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Doing Business 2016
Legal research findings on
business regulation and the law
ow laws and regulations affect The review reveals four thematic axes The legal research findings relevant
the life of a local company is a (table 12.1). First, a number of articles to the Doing Business indicators cover
Hcomplex question. The Doing study the impact of court efficiency and four main areas: court efficiency
Business report has endeavored to pro- the role of alternative dispute resolution and alternative dispute resolution;
vide a cross-country comparison of the (ADR) in countries’ development by ana- corporate governance; creditors’ rights
regulatory environment for local small lyzing the symbiotic relationship between and collateral laws; and insolvency
and medium-size businesses since its the two.3 Second, many articles examine rules and reorganization procedures.
inception 13 years ago. Its analysis has the rights and obligations of different Alternative dispute resolution
traditionally focused on two aspects of types of shareholders in a company and mechanisms tend to have a symbiotic
the regulatory environment as it applies the rules of corporate governance that relationship with court efficiency.
to the topics covered: the efficiency with can help ensure good corporate manage- Where available, these mechanisms
which a regulatory goal is achieved and ment. Third, researchers have looked tend to be linked with faster dispute
the quality of the rule itself. The data at how creditors’ rights affect access to resolution in courts.
collected for the Doing Business indicators finance, often focusing on the importance The corporate governance literature
over the years have served as a source of of a modern secured transactions system. highlights the need for a clear set of
information for articles published in peer- Finally, studies have debated the impor- rules on who makes key decisions,
reviewed academic journals and for work- tance of reorganization procedures in an who needs to be informed about those
ing papers. In reviewing this research, insolvency framework, particularly in the decisions and how abuse from different
past editions of the Doing Business report light of the U.S. reorganization model. stakeholders can be prevented.
presented the economic perspective on The creditors’ rights literature focuses
the findings.1 But the indicators are also on analyzing whether the legal
part of a broader discussion on what con- COURT EFFICIENCY AND framework can help maximize the
stitutes “business friendly” rule of law. ALTERNATIVE DISPUTE value of collateral held by small and
RESOLUTION medium-size companies while giving
This chapter reviews articles that were secured creditors the assurance that
published in legal journals ranked among The Doing Business indicators on enforc- their rights will be protected.
the top 70 and that focus on areas ing contracts have historically touched The main objective of insolvency
covered by four sets of Doing Business on some of the issues of judicial efficien- legislation is to ensure the survival of
indicators—including articles whose cy explored by legal research in recent viable businesses, on the one hand,
core analysis centers either on the years, and a new indicator introduced and the most equitable return for
adequacy of legislation as compared with this year—the quality of judicial pro- stakeholders in businesses that should
internationally accepted standards or cesses index—broadens their coverage ultimately be liquidated, on the other.
2
on the application of the law. The four to include several additional aspects.
sets of indicators are those on enforcing One of these is the availability of arbitra-
contracts, getting credit (legal rights), tion and voluntary mediation as ADR
protecting minority investors and resolv- mechanisms. Several studies discuss
ing insolvency. While most of these indi- aspects of ADR and its relationship
cators are based primarily on a study of with court efficiency, including Dakolias
substantive law, some also examine the (1999), Ryan (2000) and Drahozal and
efficiency of the judiciary in dealing with O’Connor (2014).
commercial disputes and insolvencies.
