Governance: FAQs
Corporate governance provides the framework through which an institution’s diverse stakeholders – investors, board members, management, and employees – set the strategic vision, monitor performance, and manage risks. The objective of the governance structure is to mediate the interests of the various stakeholders and protect the long-term health of the institution.
Good governance can help an institution fulfill its mission, increase efficiency, and improve its ability to attract customers and investors. More specifically in microfinance, governing boards play an important role in helping the institution identify and navigate trade-offs that often arise between the mission and the financial bottom line. Poor people’s financial lives are at stake; governing boards help protect their interests by promoting sound and transparent operating practices.
As the microfinance industry grows and becomes more complex, governance plays an increasingly important role in managing sound institutions and preventing crises. New products, markets, providers, and financing strategies require a clear strategic vision and decision-making guidelines, agreed upon by the institution’s various stakeholders. Managing the diverse objectives and expectations of investors, board members, management, and staff can be challenging; institutions that invest in strong governance structures and processes will be better placed to navigate today’s complex operating environment.
Board members discuss a wide range of topics of strategic importance for the institution. The board will often discuss important issues as a group, and form working groups of board members to play a more active role in setting strategy and monitoring certain areas. A sample of the topics typically discussed by governing boards includes the following:
- Pace and quality of the institution’s growth
- Product diversification and service to new client segments or geographies, including small savers and rural segments
- Responsible pricing and other client protection issues
- Appropriate levels of profits and how they should be allocated
- Executive remuneration
- Financing strategies and ownership structures with more commercial players interested in MFI
Successful boards should be well-informed, able to guide strategy, and willing to challenge management as needed. To maximize a board’s effectiveness, the following should be taken into account in the board guidelines:
- Clarity on the respective roles of board and management
- Policies on conflict of interest of board members
- Information disclosure to the board
- Effective use of board committees
- Incorporating the social bottom line into strategy, performance, and decision-making
- Management capture and “founder syndrome”
Equity investors in MFIs, funds, and other MIVs can shape MFI governance at every step of the investment process – the way they do due diligence, the provisions they put in shareholder agreements, how they monitor their investments, and how they exit. Investors that choose to govern actively throughout the investment process can promote stronger MFI practices.
Recent research shows that equity investors are not fully capitalizing on the opportunity to strengthen governance. The specific areas for improvement include:
- Actively engaging in and beyond the board room
- Ensuring adequate qualifications, time commitment, and continuity of investors’ nominees
- Addressing director passivity and reticence to question management proposals
- Aligning shareholder interests
Below are some of the initiatives working to advance microfinance governance.
BBVA Microfinance Foundation Initiative (Latin America): Published two documents on governance and organizing training workshops in eight Latin American countries to promote their adoption.
The Center for Financial Inclusion at Accion’s Africa Board Fellowship: Engages CEOs and board members from financial service providers throughout sub-Saharan Africa in peer learning and exchange through client visits, seminars and virtual dialogues, enabling them to deliver better financial services to their clients.
CERISE: Helps MFIs reach their social and financial goals through more effective governance. CERISE developed a handbook to guide others through the same process.
SEEP Network: Published a toolkit providing associations with a strong foundation for putting good governance principles into practice. The toolkit offers valuable resources for the development of governance trainings.
Social Performance Task Force (SPTF) Universal Standards: Developed a set of management standards for institutions pursuing a double bottom line. Section two of the standards calls for institutions to “ensure board, management, and employee commitment to social goals.” The standards document provides additional detail on specific standards and essential practices to ensuring commitment to the institution’s social goals.