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

Every year the World Bank's Doing Business Report (DBR) ranks numerous 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 legislations, the “Protecting investors index” (PII) measures the protection of minority shareholders in listed companies. In this paper, we analyse the DBR's 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.