106 doing Business 2016
TABLE 12.1 Four thematic axes in the literature
Court efficiency Creditors’ rights and collateral Insolvency rules and
and ADR Corporate governance laws reorganization procedures
Performance of judicial Regulatory convergence in Importance of secured Good insolvency practices
administration shareholder protection and transactions regimes Azar (2008)
Dakolias (1999) corporate governance Kozolchyk and Furnish (2006)
Katelouzou and Siems (2015) Deciding between liquidation and
ADR mechanisms and procedural Aytekin, Miles and Esen (2013) Legal and collateral registry reorganization proceedings
safeguards reform in Malawi Adams (1993)
Ryan (2000) Director versus shareholder Dubovec and Kambili (2013)
primacy Relationship between
Scope of arbitration clauses Bainbridge (2014) Secured transactions reform in reorganization law and the
Drahozal and O’Connor (2014) Ghana performance of reorganization
Agency cost in principal-agent Dubovec and Osei-Tutu (2013) systems
Technology and access to justice relationship Eisenberg and Sundgren (1997)
Cabral and others (2012) Hill and McDonnell (2015) Statutory erosion of creditors’ LoPucki and Triantis (1994)
Gilson and Gordon (2013) rights and the U.K. example
Walters (2014) Secured creditors’ rights in
Company form and rights of reorganization proceedings
shareholders Segal (2007)
De Jong (forthcoming)
Voting on reorganization plans
Relationship between shareholder Kordana and Posner (1999)
and worker protection
Gahan, Ramsay and Welsh
(2014)
Another aspect measured by the new makers, as cross-country data on court on data provided by public sources on
index is the use of technology in ways that efficiency are scarce and no other data the following metrics: number of cases
can increase court efficiency and reduce set compares judicial efficiency in as filed per year, number of cases disposed
corruption—such as electronic filing, elec- many as 189 economies. per year, number of cases pending at
tronic delivery of legal documents to the year-end, clearance rate (ratio of cases
parties to a case, electronic payment of Until recently there was also little quan- disposed to cases filed), congestion rate
court fees, random assignment of cases to titative research on judicial efficiency. (pending and filed cases over resolved
the judges, publication of judgments and Researchers preferred to focus instead cases), average duration of each case and
electronic case management systems. on the qualitative aspect of comparative number of judges per 100,000 inhabit-
As Cabral and others (2012) suggest, law. Dakolias (1999) was among the first ants (figure 12.1).
technology can also improve access to to carry out a comparative analysis of the
justice. Beyond these aspects, the index performance of judicial administration. The results show that in many of these
also measures elements of the court Focusing on 11 economies in different economies the judiciary was able to meet
structure (such as the availability of a regions, the author’s analysis was based demand at a specific point in time; as time
specialized commercial court and a court
or simplified procedure for small claims) FIGURE 12.1 The number of judges relative to the population varies widely across
as well as the case management system economies
(such as the existence of specific rules on
adjournments or time limits for key court France
events like delivery of the final judgment).4 Germany
Brasília
Panama
Added to the traditional indicators on Hungary
the time and cost to enforce a contract, São Paulo
the new index provides broader insights Peru
Ecuador
into judicial efficiency and the quality of Chile
judicial processes and can help policy Singapore
makers around the world make more Colombia
Ukraine
informed decisions when undertaking 0 1 2 3 4 5 6 7 8 9
judicial reform. A review of the literature Number of judges per 100,000 inhabitants
suggests that the enforcing contracts
indicators are a unique tool for policy Source: Adapted from Dakolias (1999).
legAl reseArch Findings on Business regulATion And The lAw 107
passed, however, difficulties arose and (such as the adoption of standardized joint venture agreements) and find,
reforms were needed to address deficien- forms or the use of incentives like grants) among other things, that almost all
cies. Some of the solutions proposed to foster technology. franchise contracts include “carve-outs”
by Dakolias involve introducing ADR in their arbitration clauses. In addition,
mechanisms to address backlogs, increas- ADR mechanisms have long been recog- the authors argue that where there is
ing the number of judges by establishing nized as an important tool for enhancing mistrust in the courts, parties will rely on
temporary courts and using information court efficiency, either by helping to arbitration procedures. And they show
technology to improve productivity—all alleviate court congestion or by provid- that contractual value is lost if parties
areas addressed by Doing Business. ing a faster, less costly and more flexible cannot rely on courts to protect the value
solution for litigants. Today ADR mecha- of their information and innovation.
