Getting Back to Governance
A lack of good corporate governance lies at the heart of some of the recent failures in microfinance. This is the conclusion of an excellent publication that analyzes 10 cases of “fracasos,” or failures, of microfinance institutions in Latin America. While the analysis of the 10 cases points at several causes for failure, such as methodological deficiencies in credit technology, systemic fraud, uncontrolled growth, loss of focus, inappropriate concept design and state intervention, it suggests that with stronger governance these institutions may have had a better chance at surviving their crises.
Governance defined broadly is the system of people and processes that keep an organization on track and makes major decisions. Governing bodies define and uphold the organization’s goals and mission, guide major strategic directions, manage risks, maintain an organization’s health over time, and ensure accountability throughout the organization. Some key pillars of good governance include risk assessment and management, internal control systems, ethics and fraud prevention strategy, and transparency and trust.
At a workshop on governance, hosted by Calmeadow, Promifin, and Academia de Centroamerica, donors and investors recognized that they were partly to blame as they continue to fund some organizations despite their lack of good corporate governance. Faced with reputation and credit risks, donors and investors are now more concerned than ever about corporate governance. At the workshop, several funders including IFC and the Swiss agency SDC, as well as major investors such as Blue Orchard, responAbility and Triodos, agreed to put more emphasis on good governance in their due diligence and monitoring of the MFIs they fund. Together with raters they are interested in coming up with practical and meaningful benchmarks to measure good governance. Promifin in Central America already developed a technical tool to assess MFI’s corporate governance and offers guidance for improvement. Meanwhile the analysis on Latin American MFI failures focuses on the nuanced situation faced by institutions in that region and draws lessons from which to learn moving forward. I strongly believe good corporate governance is a key issue for microfinance across the globe. Only last week the Governor of the Central Bank of West Africa, BCEAO, commented that “decentralised financial systems are characterised by a deficit of good governance, a catastrophic management, …shortcomings and incompetences of managers.”
So what can funders do about it?
Incentivize good behavior: Funders can signal the importance of good governance and create incentives for MFIs that adhere to good practice or negative consequences for those that do not, e.g. price increases or withdrawal. Grant funders can make payments based on performance on targets related to improvements in governance. Equity investors have a key role to play in the boards of MFIs. Collective action is key; individual funders cannot succeed in doing this alone.
Put theory into practice: As far back as 2005, the Council for Microfinance Equity Funds produced a set of guidelines for implementing good corporate governance in microfinance institutions. Equity investors should apply CMEF guidelines in their investments and raise the issue in boards.
Build capacity: Good governance is central to institutional strengthening efforts and should be integrated with ongoing technical assistance and training initiatives. Building good corporate governance is a continuous process that requires a long term vision. Peer learning is also important.
Please share with us your ideas on how to advance good corporate governance across the industry.
Comments
Hola Antonique and colleagues
Hola Antonique and colleagues,
Governance on Microfinance is not a new issue, but it gains more relevance as the industry growths bigger (i.e. excessive concentration on the decision taking on one person).
Nevertheless as not only “technical” but also “political” issues have to be addressed for an effective improvement on governance, not so much concrete changes have been achieved for most of the microfinance industry worldwide.
Therefore “something new” should be done in a “different way”.
Effective improvement in governance is not only an MFIs responsibility, but a “very shared responsibility” of investors, donors, raters, regulators AND MFIs.
Experience shows that sometimes investors and donors lacked enough time/ involvement/ specialization/ experience to introduce the necessary measures/decisions to address governance issues on the MFIs they supported/invested in.
If no concrete changes are achieved on the requirement, application and evaluation of commonly and accepted benchmarks by investors and donors, supervised/evaluated by more specialized ratings/raters and regulators, we might keep talking about the “governance issues” for a “long time”.
Below you will find the right links to the governance improvement guide developed by PROMIFIN (a program funded by the Swiss Cooperation in Central America implemented by Triodos Facet).
The difference of this guide with other guides we found on microfinance governance worldwide, is that it focus on the “how to” manage the governance improvement process. Therefore it can be used together with any conceptual guide on governance.
The documents are in Spanish, we expect to develop the English version soon.
Guia de Gobernabilidad (Governance Guide)
http://www.promifin-cosude.org/biblioteca/Guia_Gobernalidad.rar
Manual de Soporte (Support Manual)
http://www.promifin-cosude.org/biblioteca/Manual_Gobernabilidad.rar
Base de Conocimiento (Knowledge Base)
http://www.promifin-cosude.org/biblioteca/Base_Conocimiento.rar
Warm regards,
Juan Vega
Hi Antonique, Juan and
Hi Antonique, Juan and colleagues.
