Business Removing

54 DOING BUSINESS IN 2005
TABLE 7.3
Building the disclosure index
Disclosure Measure Canada Korea, Rep. Mexico
Macedonia,
FYR Bangladesh Ghana Lebanon
1. Family ownership is disclosed Yes Yes No No No No No
2. Indirect ownership is disclosed Yes Yes Yes Yes Yes Yes No
3. Beneficial ownership is disclosed Yes Yes No Yes Yes No No
4. Voting agreements between shareholders must be disclosed Yes Yes No No No No No
5. Audit committees must be established Yes No Yes No No No No
6. External auditors must be used Yes Yes Yes Yes Yes Yes Yes
7. Both ownership and financial information is available publicly Yes Yes Yes Yes No No No
Disclosure Index (number of yes responses) 7 6 5 4 3 2 1
Source: Doing Business database.
charged for the building were fair to minority shareholders.
The law did not provide for such interpretation.
A large literature documents the benefits of shareholder
protection. 19 It concludes that four legal protections
of small investors are both effective and relatively
easy to enforce: 20
• Cumulative voting for directors, which permits shareholders
to multiply their number of votes by the number
of directorships being voted on and to cast the total votes
for one director. Cumulative voting allows small investors
to gain representation at the board of directors,
improving their access to information and giving them
voice in decisions on large transactions.
• Allowing derivative suits, where shareholders can
sue on behalf of the company for damages caused
to the company. Derivative suits lower the cost of challenging
management decisions in the courts, because a
shareholder only has to prove damages to the company
instead of damages to herself.
• Low threshold of capital, say 5%, to call shareholders’
meetings. Lower capital thresholds make it easier
for shareholders to organize a meeting to challenge
management and to put additional items on the meeting’s
agenda.
• Pre-emptive rights to buy new shares, where current
shareholders have the first opportunity to buy newly issued
shares in order to avoid diluting their ownership.
Pre-emptive rights limit the risk of expropriation, where
shares are issued to the controlling shareholder or related
parties at below-market prices.
Together, these protections help explain a large proportion
of the variation in access to external financing
(figure 7.5) and the number of public listings across the
world. Among middle income countries, Chile, with
strong protections for small investors, has a market capitalization
of 74% of GDP in 2003. Egypt, where equity
investors have fewer protections, has one of 29%. Among
developed countries, Spain protects small investors and
has a market capitalization nearly twice Italy’s, 71% of
FIGURE 7.5
More legal protections, more equity
Market capitalization to GDP
FIGURE 7.6
Efficient courts help protect minority shareholders
Perceived protection of minority shareholders
Higher
High
Lower
Least protections
Most protections
Countries ranked by minority shareholder protection index, quintiles
Note: Analysis controls for income per capita. Relationships are significant at the 5% level.
Source: Doing Business database, World Bank (2004a).
Low
Least time
Most time
Countries ranked by days to enforce a contract, quintiles
Note: Analysis controls for income per capita. Relationships are significant at the 1% level.
Source: Doing Business database, WEF (2004).