Researchers have studied some of these nisms are commonly incorporated into
solutions more broadly. For example, the litigation process (such as through
5
Cabral and others (2012) analyze how court-annexed arbitration), and even if CORPORATE GOVERNANCE—
the use of technology by courts and there is criticism of these mechanisms, WHO SHOULD HAVE
legal aid organizations can help improve models such as contractual arbitration CONTROL?
access to justice for low-income litigants and mediation are undeniably popular in
in the United States. While great strides the business community. Ryan (2000) The Doing Business indicators on protecting
have been made through the use of argues that the widespread use of ADR minority investors measure the protection
web-based delivery models (such as needs to be accompanied by procedural of minority shareholders from conflicts
electronic filing and document assem- safeguards so as to ensure the rights of of interest as well as shareholders’ rights
bly), accessibility and usability are still far the parties involved. The author suggests in corporate governance. To construct
from ideal. Indeed, the authors argue that that among the most important develop- these indicators, Doing Business applies a
to avoid penalizing the parties to a case, ments in judicial ADR has been the desig- consistent methodology and case study
courts implementing new technologies nation of uniform standards of ethics and to assess whether each economy has
should consider the barriers that some procedure. The author provides further implemented a set of good practices in
litigants might face in accessing the recommendations in areas relating to litigation and corporate governance that
technologies—such as self-represented confidentiality, evidence, public account- protect minority shareholders. As Aytekin,
litigants, litigants located in rural areas ability, ethical issues and quality control. Miles and Esen (2013) illustrate, econo-
and persons with disabilities or with mies can benefit from the lessons drawn
limited English proficiency. The relationship between courts and ADR from comparisons with good practices
mechanisms can be particularly complex worldwide. And the authors confirm ear-
In addition, Cabral and his coauthors when a contractual relationship is agreed lier Doing Business findings that developing
argue that mobile devices, for example, between sophisticated parties. Drahozal economies are closing the gap in regula-
will become one of the primary means of and O’Connor (2014) argue that when tory frameworks. Indeed, Katelouzou
accessing information and that the legal the parties to a contract choose between and Siems (2015) suggest that there is
community needs to adapt accordingly. courts and arbitration, an ex ante proce- a pattern of global convergence toward
And they emphasize the need to improve dural unbundling occurs when they select regulatory good practices as measured by
well-accepted technological enhance- specific claims and remedies rather than Doing Business, regardless of legal origin or
ments such as electronic filing systems. an “a la carte” choice of individual proce- tradition.
The adoption of open technical standards dures. For example, it is common practice
for electronic filing, the authors contend, for arbitration clauses to exclude certain Hill and McDonnell (2015) concur on
could ensure universal access for liti- claims and remedies or for parties to agree the importance of measurements and
gants. They also propose a triage system that even when going to court they will benchmarks, suggesting that they have
that would recommend cost-efficient still rely on arbitration to resolve particular contributed to reducing the agency prob-
choices for litigants. Finally, the authors 6
matters. These practices, referred to as lem in modern company law in the past
analyze different barriers to the adoption “carve-ins” and “carve-outs,” are used to decade. Gilson and Gordon (2013) also
of effective technology strategies that ensure greater performance incentives reflect on the agency issue. Nevertheless,
could improve access to justice. They and lower dispute resolution costs. as Bainbridge (2014) shows, whether
identify eight sometimes overlapping shareholder-centric or board-centric
barriers (for example, lack of funding, a The authors gather empirical data on company law is more beneficial depends
lack of uniformity or standardization and procedural unbundling for different on myriad characteristics specific to
a perception that using technology is not types of contracts (such as franchise each economy. In line with the updated
full justice) as well as potential solutions agreements, technology contracts and methodology for the protecting minority
108 doing Business 2016
investors indicators, De Jong (forthcom- faster progress in corporate governance prevented. Bainbridge (2014) discusses
