> Posted by Danielle Donza

The Council of Microfinance Equity Funds (CMEF) and MicroFinance Network (MFN) recently surveyed their members to find out whether MFIs are paying the people who sit on MFI boards– and if so, how much.

Some observers argue that the practice of offering payment to board members will ultimately attract members with the wrong motivations. They believe that the “right” board members are willing to serve on the board for free because of their passion for the microfinance mission. In fact, this is often true: many MFIs don’t pay their board members at all – 40 percent and 25 percent, for CMEF and MFN respectively.

However, as the microfinance industry matures, and the responsibilities of governance increase, MFIs need to be prepared to compensate their directors in order to attract highly qualified board members with the knowledge to govern a financial institution well. So, it is not surprising that among those MFIs linked to CMEF and MFN the majority do provide monetary compensation.

At present, there is a huge demand for board members in the market. Over 2,000 MFIs report to the MIX Market, and boards conservatively have an average of five board members – meaning there are at least 10,000 board seats to fill. Even those MFIs willing to pay honoraria are finding it hard to attract high-quality board members. Principal among the very valid frustrations of MFIs are that:

  • Directors often don’t have enough time available for active governance and effective oversight.
  • Board members sometimes lack sufficient seniority or qualifications.
  • It is difficult to find directors with the requisite microfinance experience and personal skills.
  • Some investors fail to ever nominate a director, reflecting a “free rider problem.”

Of the MFIs that reported board remunerations, amounts are still generally modest – US $500 per board meeting is a fairly standard level. Since most boards meet quarterly, board members are usually paid about $2,000 a year (plus travel expenses). Among the 18 percent of MFIs that reported paying an additional annual retainer fee to board members, that amount was generally about an average of $6,000 per year when offered. Thus, a board member being compensated with an annual retainer of $6,000 and a per board meeting rate of $500 would typically receive about $8,000 per year (assuming quarterly meetings).

The maximum that was reported for a per meeting compensation was $3,000 and the maximum annual retainer fee reported was $9,000. So, at the very most, in a very few number of cases, a board member might earn $21,000 for a year’s service on a board (again assuming quarterly meetings).

Some MFIs also pay additional amounts to the board chair and committee members, since those roles often require significantly more time and experience or technical skills. This additional compensation is usually not large – between $1,000 to $2,000 per year (or roughly $250 to $500 per board meeting). And approximately 60 percent of MFIs reported covering some of the travel expenses for their board directors, most often airfare followed by hotel expenses and rarely a per diem.

Clearly, there is a disconnect in the industry between the large demand for good governance, and the lack of qualified candidates to meet this need. Reaching back to econ 101, when demand outstrips supply, the price usually goes up, and it seems inevitable that the Invisible Hand will slowly start to push the price of good board directors up. Some regions, such as francophone Africa, may already see this; MFIs in that region offer some of the highest board compensations reported in the survey.

Another trend that will likely affect board compensation practices is the use of independent board directors who are unrelated to any shareholder and are totally un-conflicted. Best practices suggest that at least 25 to 30 percent of a board should be independent, but this is a difficult role to fill, given that these directors have the same board responsibilities as other members without having any “skin in the game.” Why would independent board members spend large amounts of time on their board responsibilities and take those responsibilities seriously if not for some additional compensation? Yet, over 60 percent of the MFIs reported paying independent directors the same amount as the other directors. And 87 percent of the CMEF respondents reported using only or mainly fund employees (that is, fund manager investment officers) to serve on boards.

Ultimately, if MFIs are expecting high-caliber, highly qualified, senior people to commit a significant amount of time to their governance duties, sometimes with personal liability, often with extensive travel, then they need to be willing to compensate directors for their time and efforts. The role of a board director needs to be seen as a responsibility, not an honor, and remuneration underscores the importance of that role.

Image Credit: dypadvisors.com

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