Business Removing

52 DOING BUSINESS IN 2005
• In 2003 Unefon, the cellphone unit of the Mexican
broadcaster TV Azteca, was at risk of defaulting
on a $325 million loan from its biggest creditor, Nortel.
Nortel sold the debt to a private company, Codisco Investments,
at a steep discount, for $107 million. Four
months later, Unefon paid back the full $325 million
debt. Codisco netted $218 million. But TV Azteca neglected
to tell investors that half of Codisco was owned
by its controlling shareholder. 14
• In 2003 Italian dairy-foods giant Parmalat defaulted
on a $185 million loan, prompting auditors to inspect financial
statements. It turned out accounts were falsified
to hide $10 billion in losses and $620 million misappropriated
to other family owned companies. More than $9
billion of Parmlat’s reported assets could not be traced. 15
FIGURE 7.3
Rich countries disclose the most
Disclosure index
GREATER
DISCLOSURE
Source: Doing Business database.
5.5 OECD high income
3.9 East Asia & the Pacific
3.6 Europe & Central Asia
3.2 South Asia
2.6 Middle East & North Africa
2.4 Sub-Saharan Africa
2.3 Latin America & the Caribbean
5.3 Rich
3.7 Middle income
2.6 Poor
The common element in these cases: a lack of disclosure.
None of the controlling shareholders informed
minority investors of their ownership in related companies.
This is legal in many countries. In Mexico, Russia
and 70 other countries neither the corporate law nor the
securities law required such disclosure. An external audit
finally caught the Parmalat scandal, but managers were
able to simply invent assets for 15 years without close
scrutiny from audit committees. In Turkey and 67 other
countries, the combination of both internal audit committees
and external audits to catch and disclose such
behavior is not required.
Canada, Israel, Spain, the United Kingdom and the
United States have the most disclosure requirements of
any country (table 7.2). Rich countries mandate much
higher disclosure than do developing countries. East
Asia has the most disclosure of any developing region.
Latin America has the least (figure 7.3).
TABLE 7.2
Rich countries disclose the most
Most Disclosure Index Index
Canada 7 Japan 6
Israel 7 Korea, Rep. 6
Spain 7 Lithuania 6
United Kingdom 7 Nigeria 6
United States 7 Philippines 6
Australia 6 Slovakia 6
Austria 6 South Africa 6
Chile 6 Sweden 6
Czech Republic 6 Taiwan, China 6
France 6 Thailand 6
Hong Kong, China 6 Tunisia 6
Ireland 6 Zimbabwe 6
Source: Doing Business database.
These indicators come from a new survey of corporate
and securities lawyers. 16 The data measure the most
stringent level of required disclosure, reflecting the
choices of small investors to put their money in publicly
listed or privately held companies. In countries where
stock exchange regulations and securities laws are in
force, the disclosure index assesses these regulations. In
other countries, the disclosure requirements come from
the company law. So the indicators are relevant for private
companies as well as publicly listed ones.
Disclosure of ownership shows who has enough
power to appoint managers and determine business
strategy. If an investor illicitly gains control of the business,
he may expropriate the investments of small shareholders
and do so legally by voting for transactions that
benefit him at the expense of others. Four types of ownership
disclosure reduce this possibility: information on
family, indirect or beneficial ownership, and on voting
agreements between shareholders.
Family ownership. First, investors would like to know
whether a large shareholder expands his control of the
business when another member of his family buys shares.
Some countries—such as Canada, Japan, and Norway—
mandate disclosure of ownership by immediate family
members. Others go further. The Czech Republic requires
disclosure for “any related person.” Still others impose
no requirements whatsoever, including such rich
countries as Germany and Italy, as well as middle income
ones as Egypt.
Indirect ownership. A second disclosure that benefits
small investors is that of indirect ownership. Yoshisuke
Aikawa, the founder of Nissan, describes a classic example.
Consider a wealthy Japanese family that establishes
a business, Choten Corp, with ¥1 billion. 17 The family