Form and Function in Doing Business Rankings: is Investor Protection in Italy Still so Bad?

• Autore: Luca Enriques - Matteo Gargantini
• Carica: Allen & Overy Professor of Corporate Law, in association with Jesus College - Senior Research Fellow, Max Planck Institute for International, European and Regulatory Procedural Law
• Pagine: 1-33

ARTICLES & ESSAYS

DOI 10.6092/issn.2561-6133/5583

UNIVERSITY OF BOLOGNA LAW REVIEW

ISSN 2531-6133

[VOL.1:1 2016]

This article is released under the terms of Creative Commons Attribution 4.0 International License

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Form and Function in Doing Business Rankings: is Investor Protection

in Italy Still so Bad?

LUCA ENRIQUES & MATTEO GARGANTINI†

TABLE OF CONTENTS: 1. Introduction; 2. The Doing Business Report and the Measurement

of Investor Protection; 3. The DBR: Impact on National Reform Agendas and

Criticisms; 4. The Italian Framework on Related Party Transactions; 5. Measuring

Investor Protection in Italy After the Regulation on Related Party Transactions; 6. The

DBR Evaluation. Methodological Issues; 7. The Impact of Miscoding; 8. Conclusions:

Functional Approach and Transparent Assessment.

ABSTRACTqveqeaq heqWoldq BankqDoingq BineqReoq DBRqankqnmeoq

jurisdictions across the globe according to their ability to facilitate business activities.

Among the indexes which contribute to the definition of the global competitiveness of

legilaionq heq “oecingq ineoq indeq “IIq meaeq heq oecionq ofq

minoiq haeholdeq inq liedq comanieq Inq hiq aeq eq analeq heq DBRq

assessment of the Italian regulatory framework on investor protection. We find that

the PII fails to properly evaluate the applicable rules. First, it underrates Italy because

the DBR evaluation misinterprets the role performed by independent directors under

Italian rules on related party transactions. In particular, the DBR fails to properly

account for the powers of independent directors to veto unfair transactions before

they are submitted to the board. This measure ensures that minority investors are

assured a level of protection which is at least equivalent to the mandatory abstention

by conflicting directors. Second, as past DBR overrated the PII subsequent reforms

which have substantially improved investor protection have not been accounted for by

more recent assessments, which give the misleading impression that no relevant

changes have occurred. Far from representing one of the multiple coding errors

reported in the literature, these flaws aptly show that the DBR methodology, while

correctly attempting to preserve consistency in the evaluation of different

jurisdictions, adopts an excessively formalistic approach and disregards the function

of the rules it scrutinizes. In light of the influence that the DBR exerts on national

policymakers, this approach is detrimental because it might induce window-dressing

reforms. Moreover, it may rule out experimentation, which is a key element in

ensuring that the applicable rules keep pace with the variety of techniques which are

adopted to expropriate minority shareholders.

KEYWORDS: Doing Business Rep ort; Investor Protection; Related Party Transactions; Law and

Finance; Comparative Corporate Governance.

This paper is due to appear in the Studies in Honour of Diego Corapi. The authors were, respectively, a

Consob C ommissioner and his aide between 2007 and 2012. They also took part to a Bank of Italy

seminar in which the issues discussed in this paper were addressed with the DBR team. Although the

essay is the result of a joint effort, parts 1, 2, 3, 5, 6, and 7 are to be attributed to Matteo Gargantin

University of Bologna Law Review

[Vol.1:1 2016]

DOI 10.6092/issn.2561-6133/5583

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1. INTRODUCTION

The Doing Business Report [hereinafter DBR] is an assessment exercise

prepared by the World Bank with the aim of comparing the efficiency of

nearly two hundred jurisdictions. On a yearly basis, the DBR assesses

national regulatory frameworks against benchmarks covering various fields

of business law; the results of the evaluation are reported in a ranking of all

concerned jurisdictions. The DBR exerts significant influence on the assessed

nations. If the rankings display unsatisfying results, political pressure in the

concerned countries often induces governments to put the inefficiencies

highlighted by the exercise high on the reform agenda.

