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Matteo Gargantini
University of Bologna Law Review
comparative corporate governance
Form and Function in Doing Business Rankings: is Investor Protection in Italy Still so Bad?
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Articles & Essays
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Matteo Gargantini
2016/07/19
10.6092/issn.2531-6133/5583
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Max Planck Institute
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comparative corporate governance
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Form and Function in Doing Business Rankings: is Investor Protection in Italy Still so Bad?
https://bolognalawreview.unibo.it/article/download/5583/6015
1
ARTICLES & ESSAYS                                                                   DOI 10.6092/issn.2561-6133/5583




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

                           LUCA ENRIQUES & MATTEO GARGANTINI†

TABLE OF CONTENTS: 1. Introduction; 2. The Doing Business Report and the Measurement
of Investor Protection; 3. The DBR: Impact on National Reform Agendas and
Criticisms; 4. The Italian Framework on Related Party Transactions; 5. Measuring
Investor Protection in Italy After the Regulation on Related Party Transactions; 6. The
DBR Evaluation. Methodological Issues; 7. The Impact of Miscoding; 8. Conclusions:
Functional Approach and Transparent Assessment.



ABSTRACT: 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.

KEYWORDS: Doing Business Report; Investor Protection; Related Party Transactions; Law and
Finance; Comparative Corporate Governance.



This paper is due to appear in the Studies in Honour of Diego Corapi. The authors were, respectively, a
Consob Commissioner and his aide between 2007 and 2012. They also took part to a Bank of Italy
seminar in which the issues discussed in this paper were addressed with the DBR team. Although the
essay is the result of a joint effort, parts 1, 2, 3, 5, 6, and 7 are to be attributed to Matteo Gargantin




                                           UNIVERSITY OF BOLOGNA LAW REVIEW

                                                   ISSN 2531-6133

                                                    [VOL.1:1 2016]

          This article is released under the terms of Creative Commons Attribution 4.0 International License


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    1.   INTRODUCTION

The Doing Business Report [hereinafter DBR] is an assessment exercise
prepared by the World Bank with the aim of comparing the efficiency of
nearly two hundred jurisdictions. On a yearly basis, the DBR assesses
national regulatory frameworks against benchmarks covering various fields
of business law; the results of the evaluation are reported in a ranking of all
concerned jurisdictions. The DBR exerts significant influence on the assessed
nations. If the rankings display unsatisfying results, political pressure in the
concerned countries often induces governments to put the inefficiencies
highlighted by the exercise high on the reform agenda.

         One of the areas the DBR covers is investor protection: the “Protecting
investors index” [hereinafter PII] aggregates scores calculated for a number
of variables, which code the presence (or absence) of rules increasing
shareholder protection according to the DBR methodology. More precisely,
the PII measures how jurisdictions protect minority shareholders in listed
companies with regard to a hypothetical transaction between a listed
company and its controlling shareholder.

         The DBR methodology on investor protection has triggered a lively
academic debate on both theoretical and practical aspects. On the one hand,
the adequacy of criteria and even the possibility to measure the efficiency of
legislations have been called into question. On the other hand, coding
mistakes have been reported for various jurisdictions. We do not enter here
the discussion on the merits of benchmarking economic legislation across
jurisdictions which belong to different legal traditions,1 nor we scrutinize the
appropriateness of the variables the PII relies upon. Rather we purport to
criticize the DBR assessment of investor protection in Italy as the outcome of
exceedingly       formalistic      evaluations.      We     also    show       that       previous
misunderstandings of the relevant laws have led to underestimate more

†
 Luca Enriques is the Allen & Overy Professor of Corporate Law, in association with Jesus
College. Matteo Gargantini is Senior Research Fellow, Max Planck Institute for International,
European and Regulatory Procedural Law.

1
  Similar benchmarking exercises are performed in the European Union, especially in the field of
labour and social law, under the so-called “Open Method of Coordination”: see, e.g., Sabrina
Regent, The Open Method of Coordination: A New Supranational Form of Governance?, 9 EUR. L. J. 190
(2003).



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recent    progresses       of   the    Italian    legislation,     so   that      the     historical
performances reported in the DBR with a view to showing the evolution of
the legal framework give the false impression that no advancement was
made over the last years.

         Although we concentrate on coding mistakes, our analysis has broader
implications. Our key argument is that in both the design and the
measurement of the variables composing the evaluation grid a functional
approach should be preferred over a formalistic analysis.2 When the relevant
legal regime ensures the same result the DBR envisages, although via a
different legal device, then the assigned score should reflect the equivalent
level of investor protection. This may require greater flexibility in the
definition of variables. Further, we stress that, when assessing the rules
which apply to investor protection in a given jurisdiction, attention should be
paid to the broader national legal framework. Effective investor protection
may, indeed, be better ensured by rules that, despite not matching the
relevant criterion at first sight, could lead to a different assessment if
considered as part of a broader legal context rather than in isolation. 3

         After describing the DBR methodology (part 2), the paper summarizes
the ongoing academic debate on the positive and negative aspects of the DBR
assessments (part 3). The main provisions of the Italian framework on
related party transactions [hereinafter RPTs] are then illustrated (part 4). It
is then shown how the DBR evaluation fails to consider that this framework
ensures results equivalent to those provided for by the DBR criteria by
utilising different regulatory tools (part 5). We then analyse more in depth

2
  See John Armour et al, How Do Legal Rules Evolve? Evidence from a Cross-Country Comparison of
Shareholder, Creditor, and Worker Protection, 57 AM. J. COMP. L. 586, 600 (2009) (claiming that
variables should be selected according their functional impact on corporate practices and
proposing a set of criteria aimed to match functional variables with formal rules). See also
Mathias Siems & Simon Deakin, Comparative Law and Finance: Past, Present and Future Research,
166 JITE 124 (2010) (comparative law is functionalist, while comparative law and finance typically
just verifies if one specific legal rule does or does not exist in different countries); Mathias
Siems, Numerical Comparative Law: Do We Need Statistical Evidence in Law in Order to Reduce
Complexity?, 13 CARDOZO J. INT'L & COMP. L. 531, 540 (2005) (while statistical evaluations typically
confine themselves to verifying whether a legal provision exists in a jurisdiction, indices should
include measures that contain functional equivalents in order to avoid distorted outcomes).
3
  See generally Benito Arruñada, How Doing Business Jeopardises Institutional Reform, 10 EUR. BUS.
ORG. L. REV. 571 (2009) (noting that “measuring institutions in countries with different legal
traditions requires appreciating that different legal structures suit different contexts”). See also
Armour et al., supra note 2, at 596 (a particular institution, even if suboptimal in isolation,
should be retained when its removal would exert adverse effects on other complementary
institutions).




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the methodological flaws underlying this miscoding so as to demonstrate
how a functional approach would help obtain a more accurate assessment
(part 6). The impact of the miscoding is then quantified in order to show how
the DBR’s inaccuracies may create perverse incentives by reducing countries’
willingness to enact effective legislation whilst inducing window-dressing
reforms (part 7). Part 8 concludes.




    2.   THE DOING BUSINESS REPORT AND THE MEASUREMENT OF INVESTOR PROTECTION

Since 2004, the International Finance Corporation – a member of the World
Bank Group – has been assessing the quality of economic legislations across
the globe. The study compares the relative ease of running a business activity
in each jurisdiction. Its results are published on a yearly basis in the DBR,
which shows how assessed countries are performing under the common
criteria so as to highlight improvements in their respective regulatory
frameworks.

         The DBR results are reported in a single global index (“Ease of doing
business”) and in sectorial rankings which address specific aspects of
business activities. Among these partial rankings, the “Protecting investors
index” (PII) was first introduced in 2005 in order to assess how effectively
minority shareholders’ interests are protected against expropriation via
conflict-of-interest transactions. The underlying rationale is that economic
development prospers where property rights (in this case, investors’
entitlements) are clearly defined ex ante and effectively enforced ex post. 4




4
  See Claude Ménard & Bertrand Du Marais, Can We Rank Legal Systems According to Their Economic
Efficiency?, 26 J.L & POL'Y 61 (2008) (recalling Hernando de Soto’s theory on reduction of
informality – and consequently of transaction costs – through definition and implementation of
property rights). On the theoretical framework underlying the DBR see Beth Ahlering & Simon
Deakin, Labor Regulation, Corporate Governance, and Legal Origin: A Case of Institutional
Complementarity?, 41 LAW & SOC'Y REV. 865, 869-872 (2007); BERTRAND DU MARAIS, DES INDICATEURS
POUR MESURER LE DROIT?: LES LIMITES MÉTHODOLOGIQUES DES RAPPORTS DOING BUSINESS 21-23 (Bertrand
Du Marais ed., 2006); Alessio M. Pacces, How does Corporate Law Matter? ‘Law and Finance’ and
Beyond, in MICHAEL FAURE & SMITS, DOES LAW MATTER? ON LAW AND ECONOMIC GROWTH 297, 299-
300 (Michael Faure & Jan Smits eds., 2011).



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The assumption is hardly questionable, 5 although causation6 (and even
correlation7) between the quality of legislation in force and the development
of financial markets is still an open issue.

         In order to assess the protection against directors’ misuse of
corporate assets, the PII aggregates data on the relevant legislation according
to a standardised set of criteria. 8 Relevant provisions in every jurisdiction are
evaluated and scored according to three sub-indexes which respectively
measure disclosure required for RPTs (“Extent of disclosure” index),
directors’ liability (“Extent of director liability” index), as well as the
availability of legal remedies to shareholders (“Ease of shareholder suit”
index). The PII is the average of the three sub-indexes.

