Business Removing

49
Protecting investors
Who uses equity finance?
What encourages equity investment?
What to reform?
Why reform?
In July 1991 the Bank of Credit and Commerce International,
otherwise known as BCCI, collapsed. Its 400
branches in 70 countries closed. Investors faced losses totaling
more than $10 billion. In November the same year
the body of Robert Maxwell, one of Britain’s wealthiest
men, was found in the sea off the coast of Tenerife. A few
days later the auditors of the Mirror Group found that
$900 million had been diverted as unauthorized loans
from the pension fund to Maxwell’s private companies.
Interest in corporate governance took off. Sir Adrian
Cadbury, chair of the first committee on corporate governance
in the United Kingdom, writes: “When our Committee
was formed [in 1991], neither our title nor our
work program seemed framed to catch the headlines. It
is, however, the continuing concern about standards of
financial reporting and accountability, heightened by
BCCI, Maxwell, and the controversy over directors’ pay,
which has kept corporate governance in the public eye.” 1
Since the Cadbury report, more than 160 corporate governance
guidelines and codes of best practice have been
produced in 90 countries. 2
Meanwhile, Kwadwo, a Ghanaian who recently returned
from working abroad, is looking for additional
private financing. Having saved $40,000, he wants to
start a bus company to service the link between Accra
and Kumasi. He is looking to buy 6 buses and needs another
$30,000. So he goes to the bank but is told that he
needs to put up $90,000 as collateral for the $30,000 he
would borrow. This won’t do. Kwadwo approaches several
people who have that kind of money and offers
them a partnership. But everyone declines, afraid that
Kwadwo would abscond with their money.
In countries like Ghana, good corporate governance
is about creating incentives for investors to provide finance
without the need to exercise daily control of business
operations. The typical case looks more like
Kwadwo’s search for a business partner than it resembles
BCCI or initial public offerings in rich countries. And
potential investors worry about expropriation by the entrepreneur
or managing partner. 3 But the same principles
of good corporate governance apply in both rich
and poor countries.
Preventing expropriation from taking place, and
exposing it when it does, requires legal protections of
small shareholders and enforcement capabilities. And—
the focus of Doing Business in 2005—it requires that the
business disclose information on ownership and financial
performance and on the precise nature of business
transactions. Whether small investors decide to go to the
court, file a complaint with the regulator or feed the information
to the media and embarrass the insider, better
information disclosure helps.
Four types of ownership disclosure reduce expropriation:
information on family, indirect, and beneficial
ownership, and on voting agreements between shareholders.
Two types of financial disclosure help investors:
the business can have an audit committee that reviews
and certifies financial data and the law may require that
an external auditor be appointed. Finally, disclosure is
most effective when both ownership and financial information
is available to all current and potential investors.
Summing these seven features into a Disclosure Index,
ranging from 0 to 7, reveals that British investors enjoy
among the strongest protections in the world, with a score