OneqofqheqaeaqheqDBRqcoeqiqineoqoecionqheq“oecingq

ineoqindeq hereinafter PII] aggregates scores calculated for a number

of variables, which code the presence (or absence) of rules increasing

shareholder protection according to the DBR methodology. More precisely,

the PII measures how jurisdictions protect minority shareholders in listed

companies with regard to a hypothetical transaction between a listed

company and its controlling shareholder.

The DBR methodology on investor protection has triggered a lively

academic debate on both theoretical and practical aspects. On the one hand,

the adequacy of criteria and even the possibility to measure the efficiency of

legislations have been called into question. On the other hand, coding

mistakes have been reported for various jurisdictions. We do not enter here

the discussion on the merits of benchmarking economic legislation across

jurisdictions which belong to different legal traditions,1 nor we scrutinize the

appropriateness of the variables the PII relies upon. Rather we purport to

criticize the DBR assessment of investor protection in Italy as the outcome of

exceedingly formalistic evaluations. We also show that previous

misunderstandings of the relevant laws have led to underestimate more

† Luca Enriques is the Allen & Overy Professor of Corporate Law, in association with Jesus

College. Matteo Gargantini is Senior Research Fellow, Max Planck Institute for International,

European and Regulatory Procedural Law.

1 Similar benchmarking exercises are performed in the European Union, especially in the field of

labour and social law, under the so-calledqOenq Mehodq ofq Coodinaionq see, e.g., Sabrina

Regent, The Open Method of Coordination: A New Supranational Form of Governance?, 9 EUR. L. J. 190

(2003).

University of Bologna Law Review

[Vol.1:1 2016]

DOI 10.6092/issn.2561-6133/5583

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recent progresses of the Italian legislation, so that the historical

performances reported in the DBR with a view to showing the evolution of

the legal framework give the false impression that no advancement was

made over the last years.

Although we concentrate on coding mistakes, our analysis has broader

implications. Our key argument is that in both the design and the

measurement of the variables composing the evaluation grid a functional

approach should be preferred over a formalistic analysis.2 When the relevant

legal regime ensures the same result the DBR envisages, although via a

different legal device, then the assigned score should reflect the equivalent

level of investor protection. This may require greater flexibility in the

definition of variables. Further, we stress that, when assessing the rules

which apply to investor protection in a given jurisdiction, attention should be

paid to the broader national legal framework. Effective investor protection

may, indeed, be better ensured by rules that, despite not matching the

relevant criterion at first sight, could lead to a different assessment if

considered as part of a broader legal context rather than in isolation.3

After describing the DBR methodology (part 2), the paper summarizes

the ongoing academic debate on the positive and negative aspects of the DBR

assessments (part 3). The main provisions of the Italian framework on

related party transactions [hereinafter RPTs] are then illustrated (part 4). It

is then shown how the DBR evaluation fails to consider that this framework

ensures results equivalent to those provided for by the DBR criteria by

utilising different regulatory tools (part 5). We then analyse more in depth

2 See John Armour et al, How Do Legal Rules Evolve? Evidence from a Cross-Country Comparison of

Shareholder, Creditor, and Worker Protection, 57 AM. J. COMP. L. 586, 600 (2009) ( claiming that

variables should be selected according their functional impact on corporate practices and

proposing a set of criteria aimed to match functional variables with formal rules). See also

Mathias Siems & Simon Deakin, Comparative Law and Finance: Past, Present and Future Research,

166 JITE 124 (2010) (comparative law is functionalist, while comparative law and finance typically

just verifies if one specific legal rule does or does not exist in different countries); Mathias

Siems, Numerical Comparative Law: Do We Need Statistical Evidence in Law in Order to Reduce

Complexity?, 13 CARDOZO J. INT'L & COMP. L. 531, 540 (2005) (while statistical evaluations typically

confine themselves to verifying whether a legal provision exists in a jurisdiction, indices should

include measures that contain functional equivalents in order to avoid distorted outcomes).

3 See generally Benito Arruñada, How Doing Business Jeopardises Institutional Reform, 10 EUR. BUS.

ORG. L. REV. 571 (2009) noingqhaq meaingq iniionq inqconieq ih different legal

adiionqeieqaeciaingq haqdiffeenq legalqceqiq diffeenqconeq See also

Armour et al., supra note 2, at 596 (a particular institution, even if suboptimal in isolation,

should be retained when its removal would exert adverse effects on other complementary

institutions).