         Variables register, inter alia, what corporate body is entitled to
approve the transaction, how detailed and extensive is the information
available to such body before it decides and subsequently provided to the
public at large. Enforcement-related features are also taken into account (e.g.
the possibility for shareholders which represent less than 10% of the


5
  See INDEP. EVALUATION GRP., An Independent Evaluation Taking the Measure of the World Bank-IFC
Doing Business Indicators, 3 (Oct., 2008).
6
  John Coffee, The Rise of Dispersed Ownership: The Role of Law in the Separation of Ownership and
Control, 111 YALE L. J. 1, at 59-66 (2011) (in many instances, stock market developed before
legislation aimed at protecting minority shareholders was introduced); BRIAN R. CHEFFINS,
CORPORATE OWNERSHIP AND CONTROL: BRITISH BUSINESS TRANSFORMED 35-40 (2010) (U.K. law
traditionally offered scant protection to investors, in spite of financial market development).
7
  See also John Armour et al., Shareholder Protection and Stock Market Development: An Empirical Test
of the Legal Origin Hypothesis, 6 J. EMPIRICAL LEGAL STUD. 343 (2009).
8
  Since its first publication in September 2003, the DBR has rested upon methodologies inspired
by the well-known scientific studies by Andrei Shleifer and his co-authors. See initially Int’l Fin.
Corp. [IFC], Doing Business in 2004. Understanding Regulation, DOINGBUSINESS.ORG, 7 (Sep.,
2003),http://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Annual-
Reports/English/DB04-FullReport.pdf. For PII see Int’l Fin. Corp. [IFC], Doing Business in 2005.
Removing       obstacles    to     growth,     DOINGBUSINESS.ORG,     85        (Jan.   1,     2005),
http://www.doingbusiness.org/~/media/FPDKM/Doing%20Business/Documents/Annual-
Reports/English/DB05-FullReport.pdf, referring to Rafael La Porta et al., Law and Finance, 106 J.
POL. ECON. 1113 (1998) where a first set of criteria – “anti-director rights index” – was proposed
with a view to testing possible correlations between the quality of company and securities law,
on the one hand, and ownership concentration in listed companies, on the other hand; id. at
1150. See subsequently Int’l Fin. Corp. [IFC], Doing Business 2010. Reforming through difficult times,
DOINGBUSINESS.ORG,42(Sep.9,2009),http://www.doingbusiness.org/~/media/GIAWB/Doing%20Bu
siness/Documents/Annual-Reports/English/DB10-FullReport.pdf, where reference is made to
Simeon Djankov et al., The law and economics of self-dealing, 88 J. FIN. ECON. 430 (2008) (defining a
new and more detailed grid – “self-dealing index”). For further details on similar studies
underpinning other indices within the DBR see Kevin E. Davis & Michael B. Kruse, Taking the
Measure of Law: The Case of the Doing Business Project, 32 LAW & SOC. INQUIRY 1101 (2007). Reliance
on academics or outsources in the production of indicators is no exception: cf. Kevin E. Davis et
al., Introduction: Global Governance by Indicators in GOVERNANCE BY INDICATORS. GLOBAL POWER
THROUGH QUANTIFICATION AND RANKINGS 3, 13 (Kevin E. Davis et al. eds., 2012).




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outstanding capital to directly or derivatively initiate a claim, as well as
directors’ liability for damages and the availability of disgorgement of
profits). Access to evidence through discovery is also a criterion of
assessment.

         Variables are measured against a hypothetical transaction which is
identical     for all     jurisdictions. The fictional company                     – “Buyer,” a
manufacturing firm listed on the most important stock exchange of the
concerned country – purchases a truck fleet from another company
(“Seller”). Mr James, holding a 60% stake of the outstanding capital, is
Buyer’s controlling shareholder and also a member of the board of directors.
He also owns the 90% of Seller. In the transaction, which falls within the
scope of Buyer’s ordinary course of business, the fleet value equals 10% of
Buyer’s assets and its price is set above the market value. It is also assumed
that all the “required approvals” for the transaction are obtained and that
disclosure is made, so that no fraud has occurred. In this scenario, Buyer
incurs into a loss and its shareholders decide to sue Mr James, along with
those who are involved in the transaction.

         The evaluation team first establishes what rules apply to the relevant
transaction in the various jurisdictions. Depending on the availability of the
legal remedies, scores are then assigned by reflecting the assumption that
the higher the number of regulatory tools for protecting against tunneling,
the stronger the protection for investors.



    3.   THE DBR: IMPACT ON NATIONAL REFORM AGENDAS AND CRITICISM

In line with the declared purpose of stimulating reforms - on the assumption
that an efficient regulatory environment is pivotal in fostering economic
growth – the influence of the DBR on national policy debates is remarkable. 9

9
  See INDEP. EVALUATION GRP., supra note 5, at 44-6 (DBR fosters national debates on legislative
reforms, although its role as a guide for policy priority is weak because it often focuses only on
specialized aspects of larger problems and disregards national contexts). See also INDEP. PANEL,
Review    of     the   Doing     Business    Report,     DBRPANEL.ORG,     19    (Jun.    24,     2013),
http://faculty.washington.edu/hgwolff/Doing%20business%20review%20panel%20report%20w
ith%20signatures%20and%20Bibliography.pdf, many institutions refer to the DBR without
considering its inherent limitations. See also Ralf Michaels, Comparative Law by Numbers? Legal
Origins Thesis, Doing Business Reports, and the Silence of Traditional Comparative Law, 57 AM. J. COMP.
L. 772 (2009) (listing the factors making the DBR appealing and assessing DBR’s impact).



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On the one hand, some countries have passed legal reforms with the explicit
purpose of matching the criteria set by the DBR’s evaluation grid. 10 On the
other hand, academics and politicians from other jurisdictions have harshly
opposed the assessment method and its results. Widespread criticism also
testify to the significance of the DBR.11

         The reasons for such significance are manifold. For developing
countries, the possibility to access the lending programs of the World Bank
may depend on the results of the DBR evaluation, which is regarded as a
proxy     of   the    aided    country’s      willingness       to   improve        its    economic
performance to the advantage of citizens’ living standards. For developed
economies, unsatisfactory rankings exert political pressure on governments.
Their “name and shame” effect is often amplified by the extensive press
coverage on the DBR.12 The DBR, as opposed to other evaluation studies on
national performances,13 displays the results of benchmarking by ranking all
participating jurisdictions on the basis of their performance. This creates a
feeling of competition among jurisdictions.14 These rankings satisfy the need
for easy-to-use information15 because they exert great symbolic power and,
regardless of the technicalities that characterise local legislation, are easy to
understand for the public at large.16


10
   See, e.g., Caralee McLiesh & Pedro Arizti, The Doing Business Project, in OECD, MFDR PRINCIPLES IN
ACTION: SOURCEBOOK ON EMERGING GOOD PRACTICES 110 (2006) (reporting how Jordan, Korea,
Mozambique, Nicaragua, Serbia and Montenegro have used the DBR as a reform driver).
11
   For France see DU MARAIS, supra note 4.
12
    See INDEP. EVALUATION GRP., supra note 5, at 41 (communication strategy is one of the
determinants of DBR’s success but may sometimes mislead users, for example with regard to
assertions of causations when only correlation is demonstrated).
13
    See, e.g., CEPEJ, European Judicial Systems. Efficiency and Quality of Justice, COE.INT (2012),
http://www.coe.int/t/dghl/cooperation/cepej/evaluation/2014/Rapport_2014_en.pdf             (on the
evaluation of domestic judicial systems).
14
   Rankings, as opposed to ratings, may give the impression that no reform is made to the extent
that numerous jurisdictions are improving at the same time, and may hide the degree of
variation between countries (David Irwin, Doing Business: Using Ratings to Drive Reform, 26 J. INT’L.
DEV., 658 (2013) (ebook). See also INDEP. EVALUATION GRP., supra note 5, at xvi (“changes in a
country’s ranking depend importantly on where it sits on the distribution; small changes can
produce large ranking jumps, and vice versa. These factors contribute to anomalies in
rankings”); INDEP. PANEL, supra note 9, at 2, 20-2 (which, while suggesting maintenance of
country rankings, admits that cardinal scores – already provided by the DBR with the “Distance
to Frontier” metrics – are more informative; for subsequent developments see infra note 18 and
text accompanying note 29).
15
   See Siems, supra note 2, at 534 (numerical analysis satisfies the need to reduce complexity in
order to increase the practical role of comparative law).
16
   See Ralf Michaels, The Functionalism of Legal Origins, in DOES LAW MATTER? ON LAW AND ECONOMIC
GROWTH 31 (Michael Faure & Jan Smits eds. 2011) (reductionist quality of rankings is an
advantage for their marketability).




