Doing Business reforms

Protecting the rights of minority shareholders

A record number of 24 economies strengthened minority investor protections in 2018/19. The Philippines made the most noteworthy improvements to minority investor protections this year. New rules for public-listed companies issued by the Securities and Exchange Commission on April 25, 2019, made significant headway toward mitigating the risks of prejudicial conflicts of interest in companies. Specifically, the new rules require the board of directors, excluding the interested directors to approve transactions with interested parties. The interested director must fully disclose all material facts regarding his interest in the transaction to the Board of directors. The company must immediately disclose information on the terms of the transactions and the interested director’s conflict of interest to the exchange. Moreover, an interested director can be disqualified from serving in the management of any company for 1 year or more upon a successful claim by shareholders. As a result, the Philippines improved its score for minority investor protections by 16 percentage points.

China, the Bahamas and Serbia also significantly strengthened minority investor protections. In China, this is the result of the combined action of the Supreme People's Court, which issued clarifications on the application of the Company Law, and the Shanghai Stock Exchange, which amended the listing rules. Among the changes, a controlling shareholder with a conflict of interest can be held liable when a transaction is unfair and causes damages to the company, shareholders can vote board members out of office more easily.

Seven economies—Armenia, Egypt, Arab Rep., Kenya, Morocco, Oman, Uzbekistan and Zambia—gave shareholders a more prominent role in major corporate decisions such as major transactions, issuance of new shares and appointment of auditors, increasing their scores on the extent of shareholder rights index.

Twelve economies—Armenia, the Bahamas, Bahrain, China, Kosovo, Lithuania, Morocco, Oman, Serbia, Spain, Uzbekistan and Zambia—took steps to clarify corporate governance, ownership and control structures by, for example, enacting legislation that requires companies to nominate independent board members and set up an audit committee. These changes resulted in improvements in the scores of these economies on the extent of ownership and control index.

Ten economies—the Bahamas, Djibouti, Greece, Kosovo, Kuwait, Morocco, Myanmar, the Russian Federation, Serbia and Uzbekistan—passed legislation that increased corporate transparency requirements. These laws give more agenda-setting power to shareholders and disclose board member activities in other companies, executive compensation and audit reports. These economies improved their scores on the extent of corporate transparency index.

Finally, fourteen economies enacted regulation to mitigate potentially abusive or prejudicial transactions with interested parties. Among them, Serbia amended its law on companies to require the external review of significant related-party transactions and detailed disclosure within 3 days of approving the transaction. These economies—Armenia, Azerbaijan, the Bahamas, China, Greece, Kenya, Kosovo, Myanmar, Philippines, Saudi Arabia, Serbia, Ukraine, United Arab Emirates and Zambia—improved on the extent of approval, extent of director liability and ease of shareholder suits indexes.

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Reforms implemented in 2018/19 are available here.