ing) attempts to shed further light on practices than Canada is. The authors whether shareholders or management
differences between regulatory frame- find that Turkey has improved in many should ultimately have control in corpo-
works applicable to listed and nonlisted aspects of modern corporate governance, rate decisions and whose interests should
companies and on the consequences for though the development of effective and ultimately prevail. The author examines
the rights of investors. efficient boards remains an area of slower the general assumption that shareholder
progress. And they provide support for primacy is a defining characteristic of New
Research on company law and corporate the claim that developing countries are Zealand company law and compares the
governance models has generated three closing the corporate governance gap means and ends of corporate governance
commonly accepted paradigms: First, with high-income countries. in that body of law with those in the
this area of law may be path-dependent considerably more board-centric regime
and thus not subject to many significant In another important finding, Aytekin, of the United States. He finds that New
changes in a given jurisdiction. Second, Miles and Esen show that while there Zealand company law both establishes
the influence of the U.S. corporate gov- was no change in Turkey’s positive trend shareholder wealth maximization as the
ernance model has led to the dominance of corporate governance development objective of corporate governance and,
of market-oriented company law. And during the 2008–09 financial crisis, despite assigning managerial authority to
third, an economy’s legal origin and stage Canada’s corporate governance practices the board of directors, gives shareholders
of economic development are important and reputation were adversely affected significant control rights. This contrasts
factors in determining shareholder during this period. The authors conclude with the separation of ownership and con-
protection. Yet Katelouzou and Siems that researchers and practitioners need trol mandated by the U.S. system. Arguing
(2015), using leximetric data measuring to give special attention to the develop- that this separation of ownership and con-
the strength of formal legal protections ment and functioning of company boards trol has significant efficiency advantages,
in 30 countries over a 24-year period, in Canada as well as Turkey, because the author suggests that New Zealand
demonstrate the weakening of these they find that this element of corporate has opted for a more shareholder-centric
paradigms. To do so, they construct a governance is weaker than others in both model because there are only a small
shareholder protection index by measur- these countries. number of New Zealand firms for which
ing 10 aspects of shareholder protection, director primacy would be optimal.
some of which are also covered by the For a corporation to flourish, a clear set of
protecting minority investors indicators. rules is needed on who makes key deci- Transparency in the decision-making
According to the authors’ findings, the sions, who needs to be informed about structure is also imperative to ensure the
U.S. model of company law is not the those decisions and how abuse from performance of corporations—especially
norm. In addition, since the financial cri- different company stakeholders can be since performance can be understood in
sis, interest in reform has shifted to other
areas of law. And countries with similar FIGURE 12.2 Shareholder protection increased between 1990 and 2013 in all 30
levels of shareholder protection do not countries in a study
necessarily have the same legal origin 2013
or stage of economic development. The Shareholder protection index (0–10)
10 1990
authors also suggest that all 30 countries 9
in their study increased shareholder pro- 8
tection over the period covered (figure 7
12.2). 6
5
Comparisons of countries with different 4
legal traditions and levels of develop- 3
ment can help identify good practices 2
as well as weaknesses in law. Aytekin, 1
0
Miles and Esen (2013) use a comparative Italy ey
rance apan India Brazil Spain urk oland Chile China
F J Africa T Latvia
approach to analyze the development of Canada Sweden Belgium P akistan Mexico Cyprus Estonia
Malaysia Germany P Slovenia
Lithuania Argentina ederation
corporate governance in Turkey, particu- United States South Switzerland Netherlands
larly after 2006. They use a comparison United Kingdom Czech Republic
Russian F
with Canada to identify strengths and
weaknesses in the Turkish system and Source: Adapted from Katelouzou and Siems (2015, figure 1).
to determine whether Turkey is making Note: Higher scores on the shareholder protection index (as defined in Katelouzou and Siems 2015) indicate stronger
protection of shareholders in the law.
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