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While DBR’s influence has been significant since its first publication, 17 a
number of legal academics have harshly questioned its methodology and
results. Criticisms have addressed two key aspects of the evaluation process.
The selection of the standards according to which the ease of carrying out an
economic activity should be assessed, along with the process for evaluating
compliance with those standards have both been contested. Remarks
concerning the selection of standards often address the very possibility of
measuring the legislation applicable in different jurisdictions against a single
yardstick, thus avowedly18 following a “one-size-fits-all” approach.19 Critics
argue that the preferable approach varies according to the legal, political, and
social context.20 First, interaction with rules left outside the scope of the
assessment may limit, and perhaps even revert, the positive effects of rules
that the DBR methodology considers in isolation. Second, good law on the
books does not mean good law in action, the latter depending on formal and
informal enforcement mechanisms. However, the DBR notoriously disregards
enforcement practices.21




17
    The Doing Business indicators are frequently mentioned among the most important indexing
exercises: see, e.g., DAVIS et al., supra note 8, at 3.
18
   Int’l Fin. Corp. [IFC], supra note 8, at xvi; INDEP. PANEL, supra note 9, at 23; see also as regards
labour law id. at 3, 28 highlighting a switch towards a more nuanced approach on the
“employing workers” measurement, for which the DBR has recently provided absolute data
instead of rankings. Some amendments to the DBR methodology announced in April 2014 will
change the approach currently followed for the remaining indexes as well. In particular, the DBR
will emphasize variations in the distance between the results achieved by each country, on the
one hand, and the performance of the most efficient jurisdiction, on the other hand. This should
help point out more clearly improvements that, while changing the distance between
competitors, are not sufficient to ensure a better ranking. See Int’l Fin. Corp. [IFC], Forthcoming
changes       to      the     Doing        Business     report,  DOINGBUSINESS.ORG        (Apr.     30,
2014),http://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Methodol
ogy/Survey-Instruments/DB15/Forthcoming-methodology-changes-to-the-Doing-Business-
Report.pdf.
19
   For a review see Pacces, supra note 4, at 303-307.
20
    Davis & Kruse, supra note 8, at 1102-1103. Benito Arruñada, Pitfalls to avoid when measuring
institutions: Is Doing Business damaging business?, 35 J. COMP. ECON. 734 (2007); Ménard & Du
Marais, supra note 4, at 77-80; INDEP. PANEL, supra note 9, at 3.
21
   See INDEP. EVALUATION GRP., supra note 5, at xv-xvi and xxiv (DB indicators primarily measure
laws and regulations as they are written, but the relevance of each indicator depends on actual
implementation of the law, which DB does not aim to measure).



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Further, regardless of how well the variables have been construed, some
degree of subjectivity in weighing the importance of each criterion and,
therefore, in determining the final rankings is unavoidable. 22

          Doubts are also cast on the ability of one or more specific criteria to
properly measure the legal environment where entrepreneurs operate. The
World Bank itself has recognised that the policy implications of its evaluation
might be questionable, and has subsequently amended its methodology. For
instance, the original labour law indicator which measures the ease of hiring
and firing workers has raised widespread concerns. The indicator rested on
the assumption that less regulation, and therefore fewer burdens on
employee dismissal should be regarded as a proxy for higher efficiency.
Critics    stressed     that    deregulation        does not       necessarily        mean        better
regulation.23 They argue that there is no evidence that light-touch labour law
improves economic performance or creates more jobs. 24 Such remarks led to
an amendment of the methodology for labour law, now included in the new
“employing workers” indicator, and to its exclusion from the indexes
composing the “Ease of doing business”.25

          Other criticisms have addressed the “Ease of starting a business” 26
and the PII itself. As a consequence, they have called into question the global
“Ease of doing business” indicator which inevitably reflects, or even
amplifies,             improper               definitions             of            sub-indexes.27


22
   Cf. For a similar consideration with reference to corporate governance indices see Sanjai
Bhagat et al., The Promise and Peril of Corporate Governance Indices, 108 COLUM. L. REV. 1825 (2008)
(market participants may have divergent preferences when weighting governance features, and
some variables may be substitutes for others).
23
   See DAVIS et al., supra note 8, at 9 (Every selection of variables inevitably reflects underlying
ideological assumptions on the role of regulation and its effects on society).
24
   See, e.g., Janine Berg & Sandrine Cazes, Policymaking Gone Awry: The Labor Market Regulations of
the Doing Business Indicators, 29 COMP. LAB. L. & POL'Y J. 350, 355-360 (2008).
25
   See Peter Bakvis, The World Bank’s Doing Business Report: A last fling for the Washington Consensus,
15 EUR. REV. LAB. RES 434 (2009); Int’l Fin. Corp. [IFC], Doing Business 2014. Understanding
Regulations for Small and Medium-Size Enterprises, DOINGBUSINESS.ORG, 2 (Jun. 1,
2013),http://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Annual-
Reports/English/DB14-Full-Report.pdf.
26
   See Arruñada, supra note 20, (DBR methodology, which assigns a better score to jurisdictions
where procedural requirements such as preregistration and registration are cheaper and less
time-consuming, underestimates the costs of reduced legal certainty); for a reply contra Simeon
Djankov et al., The law and economics of self-dealing, 88 J. FIN. ECON. 430 (2008). See also Arruñada,
supra note 3, for a counter-reply.
27
   See INDEP. PANEL, supra note 9, at 4 (noting that there is no strong justification for simple
averaging across indicators to produce the Ease of doing business index and suggesting its
removal).




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Some scholars have proposed alternative assessment criteria for shareholder
protection in the attempt to have a more accurate understanding of the
comparative advantages of different jurisdictions. 28 Further changes in the
DBR methodology, which have been announced in April 2014, will tackle
some of these critiques in an attempt to improve the completeness of the
evaluation. This would lead to a more careful consideration of its results. 29
The evaluation grid will inevitably remain exposed to critiques. Scholars
would still have diverging opinions on the relative importance of the
diverging legal rules.

         Regardless of the theoretical debate, the accuracy of DBR assessments
has also been challenged.30 The exercise relies on imaginary transactions –
such as the one involving Buyer and Seller, sketched in Part 2 – that are
devised to test how the law would operate in similar circumstances. 31 Data on
the applicable rules are gathered by submitting questionnaires to local
experts. Results are subsequently discussed with the World Bank team in
charge of the evaluation.32




28
    For an alternative shareholder protection index cf. Priya P. Lele & Mathias M. Siems,
Shareholder Protection: A Leximetric Approach, 7 J. CORP. L. STUD. 17 (2007). On the same index see
also Siems & Deakin, supra note 2, at 128-135. CENTRE FOR BUSINESS RESEARCH, EXTENDED
SHAREHOLDER PROTECTION INDEX (www.cbr.cam.ac.uk).
29
   The PII will be renamed “protecting minority investors” index and will cover an extended set
of rules. For instance, attention will be paid to shareholders rights, including pre-emption on
newly-issued shares and the presence of a mandatory bid rule, as well as to rules concerning
decisions that have to be submitted to the general meeting, such as issuance of new shares.
Furthermore, the assessment will address the composition of the board of directors as regards
the presence of non-executive or independent members and the separation of the chairperson
and the CEO; see Int’l Fin. Corp. [IFC], supra note 8, at 3. See also Int’l Fin. Corp. [IFC], Doing
Business 2015. Measuring Business Regulation – Questionnaire, DOINGBUSINESS.ORG (2015),
http://www.doingbusiness.org.
30
   See, e.g., Davis & Kruse, supra note 8, at 1104-1107, 1111-1115 (concluding that shortcomings in
the DBR assessments make the report too unsound to be used as the basis for across-the-board
legal reforms).
31
   This approach has also been criticized by some scholars, in whose opinion the selection of a
hypothetical scenario by economists from the United States is very likely to reflect the specific
characteristics of common law jurisdictions, thus biasing the subsequent comparison with civil
law jurisdictions (see Michaels, supra note 9, at 786). See also Siems & Deakin, supra note 2 (as the
Law and Finance stream of research is mainly based on U.S. securities law, it can be regarded as
a “hidden benchmarking” which measures the vicinity to the U.S. model); INDEP. PANEL, supra
note 9, at 16 (the selection of the hypothetical scenarios used to test the variables may be prone
to home biases). DBR criteria’s appropriateness was however questioned from a U.S. perspective
as well (Pacces, supra note 4, at 303).
32
   For a description see INDEP. EVALUATION GRP., supra note 5, at 13-9; Davis & Kruse, supra note 8,
at 1095, 1099-1100.



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That procedure has not always been reliable. 33 For instance, Italy’s PII score
has also been affected by mistakes which were later admitted by the DBR
itself.34




     4.     THE ITALIAN FRAMEWORK ON RELATED PARTY TRANSACTIONS

The Regulation on Related Party Transactions [hereinafter, “the RPT
Regulation” or “the Regulation”] sets out the rules and principles that
Italian listed companies have to respect in order to ensure that RPTs are
adequately disclosed to the market and fulfil minimum standards of
substantial and procedural fairness.35 The Regulation was approved by
Consob – the Italian Securities and Exchange Commission – in 2010 and fully
enacted one year later. The Regulation contains a set of detailed rules while




33
   Numerous mistakes afflicting the first DBR on France were pointed out in the fracas raised by
the French legal and political community (see also DU MARAIS, supra note 4, at 45: binary codes do
not fit with instances where more than two options are available under national law) and were
therefore fixed in the subsequent editions (Anne-Julie Kerhuel & Bénédicte Fauvarque-Cosson, Is
Law an Economic Contest? French Reactions to the Doing Business World Bank Reports and Economic
Analysis of the Law, 57 AM. J. COMP. L. 811, 815-816 (2009). Mistakes affecting other countries in
the measurement of the “Ease of starting a business” index are reported by Arruñada, supra note
20, at 743-744, and Arruñada, supra note 3, at 559. See also Bjørn Høyland et al., The tyranny of
international index rankings, 97 J. DEV. ECON. 8 (2012) (measuring the uncertainty affecting DBR
evaluations). Mistakes have similarly been highlighted in La Porta et al., supra note 8, at 1113; see
also Holger Spamann, The “Antidirector Rights Index” revisited, 23 REV. FIN. STUD. 467 (2010)
(finding that data reported for 33 out of the 46 surveyed countries were affected by coding
errors, the correction of which falsifies the claim of the original study that common law
outperforms civil law in terms of investor protection).
34
   The “Ease of shareholder suits” index includes a variable that measures the level of proof
required for civil lawsuits. If this is lower than the burden of proof applicable to criminal cases,
then the jurisdiction gets one point. Up to the 2012 Report, the variable scored 0 (see the Country
Tbl. for Italy as of 2012). However, the correct indicator should have been 1 because under Italy’s
rules criminal liability requires proof of intentionality while civil liability is based on negligence,
which is easier to prove. The mistake was fixed as from the 2013 report. As that variation did not
reflect any law reform, the 2013 and 2014 Reports properly report no change over time in this
respect: see Int’l Fin. Corp. [IFC], Doing Business 2014 – Economy Profile: Italy, DOINGBUSINESS.ORG,
60(Oct.29,2013),https://openknowledge.worldbank.org/bitstream/handle/10986/18495/828700It
aly0ITA0Box0382099B00PUBLIC0.pdf?sequence=1&isAllowed=y. The same holds true for other
rankings, which were consequently amended in retrospect (id., at 57). Similar retroactive
corrections are not exceptional: see INDEP. EVALUATION GRP., supra note 5, at 17. See also DU MARAIS,
supra note 4, at 40, 54 (questions on the standard of evidence in the PII are framed according to
common law legal tradition and might make little sense for civil law countries, thus leading to
coding errors).
35
   See Art. 2 RPT Regulation (Consob Decision No. 17221 of 12 Mar. 2010, as amended; O.J. No. 152
of 2 Jul. 2010). We provide here an overview of the rules applicable to Buyer’s transaction with
Mr. James. For a more comprehensive description of the Regulation see Marcello Bianchi et al.,
Regulation and self-regulation of related party transactions in Italy, QUADERNI DI FINANZA CONSOB NO.
75, at 10-13 (2010); Organisation for Economic Co-operation and Development [OECD], Related
Party Transactions and Minority Shareholder Rights, 115-6, (2012).




