Minority shareholders are important. Just ask the World Bank.
Every year, the World Bank publishes an “Ease of Doing Business Index” for countries and economies across the world. The index looks at a variety of factors, and one of the most important is each country’s legal framework for protecting minority shareholders. The World Bank considers these protections extremely important for evaluating whether a jurisdiction is a good place to do business.
WHY DO MINORITY INVESTOR PROTECTIONS MATTER?
One of the most important issues in corporate governance is self-dealing—the use of corporate assets by company insiders for personal gain. Related-party transactions are the most common example. High ownership concentration and informal business relations can create the perfect environment for such transactions, which allow controlling shareholders to profit at the expense of the company’s financial health—whether because company assets are sold at an excessively low price, assets are purchased at an inflated price or loans are given by the company to controlling shareholders on terms far better than the market offers.
Empirical research shows that stricter regulation of self-dealing is associated with greater equity investment and lower concentration of ownership. This conclusion is in line with the view that stronger legal protections make minority investors more confident about their investments, reducing the need for concentrated ownership to mitigate weaknesses in corporate governance.
