting Minority Investors indicator measure?
- What is not measured by the Protecting Minority Investors indicator?
- What is new in the Protecting Minority Investors indicator?
- What type of company does the indicator focus on?
- What is meant by “investors”?
- Does the Protecting Minority Investors indicator record the de jure (concerning law) or the de facto (concerning practice) situation?
- Does the indicator advantage common law economies over civil law economies?
WHAT DOES THE PROTECTING MINORITY INVESTORS INDICATOR MEASURE?
The indicator measures the protection of minority investors from conflicts of interest through one set of indices (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: the related-party transaction. The index measures the protection of shareholders against directors’ misuse of corporate assets for personal gain by distinguishing 3 dimensions of regulation that address conflicts of interest: 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 by distinguishing 3 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, compensation, audits and financial prospects (extent of corporate transparency index).
WHAT IS NOT MEASURED BY THE PROTECTING INVESTORS INDICATOR?
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 INDICATOR?
In 2016, the shareholder governance index was further refined. New questions were introduced for limited companies: whether all members must consent to add a new member, whether there is a management deadlock breaking mechanism, and whether members must meet at least once a year.
WHAT WAS CHANGED IN 2014 IN THE PROTECTING MINORITY INVESTORS INDICATOR?
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 indices were added to measure protections in matters beyond conflicts of interest: extent of shareholder rights index, extent of ownership and control index and extent of corporate transparency index. The average of these three indices forms the extent of shareholder governance index. Third, the ease of shareholder suits index was expanded to take into account the allocation of legal expenses.
WHAT TYPE OF COMPANY DOES THE INDICATOR FOCUS ON?
For the extent of conflict of interest regulation index, the case study considers a publicly traded company with a large number of shareholders managed by a board of directors or supervisory board with no fewer than 5 members. In addition, it is assumed that one of the members of the board is also a majority shareholder of the company.
If there is no stock exchange in the economy, or if there are fewer than 10 firms actively traded on the economy’s stock exchange, 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 measures 20 aspects of investor protection of applicable to the same company type. In addition, the index also measures whether 10 of these protections are also afforded to investors in limited companies.
WHAT IS MEANT BY “INVESTORS”?
There are many different types of investors and even more types of investments. The Protecting Minority Investors indicator focuses specifically on equity investors and, more precisely, on minority shareholders who have a stake large enough to potentially allow them to vote on important decisions and share in losses and profits but not large enough to allow them to control the company.
DOES THE PROTECTING MINORITY INVESTORS INDICATOR RECORD THE DE JURE (CONCERNING LAW) OR THE DE FACTO (CONCERNING PRACTICE) SITUATION?
The indicator measures 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 remedy (for example, breach of fiduciary duties).
DOES THE INDICATOR 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).