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leaving room for some optional choices.36 Because the simulation of the DBR
only considers default provisions, with few exceptions we limit our
description to rules which apply to the PII hypothetical transaction by
default.

         The Regulation prescribes that the whole board shall be in charge of
deciding whether the RPT is to be entered into. Therefore, no delegation of
powers to the executives is allowed in this respect. 37 Before such a decision is
made, however, a special committee – composed exclusively of unrelated38
independent39 directors – shall evaluate the substantial fairness of the affair
as well as the company’s interest in the transaction. The special committee
has to be involved in the negotiations and internal decision-making process
leading to the RPT approval. Not only the special committee is entitled to
receive timely information on the ongoing negotiations, but it may also
request clarifications on specific issues and provide comments to the
executives throughout the process. 40 The committee may also ask for the
advice of independent experts of its own choice. The company will bear the
related costs for the additional expertise.41

         The special committee can veto the transaction by releasing a binding
advice. Alternatively, an express charter provision may opt out of the special
committee voting requirement in favour of a double-majority quorum in the
board of directors. The transaction may not be entered into unless the
majority of the independent board members have approved it. 42 The



36
   See, e.g., Bianchi et al., supra note 35, at 13 (identifying the most relevant optional provisions).
37
   See RPT Regulation, supra note 35, art. 8(1)(a).
38
    For the purposes of the Regulation, directors are “unrelated” if they are neither the
counterpart of the relevant transaction nor a related party thereof.
39
   Directors are deemed independent if they comply with the requirements set by the applicable
corporate governance code. If the company does not conform to any code, then some default
requirements apply (see RPT Regulation, supra note 35, art. 3(1)(h)).
40
    See RPT Regulation, supra note 35, art. 8(1)(b). Early involvement of independent directors
enhances the quality of their review and improves the general rule requiring disclosure of
conflicts of interests to the whole board when the final decision on the transaction is taken
CODICE CIVILE [CIVIL CODE] [C.C.] art. 2391. The procedure therefore goes beyond the DBR
methodology, where compliance with the general rule suffices to receive the maximum score (2)
for the variable “whether disclosure of the conflict of interest by Mr James to the board of
directors is required” (one point is given if a general disclosure that a conflict exists is mandated
without any further specification, and no point otherwise).
41
    Companies may cap the total expenses for opinions concerning transactions of lesser
importance.
42
   See RPT Regulation, supra note 35, art. 8(1)(c).



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Regulation,43 however, allows companies to overcome the independent
directors’ binding negative advice - under the form of either a committee
resolution or a double-majority quorum - through an ad hoc authorization
by the shareholders’ general meeting.44 When the company opts for this
opportunity, the applicable procedures shall ensure that the proposed
transaction can only be entered into if it reaches the ordinary quorum and is
approved by a majority of unrelated shareholders (so-called “whitewash”
procedure).45 Therefore, the transaction cannot be entered into if the
majority of minority shareholders has voted against the transaction. 46

         Disclosure is mandated by specific provisions within the Regulation.
These requirements are complementary to the general rules on ad hoc
dissemination of internal information. 47 They require to disclose information
in relation to, inter alia, the qualification of the transaction as RPT, the
nature of the relationship with the related party (to be identified), the
amount of the transaction, the procedure followed for approval, and the
dissenting opinions – if any – within the board or the special committee.48



43
   See RPT Regulation, supra note 35, art. 8(2).
44
    In April 2014, the E.U. Commission adopted a proposal to introduce an European-wide
legislation on related party transactions. According to the proposal, shareholder approval shall
be mandated before any such transaction is entered into which exceeds 5% of company’s assets
or which can have a significant impact on profits or turnover: see European Commission,
Proposal for a Directive of the European Parliament and of the Council amending Directive 2007/36/EC
Art. 9c(2), at 9, (2014).
45
   See RPT Regulation, supra note 35, art. 11(3). Companies’ code and bylaws are allowed to
establish that a minimum threshold, not higher than 10%, must be present at the GM in order to
make the whitewash effective.
46
   The majority of the minority approval mechanism neutralizes the effects of the provision
failing to impose abstention from voting on conflicted shareholders (C.c. art. 2373).
47
   According to Art. 114 and 181 of the Consolidated Law on Finance, enacting Commission
Directive 2003/6/EC, Art. 6, companies shall immediately disclose inside information concerning
transactions that, if made public, would be likely to have a significant effect on the price of their
shares. In the DBR’s methodology, no reference is made to how the transaction relates to ad hoc
disclosure duties, possibly also because no such duties exist under U.S. law. Any evaluation on
whether the DBR model transaction involves price sensitive information will be highly
discretional, although the size of the consideration paid for the truck fleet is very likely to make
dissemination necessary. Because the DBR treats Germany as a jurisdiction imposing immediate,
detailed disclosure of Mr. James’s transaction (see Int’l Fin. Corp. [IFC], Doing Business 2014 –
Economy Profile: Germany,           DOINGBUSINESS.ORG,       64    (Oct.   29,   2013),http://www-
wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2014/05/01/000260600_2014
0501155900/Rendered/PDF/828430Germany0DEU0Box0382098B00PUBLIC0.pdf,                      where      a
scoring of 1 is assigned because the applicable rules require disclosure of the transaction, but not
of Mr. James’s interest), and such a conclusion can only be based on the ad hoc disclosure duties
deriving from E.U. law (in the absence of specific disclosure duties relating to RPTs under
German law), we will similarly assume in the following that Mr. James’s transaction would
trigger ad hoc disclosure duties in Italy as well.
48
   See RPT Regulation, supra note 35, art. 6; see also Commission directive 2003/6/EC, Art. 6(7).




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Regardless of the qualification of the RPT as inside information, detailed
information must be published within seven days from the approval by the
competent body or, when the circumstances so require, from the contractual
proposal.49 Such information is provided in accordance with a standardised
format set by the Regulation that mandates disclosure of the terms of the
transaction. Disclosure must, inter alia, specify the company’s interest in the
operation and describe the criteria adopted to define the consideration paid.
Conflicting interests, including indirect interests, are to be divulged (e.g.
when the managers’ compensation is influenced by the performance of the
RPT).50

          Finally, annual and interim reports must provide information on
individual major RPTs.51




     5.   MEASURING INVESTOR PROTECTION IN ITALY AFTER THE REGULATION ON RELATED
          PARTY TRANSACTIONS

According to the 2014 DBR, Italy does not reach the highest score in a
number of sub-indexes (ten out of eighteen) within the PII. Furthermore, the
DBR does not report, in its section displaying past performances, any
variation in the applicable rules during the last years. The approval of the
RPT Regulation (in 2010), as well as its entry into force (in 2011) have not
been coded as relevant regulatory reforms for investor protection. Most of
the scorings assigned adequately reflect Italy’s current and previous legal
and regulatory environment, while others do not.

          Coding mistakes may lead to underestimate or overestimate the
current level of investor protection in a given jurisdiction. They can also
misrepresent the evolution of the applicable rules because inflated past
scorings can hamper the registration of subsequent improvements. The
reasons why some of the scores assigned to Italy inaccurately reflect the


49
    The questionnaire used to gather the relevant data only refers to information disseminated
within 72 hours after the transaction is approved (Int’l Fin. Corp. [IFC], Doing Business 2014.
Measuring Business Regulation – Questionnaire, DOINGBUSINESS.ORG, 5 (2014),
http://www.doingbusiness.org).
50
   See RPT Regulation, supra note 35, art. 5 and Annex 4.
51
   See RPT Regulation, supra note 35, art. 5.



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national legal framework, either for the present or for the past, are manifold.
In some cases, the scoring may simply be the result of a basic
misunderstanding of the Italian legislation; in others, miscoding may stem
from a formalistic interpretation – rather than a functional one – of the
applicable rules or of the DB methodology itself. As a result, according to the
DBRs, the Italian legal system has made no progress in recent years.
According to the evaluation no noteworthy reform has been passed in 2010,
or enacted in 2011.52 Although the DBR team stated that “a rigorous reform
effort will certainly be reflected in the DB indicators,” 53 regardless of
whether it is intended to improve on DBR rankings we intend to show that
the ranking fail to account for Italy’s improved legal regime.54

         In part 7, we analyse how mistakes in past assessments are
responsible for delivering misleading information on the jurisdiction’s legal
developments. In this section, we highlight one inaccuracy in the coding of
the legislation currently in force. In particular, the DBR fails to properly
account for the function performed by the review of RPTs by independent
directors and the ensuing veto power over unfair deals. We believe that the
introduction of independent board members brought substantial change to
Italian corporate practices: there is evidence that active shareholders can
take advantage of the Regulation to successfully challenge RPTs. 55 This shows
that the new legal devices which aim at protecting minorities are not just
cosmetic.

