Once upon a time, only countries like Britain and the United States had legal provisions in place to protect the rights of minority shareholders against the actions and decisions of large shareholders and management. As a result, money flowed into the stock market, and capitalization grew vigorously, dwarfing all other markets around the world. Beginning in the 1980s, however, countries in Continental Europe and Asia introduced reforms in their corporate legislation, affording minority shareholders a number of legal protections, including boosting the powers of the general shareholders’ meeting, prohibiting multiple voting rights and dual-class shares, mandating the presence of independent directors, and requiring the disclosure of major equity stakes, among others. What has driven these changes? Have they resulted in the growth of the stock market?
A new paper by Mauro F. Guillén of the Wharton School and Laurence Capron of INSEAD sheds light on these important issues.* They have assembled information on legal protections for minority shareholders in as many as 78 countries since 1970. They document that whereas four decades ago the Anglo Saxon countries afforded minority shareholders the greatest degree of protection, after the year 2000 countries in Western Europe, East Asia, and, especially, Eastern Europe and Central Asia had passed new legislation protecting minority shareholders.
The authors show that many countries around the world passed such new rules and regulations in response to a number of factors, including new economic ideas about free markets, imitation of other countries in the same region, emulation of the United States as the global financial leader, and pressures from the International Monetary Fund, which grew eager to induce countries in under financial stress to implement reforms.
By the 2010s, the countries in the world with the greatest degree of protection of minority shareholders were Kazakhstan, Russia, Uzbekistan, South Korea, Mauritius, and Poland. This phenomenon begs the question of whether legal reforms protecting minority shareholders are actually enforced or if they remain largely ceremonial. The research by Guillén and Capron, which carefully takes into account a number of economic and financial variables, conclusively shows that the adoption of legal protections has increased stock market capitalization, trading, and turnover. But they also found that the beneficial effects of such legal provisions are larger when the government has the capacity to enforce them.
Guillén and Capron argue that governments should continue to promote minority shareholder rights as an antidote against the abusive use of private information. Global competition for capital has intensified considerably, and having an appropriate legal framework that protects minority shareholders should be at the top of the policymaking agenda. Their research also has implications for companies and investors. Companies making investments in foreign countries need to carefully consider the extent to which minority shareholder rights are protected whenever they make decisions about floating part of their equity in a foreign subsidiary. Investors seeking global diversification of their portfolios also need to study the international map of shareholder protections before making decisions.
In order to facilitate these decisions, Guillén and Capron have made their data available here
The paper in its entirety can be found here.
*Mauro F. Guillén and Laurence Capron, “State Capacity, Minority Shareholder Protections, and Stock Market Development.” Administrative Science Quarterly 61(1) (2016).