As a former Director of MicroFinanza Rating, a worldwide specialized rating agency, we have observed directly in our ratings in the last 10 years that the majority of problems experienced by MFIs are a result of poor corporate governance and management decisions. We found that the most common corporate governance weaknesses (especially in not regulated MFIs) are: key person risk, insufficient knowledge and experience of the board in financial analysis, ineffective information systems that do not flow from one level of management to another, inadequate processes for internal controls, conflicts of interest, and the lack of a regular (auto-)evaluation to develop and adapt the corporate governance according to the growth, internal changes (strategy and objectives) and the external context changes.
Corporate governance is a crucial, complex and ongoing dynamic process whose evaluation and evolution is a good practice for handling unexpected or challenging situations. Good governance requires constant education and development planning. This is especially important when an MFI transforms from a nonprofit to a regulated MFI, with new players joining its ownership and management structure.
Although specialized rating agencies put a lot of emphasis on ownership and corporate governance risk which is a critical area for determining the risk and future potential of an MFI, it is also true that this is a qualitative area very hard to quantify. As Microrate writes in its Technical Guide on performance ratios, ownership, corporate governance and management is an area of analysis which suffers from a lack of indicators.
Therefore, as you have already said, an important area to work are a set of predetermined indicators and it would be very important for all actors (investors/donors, raters , regulators, etc.) to achieve practical, meaningful and commonly accepted benchmarks to measure good governance.
More in general, I think that it is crucial to join efforts to improve the governance evaluation process and develop steps to correct known warning signs. The Technical Guide developed together with Juan and PROMIFIN is a first practical effort into this direction.
Finally, FYI, I would like to mention some other recent initiatives on institutional governance:
• On Thursday, July 8th, IAMFI and MicroFinanza Rating collaborated to host a webinar on corporate governance in microfinance institutions (MFIs): http://iamfi.com/events.html#MFRWebinar
• On the 14th of October 2010, I participated at the debate organized by the World Microfinance Forum (WMF) in Genève between leading European investors and 0two MFIs that had undergone major governance changes. The debate was very interesting and it focused especially on the relationship between ownership and governance and on the shareholders pacts/agreements. I also found the input paper for the conference very interesting. It provides a fresh approach on the parallels between the Corporate Governance issues in the large banks that may have contributed to the financial crisis, and the lessons that can be learnt from these issues for microfinance. Please find the link to download the paper “No 11. Maria Giovanna Pugliese, Same Game Different League. What microfinance institutions can learn from the large banks corporate governance debate, October 2010”:
http://www.microfinanceforum.org/cm_data/Same_Game_Different_League_-_L…
The WMFG is also starting a “Working Group” on institutional governance. This Working Group is quite in line with the objectives of the other Working Group in Latin America that you mentioned (promoted by Calmeadow, Promifin, and Academia de Centroamerica). The two initiatives seem complementary and our idea is to exchange and share information in order to find some synergies and “leverage” the output of the two initiatives.
• I also heard that the BBVA foundation is currently working on some governance guidelines.
Massimo Vita
Thank you, Massimo, for
Thank you, Massimo, for sharing some information on the WMFG’s debate in October. A range of governance issues were discussed, including the applicability of general governance principles from mainstream finance (such as the separation of Chairman and CEO, a majority of independent shareholders, and a one share one vote policy) to microfinance, the issue of microfinance specific governance issues, and the role of investors in strengthening governance in microfinance. For a full article on the debate’s proceedings, please see: http://www.microfinancegateway.org/p/site/m/template.rc/1.9.48410/
The discussion highlighted a need for improved governance in microfinance to avoid and manage crises, and to ensure the industry can continue to grow sustainably. In response to this, the World Microfinance Forum in Geneva is launching an online Governance Platform. This will serve as an information exchange hub, bringing together different players in the industry on the topic of governance and raising awareness. Microfinance practitioners, investors and other stakeholders will be able to sign up to the platform online to show their commitment to improving governance, and can contribute their own ideas and practical tools for the further development of governance in microfinance. The Platform will serve as the “go to” resource for tools and materials to help MFIs improve their governance, and investors to learn more about criteria they can include in their Due Diligence to minimise their exposure to governance risk. Further, the WMFG will produce research on different governance structures and methods used by individual MFIs, to help determine what works and what does not work in governance in microfinance. I would be very interested to hear some feedback on this initiative, which will go online in March 2011.
For more information on the WMFG’s governance platform, please email me: stephanie.geake@microfinanceforum.org
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