         While we acknowledge that one mistake is tolerable in assessing a
country’s legal protections for minority shareholders, we focus on this
mistake for three main reasons. First, its impact on Italy’s PII ranking is not



52
   Int’l Fin. Corp. [IFC], Doing Business 2012 – Economy Profile: Italy, DOINGBUSINESS.ORG, 61-63 (Jan.
1,2012),http://www.wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2012/02/2
3/000333038_20120223235145/Rendered/PDF/653230Italy0Do0Box0365711B00PUBLIC0.pdf. See
infra Fig. 1.
53
   Int’l Fin. Corp. [IFC], Doing Business in Italy – Reform opportunities, DOINGBUSINESS.ORG, 3 (2012),
http://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Subnational-
Reports/DB13-Italy.pdf.
54
   See Organisation for Economic Co-operation and Development, supra note 35, at 117 (“Italy has
made considerable progress in recent years to promote and defend shareholder rights and to
improve transparency”).
55
   See BELCREDI & ENRIQUES (2014), at 27-8 (reporting successful initiatives by Amber Capital LP
at companies such as Fondiaria SAI and Parmalat).




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negligible. Indeed, it accounts for eighteen positions in the last DBR. 56
Second, it affects one of the core regulatory devices of the RPT Regulation,
which has been implemented with the intent to ensure that conflicted
transactions are entered into at fair conditions; the DBR’s misunderstanding
of the Italian regulatory framework is therefore much larger than what is
shown by this single mistake. Third, this coding mistake reveals the
challenges that the DBR evaluation encounters in balancing the objectivity of
the evaluation while also carefully assessing peculiar solutions by individual
jurisdictions.

        Indeed, some of the procedural requirements in the RPT Regulation
are admittedly unique. Therefore, it may be difficult to precisely allocate
them into standardized legal framework models of the DBR simulation. That
is the case with the special committee’s binding advice on the RPT. The PII
variable ascertains whether the corporate body provides sufficient legal
approval for the transaction. The evaluation grid assigns a score of zero if the
CEO alone can approve the RPT; one point is given if the board of directors or
shareholders must vote on the transaction but “Mr James” is permitted to
vote in his quality of board member or shareholder respectively; a score of
two is assigned if the board approval is needed while “Mr James” is not
permitted to vote; finally, a maximum score of three is granted if
shareholders must vote on the transaction while “Mr James” has to abstain.

        According to the DB team in charge of evaluating Italy, “[RPTs] are
pre-approved by the independent directors’ committee and approved by the
board of directors. In addition, the new regulation allows the participation of
the interested party in the approval process (board of directors). In addition,
according to the new regulations, regardless of the committee’s opinion, the
board of directors (in which the interested party can vote) has the final say
on the transaction. It is important to note that according to the new
regulations, the committee of independent directors does not have the power
to block or veto related-party transactions. Based on the methodology, Italy
receives one point under this questions.” 57 The team therefore assigned to

56
 See infra Tbl. 6.
57
  See DBR TEAM, Doing Business Project Response – Italy, 13 (Jul. 19, 2011) (unpublished
manuscript) (on file with the authors).



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Italy a score of 1. The reported statement is inaccurate in describing the RPT
Regulation and shows some misunderstandings on the functioning of its
procedural safeguards. As clarified in section 4, the new regulation relies on
the review of RPTs by a special committee of independent directors. Their
power to veto the transaction is the primary tool for ensuring minority
shareholder protection. More precisely, independent directors are involved
in the negotiation. The board of directors’ approval of the RPT is subject to
binding favourable advice of a committee of independent directors. In other
words, the committee of independent directors has a veto power on RPTs.58

         The requirement for independent committee’s binding opinion
neutralizes the disgraceful choice by Italian lawmakers in 2003 not to
disqualify interested directors from voting. 59 Interested directors cannot be
members of the special committee which can veto the resolution.60

         To conclude, according to the default regime, a negative advice from
the independent committee of directors can block the RPT. Therefore, the
appropriate score should be 2 instead of 1.61

         As the coding we would deem appropriate at first sight does not
correspond to that displayed by the DBR, in the next part we analyse more in
depth the reasoning underpinning the DBR judgement and provide a critique
thereto.




58
   The committee’s binding advice is the default rule, but a double-majority quorum is required
for opting-out companies. See supra note 42.
59
   C.c. art. 2391. To be sure, if the majority is reached and the interested director’s vote is pivotal,
the board resolution (as well as the RPT) is voidable in case it is harmful for the company.
60
   Nor can they count for independent directors’ majority purposes in case companies have
opted out of the default rule providing for the special committee’s veto power. See supra note 58.
61
   To be sure, companies may opt out of the said regime via a charter amendment (to be
approved by shareholders holding a two thirds majority of the capital represented at the
meeting, according to the general rule: C.c. artt. 2368 and 2369, so that the independent
committee does not have the final say on the RPT; but, whenever companies opt out this way,
the power to approve the RPT is shifted to the general meeting upon the favourable vote of non-
interested shareholders. If the optional regime is chosen, therefore, 3 should be the correct
score. We leave this hypothesis out of the picture in the following, because the DBR focuses on
default rules. If the pending E.U. Commission’s proposal mandating shareholder approval is
eventually to become law (see supra note 44 and accompanying text), Italy – as any other E.U.
jurisdiction – will get 3 points for this variable.




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     6.   THE DBR EVALUATION. METHODOLOGICAL ISSUES

The DB team’s explanations62 show that the reason why the DBR assigns 1 to
Italy despite the independent directors’ veto power is twofold:

     1.   The case study assumes that the approval by the committee is a
          formalistic requirement (see part 2). The independent committee,
          therefore, does not have the final say on the RPT as the final approval
          is left to the board.

     2. Interested parties may vote in the final decision of the board of
          directors.

Both points are formally correct. The DBR evaluation, however, fails to
understand the regulatory mechanisms which underpin the Italian rules on
RPTs. Indeed, according to this methodology, and to its implementation by
the team, no difference exists between the current Italian regime and a
regime where RPTs are approved by an ordinary vote of the board of
directors. This is misleading because the two mechanisms – ordinary voting
procedure and independent committee’s veto – are unlikely to lead to the
same      outcome.     Clear-cut     categorizations       always     run      the       risk      of
misinterpreting regulations that do not perfectly fit into their classification
(e.g. the Italian Regulation on RPTs). However, approaching law from a
functional perspective seems more reasonable than engaging in a box-
ticking exercise.

          As regards the first statement above (the independent committee does
not have the final say), what matters from a functional point of view is who
bears the final responsibility to screen RPTs, rather than who has the final
say on their positive approval. These two functions are usually commingled
because directors may either approve or reject the proposal by casting a
single vote. As a consequence, DB’s methodology is based on this common
voting pattern. On the contrary, the procedure set forth by the RPT
Regulation somehow splits these two phases. Once a negative vote has been
expressed by the committee of independent directors, the board can no


62
  DBR TEAM, Doing Business Project Response – Italy, 2 (Jul. 19, 2011) (unpublished manuscript)
(on file with the authors).



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longer vote on the same matter. In other words, for investor protection
purposes, it is indeed relevant whether someone other than “Mr James” and
the board of directors can say “no” to the transaction. The fact that the
whole board, which includes “Mr James” as a voting member, may still
decide whether to approve the transaction is irrelevant. Indeed, a subset of
independent and disinterested directors has already assessed that the
proposed transaction is fair and useful. Hence, the evaluation grid – or,
rather, its application – improperly assume that only mandatory abstention
may avoid improper influence by interested parties. The methodology indeed
regards any regulatory mechanism which deviates from this standard as
inadequate, regardless of whether it delivers equally effective results. 63

         In Italy, only if the committee of independent directors has given its
approval the board can still vote down the RPT. The approval by the
committee is a governance device which is designed to ensure independent
evaluation of the RPT’s fairness in the light of the company’s interest. The
assessment       exercise      by    regarding        this   approval      as     a    preliminary
authorization does not correctly evaluate regulatory strategies other than full
board voting. The DBR evaluation, therefore, does not respect the principle,
which is self-evident in comparative law, that different regulatory tools can
achieve the same results. 64 According to the ill-founded interpretation of the
DBR, when the vote is taken before and separately from the final approval of
the RPT, investors are less protected when compared to regimes where the
board approves the RPT without a dominant vote of the shareholders. It is
true that any classification of legal rules requires a minimum level of

63
   Cf. Mathias Siems, Measuring the Immeasurable: How Law Turns into Numbers, in DOES LAW
MATTER? ON LAW AND ECONOMIC GROWTH 115, 120-121 (Michael Faure & Jan Smits eds. 2011)
(Djankov et al. methodology assumes that the same type of problem exists in all the jurisdictions
considered, while this is far from obvious).
64
   More broadly, the DBR team’s thinking (as we understand it) is a distortion of the assumption
that all required approvals have been obtained (the same assumption is made by Djankov et al.,
supra note 8, at 432). The assumption enables an unambiguous assessment of criteria such as
those included in the director liability index (see, e.g., whether a shareholder plaintiff is able to
hold Mr James liable for the damage the Buyer-Seller transaction causes to the company). The
coding of these variables depends in fact on whether the transaction is carried out in breach of
the applicable corporate rules, a possibility that the methodology rules out by making the
assumption explicit. This being its function, the assumption includes the final approval by the
CEO, the board, or shareholders, as the case may be (see Djankov et al., supra note 8, at 433:
“Buyers enters into the transaction. All required approvals are obtained and all the required
disclosures made”). The same prerequisite does not make much sense if referred to variables
dealing with the procedure for approving the RPT, as it includes the variable to be measured (the
final decision-making responsibility) in the assumptions.




