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Protecting Minority Investors: Achieving sound corporate governance

Author: Doing Business
Publication: Doing Business 2017

Overview

Investment is key to private sector development. Doing Business, through the protecting minority investors indicator set, measures aspects such as the protection of shareholders against directors’ misuse of corporate assets for personal gain and the rights and role of shareholders in corporate governance. The legal implications of shareholder empowerment have been studied extensively. The literature has been scarcer, however, on the effect of shareholder empowerment on economic indicators, such as firm value, profitability, cost of capital, or capital market size. One of the objectives of Doing Business is to provide standardized, comparable measurements on the adoption of corporate governance practices across 190 economies that can be tested against economic indicators. Using Doing Business data and existing literature, this case study presents empirical evidence on the economic benefits of corporate governance practices that promote shareholder protection and empowerment. The study also contributes to defining the concept of sound corporate governance.

Main Findings

  • Doing Business has recorded and documented 166 reforms to aspects of corporate governance in 100 economies since 2005.
    Since 2013, 54 economies introduced 63 legislative changes strengthening minority shareholder protections: 38 on the extent of conflict of interest regulation index, 17 on the extent of shareholder governance index and eight on both.
  • Doing Business data confirm the positive relationship between greater protection of minority shareholders on the one hand and capital market development and access to equity finance on the other.
  • India carried out an ambitious, multi-year overhaul of its Companies Act, bringing Indian companies in line with global standards—particularly regarding accountability and corporate governance practices—while ensuring that businesses contribute more to shared prosperity through a quantified and legislated corporate social responsibility requirement.
  • When tackling what they referred to as “excessive remuneration in publicly listed companies” Swiss lawmakers opted for a comprehensive reform that also regulated the election and term of board members, their organization in subcommittees and their reporting obligations.