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

AutoreLuca Enriques - Matteo Gargantini
CaricaAllen & Overy Professor of Corporate Law, in association with Jesus College - Senior Research Fellow, Max Planck Institute for International, European and Regulatory Procedural Law
DOI 10.6092/issn.2561-6133/5583
ISSN 2531-6133
[VOL.1:1 2016]
This article is released under the terms of Creative Commons Attribution 4.0 International License
Form and Function in Doing Business Rankings: is Investor Protection
in Italy Still so Bad?
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
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.
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
University of Bologna Law Review
[Vol.1:1 2016]
DOI 10.6092/issn.2561-6133/5583
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

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