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formalism, as a purely functionalist interpretation would pave the way to
excessive subjectivity in the coding exercise. 65 On the other hand, by
assuming that the positive approval by independent board members is a
mere formality (i.e. regarding it as an irrelevant step in the voting process)
rather than the first step of a multi-staged decision the team is also
expressing a subjective opinion.

         Moreover, although according to the RPT Regulation the special
committee vote is the default mechanism it is also possible to opt for a
double-majority quorum in the vote of the board of directors. Two logical
consequences can be drawn from this information. First, no functional
difference exists between the optional rule system where the two decisions,
one by the plenum and the other by the majority of the independent
committee, are merged into one and a system where these decisions are
deferred to two separate moments. Therefore, because no one would ever
regard the double majority requirement as a preliminary authorization with
no practical value, the same should be true for functionally equivalent
regulatory mechanisms.             Second, by requiring “Mr James” to abstain the
regulatory environment will be more effective – and here we come to the fact
that interested parties are allowed to vote – because the board will not be
able to approve resolutions in the presence of dissenting votes by the
majority of independent directors.66 Therefore, although according to the
RPT Regulation interested directors may vote, the preliminary binding advice
of the independent committee (i.e., vote) reaches the same outcome and goes
even further. Indeed, even in systems where “Mr James” is not allowed to
vote – and the methodology requires no more than that – his presence at the
board meeting may significantly influence the resolution. The default device
adopted by the RPT Regulation avoids this risk as non-independent directors




65
   See Armour et al., supra note 2, at 600-1 (suggesting to enlarge the set of relevant variables in
order to reduce the risk that formalism prevails over functionalism).
66
   Note that the Djankov et al. paper requires, with respect to the general meeting approval, that
“the transaction must be approved by disinterested shareholders” (see Djankov et al., supra note
8, at 434), not that interested shareholders are not allowed to cast their vote. This formulation
of the variable – albeit referred to general meetings – better reflects the function of rules that
prevent conflicting interests from determining the outcome of decisional processes. Mandatory
abstention is the most straightforward, but not the only rule ensuring such a result.



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cannot be members of the special committee. 67 If compared to regulations
which merely require “Mr James”, as well as other non-independent board
members, to abstain the Italian procedure for deliberating on RPTs ensures a
higher level of protection. Indeed, at the special committee stage, directors
who are disinterested in the specific transaction, but are still under Mr
James’s influence, and are less likely to disregard his preferences when
voting, cannot be members of the committee.

        From a methodological standpoint, it is worth noting that the decision
to disregard the role of the special committee is acceptable only if the
applicable     legislation     is   interpreted       from     an    extremely         formalistic
perspective. Even by adopting a formalistic approach, the qualification of the
committee’s approval as a normal authorization may still be questionable.
Apparently, this formalistic approach wants to ensure that the evaluation is
consistent across different jurisdictions. However, reliance on formalism to
ensure consistency and objectivity can lead to mistaken conclusions. First,
we have shown that formal classifications (e.g. the decision to classify the
vote of independent directors as a preliminary authorization rather than as
part of a multi-staged board decision) can also be arbitrary: arbitrariness and
objectivity are hard to match. Second, by focusing on the qualification of
procedural requirements rather than on their function, current coding
practices could disregard essential features of corporate governance and
misjudge the effectiveness of investor protection mechanisms. 68



67
   This being the reason why the double-majority voting is conceived of as a second best
solution which requires an explicit choice by the company when the internal procedures are
drafted.
68
   The approach followed by the DBR team when evaluating the Italian jurisdiction is not
isolated. A similar (and symmetric) example is the maximum score (3; see supra note 61 and
accompanying text) granted to France as a consequence of the provision: cf. CODE DE COMMERCE
[C.COM.] [COMMERCIAL CODE] Artt. L225-41 and L225-40 (Fr.) that enables shareholders to vote on
RPTs authorized by the board of directors: see Int’l Fin. Corp. [IFC], Doing Business 2014 –
Economy        Profile:      France,     WORLDBANK.ORG,         65      (Oct.       29,      2013),
http://www.wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2014/04/30/0002
60600_20140430162822/Rendered/PDF/828360France0FRA0Box0382098B00PUBLIC0.pdf. First,
the evaluation apparently disregards the fact that shareholder approval is required after the
contract is entered into, and therefore does not represent a precondition for the transaction to be
passed (see MAURICE COZIAN et al., DROIT DES SOCIÉTÉS 352 (2012); see also Enriques et al., Related
Party Transactions’, in REINIER KRAAKMAN et al., THE ANATOMY OF CORPORATE LAW 168 (2nd ed 2009,
Oxford University Press). Second, the transaction is valid even in case shareholder approval is
refused (see Organisation for Economic Co-operation and Development, supra note 35, cit., at 64)
although the directors who approved it may be liable for damages ((C.COM) Artt. L225-41 and
L225-42); PAUL LE CANNU & BRUNO DONDERO, DROIT DES SOCIÉTÉS 500 (2013)).




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On the contrary, our analysis confirms that a functional approach 69 would
make the DBR assessment more accurate. 70 This approach assumes –this
assumption is not discussed upon in the present work – that the trust in
benchmarking         exercises     helps    fostering      adequate      legal     reforms.71          A
comparative law study, if properly conducted, would indeed refrain from
easily stating that a jurisdiction lacks a specific legal tool just because of the
peculiarity of its regime. Rather, it would strive to look for alternative rules
that, although formally different from the yardstick adopted as a basis for
comparison, perform the same role.72 Other legal tools are at least as effective
as mandatory abstention from voting73 regardless of whether they operate
before the transaction is brought to the plenary session of the board. Indeed,
only independent directors, which also have no interest in the transaction,
can participate to the independent committee. The evaluation should reflect
the fact that different legislative tools may perform better than conflicted
members’ abstention without additional costs. According to Konrad Zweigert
and Hein Kötz,

          “[t]he question to which any comparative study is devoted must be
          posed in purely functional terms; the problem must be stated
          without any reference to the concepts of one’s own legal system.
          Thus instead of asking, ‘What formal requirements are there for
          sales contracts in foreign law?’ it is better to ask, ‘How does
          foreign law protect parties from surprise, or from being held to an
          agreement not seriously intended?’”74



69
    See, e.g., KONRAD ZWEIGERT & HEIN KÖTZ, INTRODUCTION TO COMPARATIVE LAW 32-47 (3rd ed.
1998).
70
   See Michaels, supra note 9; Michaels, supra note 16 (suggesting stronger integration between
comparative economics and comparative law); Kerhuel & Fauvarque-Cosson, supra note 33, at
828. See also Ménard & Du Marais, supra note 4, at 76-7 (DBR neglects basic rules for an effective
comparative study).
71
   We do not therefore enter the discussion on the nature and the merits of functionalism, a
concept whose implications for comparative law are still highly debated (for an overview
Michaels, The Functional Method of Comparative Law, in THE OXFORD HANDBOOK OF COMPARATIVE LAW
339 (Mathias Reiman & Reinhard Zimmermann eds. 2008). Rather, it is the DBR’s approach
itself that compares different jurisdictions with the purpose of evaluating their relative
efficiency (see id. at 373-6); a proper application of the functional method, as opposed to
formalism, would be more consistent with the DBR’s assumptions.
72
   John Reitz, How to Do Comparative Law, 46 AM. J. COMP. L. at 621 (1998) (on comparative law
methodology).
73
   Id. at 623 (each jurisdiction may conform in different ways to the ideal legal tool adopted as a
term of comparison).
74
   ZWEIGERT & KÖTZ, supra note 69, at 34.



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Comparative legal studies therefore necessarily entail some degree of
generalisation. Searching for rules performing equivalent functions requires
abandoning formal definitions in favour of broader categories which are
capable of including rules which, though formally different from a
formalistic perspective, achieve the same normative result. 75 By inspecting
which formalities are required to approve the conflicted transaction, the DBR
methodology assumes that board approval without “Mr James’s” vote is the
second most effective governance device (after minority shareholder
approval) in ensuring fairness. However, it falls short of asking the correct
question: “does the relevant jurisdiction protect external investors by
shielding the approval of the transaction from Mr James’s conflicted interest,
i.e. by ensuring that the transaction is not passed if disinterested board
members do not agree?” This question emphasizes the objective of the
assessed regulation (sterilization of “Mr James’s” interests in board
decision), rather than the external features thereof (Mr James’s abstention,
double majority, preliminary vote by disinterested members, or other
devices).




     7.   THE IMPACT OF MISCODING

It is mainly in the dynamic evolution of applicable legislation that one can
see how indicators influence national policies. 76 The DBR provides a
diachronic perspective on legal reforms. Indeed, year-on-year changes
highlight whether a country is committed to improve its regulatory
environment.77 Flat performances or lost ground in the rankings may
indicate that policymakers are not paying attention to areas of law that are
pivotal in boosting economic growth. 78 The DBR’s focus on trends in
regulatory reforms therefore provides interested stakeholders with valuable

75
   Reitz, supra note 72, at 625 (comparative analysis … forces the comparatist to articulate
broader categories to accommodate terms that are … functional equivalents).
76
   See DAVIS et al., supra note 8, at 11 (2012) (on indicators as “technologies” of governance).
77
   Historical data are also useful to test the relative attractiveness of a country over time, thus
removing the influence of transient conditions on rankings (see John Armour et al., Shareholder
Protection and Stock Market Development: An Empirical Test of the Legal Origin Hypothesis, 6 J.
EMPIRICAL LEGAL STUD 343, 350-353 (2009)).
78
   Of course, this would just be a rebuttable presumption, so to speak, because a country may be
even more committed to reforms than others higher in DBR rankings, and just choose to do it
“its own way.”.




