The success of a private sector-led economy in attaining and maintaining a high standard of living for its citizens and residents is highly dependent on the private sector having adequate access to capital. Capital is provided by investors, and therefore adequate access to capital is influenced by the willingness and ability of investors to provide the required levels of capital at acceptable terms.
The willingness of investors to provide capital is influenced by many factors, but one factor that has emerged as being important in recent years is the amount of protection provided to minority shareholders.
Investors may be fearful of providing capital, or only do so under very onerous terms and conditions, if the legal and regulatory environment fails to provide adequate mechanisms for the monitoring of corporate insiders and company directors, as well as provide cheap and accessible mechanisms for holding corporate insiders and directors to account.
In the absence of such protections, minority investors in particular, may withdraw from the provision of capital for productive purposes, or only do so in a context where they are controlling shareholders, which may retard economic growth and development.
The World Bank’s annual publication Doing Business is probably the most credible and widely used source of information on the relative levels of protection afforded to minority investors across economies.
In the 2014 report, in terms of the ease of doing business, Barbados was ranked 91st out of 189 economies surveyed. Interestingly, the weakest area for Barbados in the calculation of that overall ranking was the level of investor protection, where Barbados was ranked 170th. As part of the survey, investor protection is assessed along three dimensions.
On the overall Strength of Investor Protection Index Barbados attained a score of three out of a possible maximum score of ten which was below the average score of 5.1 across the countries surveyed.
In terms of the components of the Strength of Investor Protection Index, on the Extent of Disclosure Index, Barbados score of two out of a possible maximum score of ten , which was significantly below the average country score of 5.3, on the Extent of Director Liability Index Barbados scored one out of a possible maximum score of ten, which was again well below the average country score of 4.5, while in terms of the Ease of Shareholder Suits Index, Barbados attained a score of six out of a possible ten points, slightly above the average country score of 5.6. The implication is that if Barbados wants to move up the rankings in this important and influential global benchmarking exercise, policymakers should focus on improving the protections afforded to minority shareholders.
The survey informs us that over the last five years countries in Europe and Central Asia have been the most active in strengthening minority shareholder protections against self-dealing among dominant shareholders.
Over that period the most common change has been increasing disclosure requirements and amending the approval process for related party transactions.
Specific measures include increased scrutiny by regulators, shareholder approvals for related party transactions, prior external review of related party transactions, explicit penalties for company executives found liable in cases of losses, offsets for legal fees incurred in bringing shareholder suits and the establishment of specialised courts.
Barbados needs to develop regulations that recognise the unique aspects of our socio-political context, but we do not need to reinvent the wheel as there are clear examples to form a basis for policy actions.
Dr Justin Robinson is Dean of the Faculty of Social Sciences at UWI’s Cave Hill Campus