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information. Indeed, potential investors can compare legislations in different
countries whilst having a full picture of the evolutionary stages within the
same jurisdiction.

         In this respect, the attribution of an erroneously high score to a
country in a certain year may paradoxically entail an underestimation of
subsequent reforms. Therefore, even when substantial improvements have
been achieved the chart might still show that the legal system of a
jurisdiction had no improvements. Once more, Italy provides some good
examples, because two variables within the PII were wrongly coded prior to
the RPT Regulation’s enactment.

         The first miscoding was about whether self-dealing transactions such
as the one hypothesized in the DBR had to be disclosed in the annual
accounts: the DBRs preceding 2012 assigned a 2 score (that is: “disclosure on
both the terms and Mr James’s conflict of interest is required” 79). This means
that respondents to the questionnaire stated that the transaction should
indeed have been disclosed in detail in annual accounts. 80 However, while
before the RPT Regulation the law generically required companies to disclose
the relations with their controlled, affiliated and controlling entities as well
as with other entities under common control, the provision, according to the
predominant interpretation, did not require a detailed disclosure of
individual      self-dealing        transactions.81        Therefore,       even         after        the
implementation of IFRS the consistent accounting practice of listed
companies was not to include detailed information on these transactions. 82




79
   Within this variable, a score of 1 is assigned if disclosure on the terms of the transaction is
mandated, but not on Mr James’s conflict of interests; 0 is assigned otherwise.
80
   A similar mistake affects the Djankov et al. paper’s coding: see Luca Enriques et al., Corporate
Governance Reforms in Italy: What Has Been Done and What Is Left to Do, 10 EUR. BUS. ORG. L. REV 477,
503-504 (2009).
81
   See Giovanni Emanuele Colombo, Il bilancio d’esercizio [The Financial Statement], in TRATTATO
DELLE S.P.A. 157 (Giovanni Emanuele Colombo & Giuseppe Benedetto Portale eds., UTET 1994).
82
   See IAS 24, § 18 (allowing the aggregation of related party transactions provided that a
distinction among categories of transactions is given). See also OIC, 140 (2007). Companies used
to aggregate related party transactions in their annual reports before the RPT Regulation entered
into force (see CONSOB (2008), Consultation document on the regulation of related party
transactions ).



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The RPT regulation has later specifically required annual, as well as the half-
yearly financial reports to disclose, 83 self-dealing transactions falling above
the materiality threshold.84 Before the regulation was enacted, 0 would have
been the appropriate score.

        In the same vein, before 2012 DBRs assigned a score of 2 for the
variable “Whether immediate disclosure of the transaction to the public
and/or shareholders is required?”.85 Before the RPT Regulation entered into
force, a mandate for immediate disclosure of RPTs would either derive from
the general rule requiring ongoing disclosure of price sensitive information 86
or from a Consob rule requiring ad hoc disclosure for certain RPT (Art. 71-II
Issuer Regulation, in place between 2001 and 2010). A transaction like the
Buyer’s would be very likely to fall within the scope of the ongoing disclosure
obligations.87 Therefore, the proper rating would have been 1 (as no
disclosure of Mr James’s conflict of interest was explicitly mandated).
According to Art. 71-II of Consob Issuer Regulation, the conditions for
triggering an obligation to disclose were so hazy that very few transactions
had been made public under the rule. More specifically, only transactions
which could have jeopardized the issuer’s financial stability or the reliability
of its financial account – according to the issuer’s own judgment – had to be
disclosed. As the case study is not assuming that these conditions are met, it
cannot be established whether “Mr James’s” transaction had to be disclosed
pursuant to Art. 71-II. By contrast, under the RPT Regulation in force since
2011,88 companies, when disseminating price sensitive information, are
required to declare relationships with the other parties of the transaction




83
   For interim financial reports, Council Directive 2007/14, art. 4, 2007 O.J. (L 69) 27 (EC),
implementing Council Directive 2004/109, art. 5(4), 2004 O.J. (L 390) 38 (EC), requires
information on individual transactions that have taken place in the first six months of the
financial year to the extent that they have materially affected the financial position or the
performance of the enterprise during that period, as well as major developments thereof.
84
   See RPT Regulation, supra note 35, art. 5(8) (listed companies shall provide information, in the
interim and annual reports, on each material transaction entered into during the reporting
period).
85
   Within this variable, a score of 1 is assigned if disclosure on the terms of the transaction is
mandated, but not on Mr James’s conflict of interests; 0 is assigned otherwise.
86
   See supra note 47 and accompanying text.
87
   See supra note 47 and accompanying text.
88
   See RPT Regulation, supra note 35, art. 6(1)(a).




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which might result in a conflict of interest.89

            Once the suggested coding corrections are considered, the misleading
impression that nothing relevant has been done in recent years fades away.
Table 1 and Figure 1 below display the DBR coding with the adjustments we
deem appropriate.90



            Table 1

         Extent of Disclosure Index (Sub-Variables)                     2011 Adj.         2012 on Adj.

     1   What corporate body provides legally sufficient approval for       1                    2*
         the transaction?


     2 Whether disclosure of the conflict of interest by Mr James to       2                      2
       the board of directors is required?


     3 Whether immediate disclosure of the transaction to the             1**                     2
       public and/or shareholders is required?


     4 Whether disclosure of the transaction in published periodic        0**                     2
       filings (annual reports) is required?


     5 Whether an external body must review the terms of the               0                      0
       transaction before it takes place?


         Extent of Disclosure Index                                        4                      8



 * The variable is adjusted to reflect the role of the binding opinion by the independent
 directors’ committee (see parts 5 and 6).


 ** The variables are adjusted to reflect the situation prior to the full RPT Regulation’s entry
 into force (Jan., 2011), where no explicit duty to immediately disclose Mr James’s conflict of
 interest was provided for and no ad hoc disclosure was mandated in the annual accounts.




89
   Furthermore, listed companies shall issue, within seven days of the approval, an information
document whose contents are set by the Regulation itself and encompass all the features of the
transaction as well as a detailed disclosure of James’s interests (see supra note 49 and
accompanying text; see RPT Regulation, supra note 35, art. 5(1) and (3); see also RPT Regulation,
supra note 35, Annex 4). Although such information is more detailed than that provided for
under RPT Regulation, supra note 35, art. 6(1)(a), it goes far beyond what is necessary to reach a
score of 2 for the variable “Whether immediate disclosure of the transaction to the public and/or
shareholders is required?”. We therefore leave it aside because the questionnaire sent to local
experts – although the methodology is silent on the point – focuses only on disclosure to be
performed within seventy-two hours after the transaction is approved (see supra note 49 and
accompanying text).
90
   In order to account for the overall impact of miscoding by the DBR, Tbl.1 and Fig.1 report all
mistakes we identified, whether attributable to basic misunderstandings of the applicable rules
(as explained in pt. 7) or to an unduly formalistic interpretation of the regulatory framework (as
explained in pt. 6).



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       Figure 1




                  Graphic: adjusted rankings for Italy (Extent of Disclosure Index)




By the same token, Tables 2 to 5 and Figure 2 show that Italy would have
ranked much worse in 2011 (93rd instead of 59th), and would have held a
much better position in 2012, when the benefits of the Regulation were to be
assessed for the first time (29th instead of 65th), as well as in the last
available survey at the time of writing (2014: 32nd instead of 49th).



       Table 2

                            2011 Original           2011 DBR Corr.          2011 Adj.**
 Protecting Investors
                                 59th                    44th                    93rd
 (rank)

 Extent of disclosure
                                   7                       7                       4
 index

 Extent of director
                                   4                       4                       4
 liability index

 Ease of shareholder
                                   6                      7*                       7
 suits index

 Strength of investor
                                  5.7                      6                       5
 protection index




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       Table 3

                               2012               2012 DBR Corr.            2012 Adj.**
Protecting Investors
                               65th                    46th                    29th
(rank)

Extent of disclosure
                                 7                       7                       8
index

Extent of director
                                 4                       4                       4
liability index

Ease of shareholder
                                 6                      7*                       7
suits index

Strength of investor
                                5.7                      6                      6.3
protection index



       Table 4

                                      2013                         2013 Adj.**
Protecting Investors
                                      49th                             32nd
(rank)

Extent of disclosure
                                       7                                8
index

Extent of director
                                       4                                4
liability index

Ease of shareholder
                                       7                                7
suits index

Strength of investor
                                       6                               6.3
protection index



       Table 5

                                      2014                         2014 Adj.**
Protecting   Investors
                                      52nd                             34th
(rank)

Extent of disclosure
                                       7                                8
index

Extent      of  director
                                       4                                4
liability index

Ease of shareholder
                                       7                                7
suits index

Strength of investor
                                       6                               6.3
protection index


 * In Tables 2 and 3, in the “[year] Corr.” column, the variable “Ease of shareholder
 suits index” is 7 – instead of 6 – so as to reflect the appropriate coding of the variable



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   “Whether the level of proof required for civil suits is lower than that of criminal cases?”
   as subsequently rectified by the DB team (see supra note 34 and accompanying text).

   ** In Tables 2-5, the “[year] Adj.” column displays the appropriate coding in light of
   our analysis.



        Figure 2




                    Graphic: adjusted rankings for Italy (Protecting Investors Index)




Therefore, while no improvement and a relative loss in competitiveness
emerge if one compares years up to 2011, on the one hand, and years since
2012, on the other, the adjusted variables highlight that Italy has actually
gained fifty-nine positions as of 2014 in comparison with 2011. Inaccuracies
of the DBR are summarised in Table 6, which measures their impact on the
ranking of Italy in 2011 and 2014.



        Table 6

 Investor protection Index     Original        DBR Corr.      Adj. Ranking           Δ         Δ
                              Ranking (1)     Ranking (2)          (3)           (3) – (1) (3) – (2)
 2011                            59 (5.7)         44 (6)           93 (5)           - 34           - 49

 2014                              n.a.           52 (6)         34 (6.3)            n.a.          + 18

 Variation (positions)             n.a.             -8             + 59              n.a.          + 67




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     8.   CONCLUSIONS: FUNCTIONAL APPROACH AND TRANSPARENT ASSESSMENT

The DBR has provided developing and developed countries with incentives to
adopt more effective economic regulation by persuading policymakers that
sound rules may enhance competitiveness and that cutting back on
regulatory costs and red tape are key ingredients of economic growth. 91
Accuracy in the preparation of rankings is however essential to avoid that
inadequate assessments convey distorted incentives to local reformers. Our
analysis reports some coding errors that affect or have affected DBR’s
assessment of Italy’s investor protection regime. Some mistakes are simply
the result of erroneous interpretations of the applicable rules (e.g. the
scoring on the mandatory individual RPTs disclosure in the annual accounts)
(part 7). Others are methodological (e.g. the identification of the body
providing legally sufficient approval for the transaction). Indeed, they fail to
recognise that the procedural guarantees set forth by the Consob RPT
Regulation are, in fact, more effective than the relevant DBR variables on
board approval (part 6).

          No ranking system can be perfect, as quantitative evaluations require
a certain degree of simplifications.92 However, some strategies may be
adopted so as to improve the accuracy of the DBR assessment, as well as the
shortcomings which affect the evaluation of the Italian legal framework for
RPTs transactions. There is room for improving the coding process in the
formulation of these indicators. Although the DBR assessment is already
following some best practices for scoring exercises (e.g., publication is made
of the identity of the experts providing the first set of information
concerning the relevant national provisions 93), its transparency is still
insufficient when it comes to justifying unclear coding decisions. 94



91
   See, e.g., Ménard & Du Marais, supra note 4, at 67 (notwithstanding their imperfection, DBRs
have the merit of having put high on the agenda the analysis of institutions as a key factor for
understanding development and growth); INDEP. EVALUATION GRP., supra note 5, at 44 (same).
92
   See Siems, supra note 2, at 529.
93
   Other organizations providing indicators are not equally transparent: for a sample review see
Nikhil K. Dutta, Accountability in the Generation of Governance Indicators, GOVERNANCE BY INDICATORS.
GLOBAL POWER THROUGH QUANTIFICATION AND RANKINGS 43, at 449-450 (Kevin E. Davis et al. eds.
2012).
94
   See INDEP. PANEL, supra note 9, at 5 (suggesting publication of contributors’ submissions so as
to allow external users to gauge the level of uncertainty associated to each index).



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Furthermore, the reliability of the rankings may improve by providing for
external review of the decisions of the DBR. This would reduce the risk that
institutional inertia, as well as confirmation biases, could produce inaccurate
final indicators even when the outcome of the process is prone to clerical
rather than methodological errors.95

         Besides making the coding process subject to review and explaining
borderline cases in the national reports, the methodology should always
follow a more functional approach. By focusing on the function of the rule
under scrutiny rather than on its formal features the highlighted drawbacks
could be substantially reduced. In particular, this approach would introduce
at least two improvements. Firstly, before rankings are made a more accurate
knowledge of the societal context of the assessed jurisdictions would have to
be obtained.96 By assessing the scrutinized rules in coordination with other
legal and economic features the concerned jurisdictions may deliver more
complete results. Indeed, in order to perform a statistical analysis the DBR
relies on an unrealistic set of rules that make it prone to simplification.97
Second, any set of regulatory standards will be unlikely to include all relevant
investor protection laws: complete information would be difficult to collect
and to handle. In this scenario, a functional approach can improve the quality
of the assessment by avoiding the risk of circularity which is one of the
major flaws of the formalistic approach. Indeed, the latter relies on the
assumption that only specific legal devices can assure effective investor
protection, and therefore it disregards the alternatives which do not fit into
the grid.98

         As a consequence of the DBR methodology, countries wishing to
reform their regulation on investor protection may be incentivised to adopt a
box-ticking approach and pass regulations that reflect the evaluation grid of
the DBR even if investors have no benefits from the reform. For instance,


95
   See Dutta, supra note 93, at 440. According to INDEP. PANEL, supra note 9, at 5, 29-30 miscoding
might be more easily avoided if risk-mitigation devices, such as external reviews, were included
in the assessment process.
96
   On the epistemic role of a functional approach see Michaels, supra note 16, at 3-4.
97
   See id., at 12, on a statistical reductionism.
98
   An underlying home bias may explain the selection bias, as a consequence of the natural
tendency for those involved in the preparation of the assessment grid to prioritise legal solutions
in place in the jurisdictions of origin (see supra note 31 and accompanying text).




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Italy would gain a number of positions in the PII ranking by amending a
small number of legal provisions in a fashion that would not substantially
improve the current level of minority protection. For instance, mandated
abstention for “Mr James” could be introduced. As we have shown, this
reform would have almost no impact on his ability to influence the
company’s decision. Secondly, as long as the DBR focuses on default rules, 99
Italy’s performance would further improve by requiring shareholders to
approve the transaction, while still granting companies the possibility of
opt-outing and of granting independent directors a veto power.100 Once more,
there is no evidence that this would strengthen investor protection.
Controlling shareholders could easily circumvent the default rule by
amending the charter. Thirdly, as the Consob RPT Regulation allows
independent directors to appoint an external adviser of their choice but does
not    mandate         it,101   imposing     fairness     opinions       would       boost        Italy’s
performance.     102
                       However, the legal and economics literature often has doubts
about the reliability of board-appointed external experts.103 For this reason,
their appointment is not compulsory.104




99
    See supra note 61 and accompanying text.
100
     A similar solution would be ruled out, though, if the E.U. Commission’s proposal on the
approval by general meeting of significant related party transactions were adopted (see supra
note 44 and accompanying text). In the proposal, shareholder vote is mandated with no
possibility of opt-outing.
101
    See supra text accompanying note 41.
102
    See Tbl. 1, line 5.
103
     See, e.g., Jonathan R. Macey, The Regulator Effect in Financial Regulation, 98 CORNELL L. REV. 621
(2013) (fairness opinions are aimed at providing protection against litigation risk rather than
conveying useful information to directors and investors; external experts have an incentive to
deliver opinions aligned with the results preferred by the company’s board); Darren J. Kisgen et
al., Are Fairness Opinions Fair? The Case of Mergers and Acquisitions, 91 J. FIN. ECON. 179 (2009)
(fining evidence that fairness opinions in M&A transactions provide little value to shareholders
of target firms, while results are mixed for acquiring firms’ shareholders); Steven J. Cleveland,
An Economic and Behavioral Analysis of Investment Bankers When Delivering Fairness Opinions, 58 ALA.
L.R. 299 (2006) (reputational concerns provide weak constraints on investment bankers having
an incentive to align their opinion with their clients’ wishes).
104
     Macey, supra note 103, at 622-3 absent Delaware courts’ de facto mandate for fairness
opinions, these would perform their function better); Nina Walton, Delegated Monitoring: When
Can Boards Rely on Outside Experts?, 14 AM. L. & ECON. REV. 271, 276-277, and 295 (2012) (when
second opinions are deemed useful to convey relevant information to the market, companies are
likely to spontaneously resort to them. When this is not the case because the external experts are
prone to conflicts of interests, mandating a fairness opinion will unduly certify the transaction
to the detriment of investors).



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If the measures we have hypothesized above were introduced, Italy’s Extent
of Disclosure Index could reach 10.105 The PII would subsequently jump to
7,106 and, ceteris paribus, the DBR for investor protection ranking Italy would
be 16th in the DBR ranking. As shown, investor protection would not
substantially improve.

         The current methodology therefore incentivises convergence to a
single set of legal devices and inevitably rules out idiosyncrasies or, at least,
makes them harder to evaluate. Therefore, it discourages the implementation
of new legal devices which would lower the costs of implementation whilst
ensuring the same level of investor protection. In other words, homologation
trumps experimentation.107 By contrast, a functional evaluation would
increase flexibility,108 which is pivotal in the field of investor protection
because tunneling techniques change over time in accordance with the
relevant legal framework.109 Therefore, like in a cops and robbers game, it
requires the continuous testing of new legal strategies.




105
    A mandatory fairness opinion would add one point on the score of 7 currently assigned for
the extent of disclosure index. Mandatory Mr James’s abstention would add another point, while
shareholder involvement – a measure alternative to Mr James’s abstention – would add two
points.
106
    PII is in fact the average of the Extent of Disclosure Index (which would increase to 10), the
Extent of director liability index and the Ease of shareholder suit index (which would
respectively remain 4 and 7).
107
    Larry Ribstein & Bruce Kobayashi, An Economic Analysis of Uniform State Laws, 25 J. LEGAL STUD.
131, 140-141 (1996) (uniform laws determine a lower degree of experimentation).
108
    On the role of functionalism in the production of rules see Michaels, supra note 16, at 4. INDEP.
PANEL, supra note 9, at 23, suggests reviewing the Indexes periodically in order to reduce
selection biases.
109
     Vladimir Atanasov et al., Law and Tunneling, 37 J. CORP. L. 1 (2011) (analysing different
tunneling techniques and anti-tunneling strategies, and claiming that there is no broad
consensus on which rules are better suited to protect investors).




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