The Investing in Inclusive Finance program at the Center for Financial Inclusion at Accion explores the practices of investors in inclusive finance. Across areas including risk, governance, stakeholder alignment, and fund management, this blog series highlights what’s being done to help the industry better utilize private capital to develop financial institutions that incorporate social aims.

With good governance a top priority for investors, donors, and regulators, it’s time to ask exactly what good governance looks like. A recent debate about the Anglo-American (shareholder) versus the European (stakeholder) models of governance set out to answer that question. The Governance Working Group (GWG), a 25-member group of microfinance professionals focused on governance, hosted by CFI, sponsored a webinar to discuss the characteristics of the two models and their implications for microfinance institutions, equity funds, and clients.

Lauren Burnhill of One Planet Ventures started off the debate by describing the model of single tier governance commonly used in the U.K. and U.S. In this model, each company has a single board that includes both executive directors, who are employed by the company or have significant ties to its corporate management, and non-executive directors who have no direct relationship with the company or its management. The company CEO may serve as chair of the corporate board, in which case a great deal of power is invested in that board position. The overarching duty of the board is to protect the interests of shareholders. In this model, particular importance is given to the protection of minority shareholder rights.

Judith Mayer of the Technische Universität München described the European (stakeholder) model. It is a two-tier model, with both a management board and a supervisory board, and it focuses not only on the interests of shareholders, but also of employees and clients. The management board is comprised of the executive committee of an organization that manages the day-to-day affairs and represents the organization. The supervisory board is not involved in day-to-day management, but instead shapes strategy, oversees the management team, and safeguards the institution overall. Underpinning the European model is the view that management should make decisions for the benefit of all stakeholders.

Both models have their advantages. A single tier board is more cost-effective, and its significant disclosure requirements provide transparency. In the European model, diverse groups have a stake in the functioning of the firm, and employees often participate on supervisory boards. During the debate it was evident that the members of the Governance Working Group generally preferred the European stakeholder model due to its inclusive nature. The Anglo-American model, with its singular focus on shareholders, places a large emphasis on profit with little attention to the role of the corporation in modern society. As a result, there is less emphasis on the social or environmental impact of corporate decisions.

The GWG members strongly agreed that a profit-maximizing lens should not be the only view represented within the boardroom and considered how best to ensure that governance practices reflect the values and principles inherent in their mission statements, including the voice of the client. To date, few MFI boards count clients as board members. Fonkoze in Haiti and CARD in the Philippines are noteworthy exceptions. Bringing the client voice to the boardroom remains an important challenge for both models.

One possible approach is a hybrid governance structure for microfinance. Lauren Burnhill challenged the GWG to follow global corporate governance trends and engage in the broader dialogue about “good practices.” For instance, Norges Bank Investment Management (NBIM), the arm of the Norwegian central bank that runs the Government Pension Fund, has put forward an “applied ownership” model as the next phase of corporate governance. This approach moves away from a rigid and detailed rules-based approach to governance and stresses a relationship of trust and accountability between shareholders and company boards, featuring high-level principles.

Is it possible to integrate shareholder and stakeholder-focused governance models or is there a need for a broader multiple bottom-line framework of some kind?

Image credit: University of Maine

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There are a number of valuable governance initiatives going on in our sector. We count five at the practitioner level, four at the investor level and four more led by policy-makers.  While these projects are coming out with interesting new insights and a range of practical tools that could be of use to other actors, they have limited dissemination channels for reaching those for whom their work is intended.

Enter the Governance Working Group (GWG), created by the World Microfinance Forum in Geneva in 2010 and housed within the Center for Financial Inclusion at Accion since April 2012, with CGAP as an active partner. The group is made up of experts in microfinance governance, many of whom are leading the initiatives mentioned above.  They cover governance projects spanning a number of geographies, topics and players:  one initiative is developing a governance rating methodology in a pilot project in Central America; another has produced a publication on current Board composition and structures across MFIs in several regions, yet another sub-group is testing peer-to-peer learning workshops in the field, where CEOs and Board Chairs share governance experiences amongst each other.

Recent work that has had input from the Governance Working Group includes:
1) Measuring Governance in Microfinance: Initial Findings from a Pilot Project – a paper produced by the World Microfinance Forum Geneva (WMFG) and MIX.  This publication discusses a set of self-reporting governance indicators developed by WMFG with the help of Working Group members.  The indicators were tested on 160 MFIs by MIX.  On analysis of the results, we were pleased to see that the majority of MFIs work through a range of Board committees and that the practice of naming the same person Chair and CEO was uncommon.  We also saw a strong presence of risk management functions across geographies.  Whilst this initial data collection effort was not able to establish an empirical relationship between indicators of governance and indicators of social and financial performance, the pilot study yielded sufficiently strong results to allow some of the indicators to be included in MIX’s ongoing data collection.

2) CGAP’s most recent focus note, Voting the Double Bottom Line: Active Governance by Microfinance Equity Investors, argues that the microfinance industry is lagging in applying accepted good practices in governance. Author Kate McKee interviewed more than 100 microfinance insiders to reveal a widely-held perception that equity investors – including private microfinance funds and public international financial institutions – are not doing enough to govern actively and ensure strong oversight of MFIs, particularly when it comes to social performance.  Governance Working Group members actively contributed in the interview process.

The Center for Financial Inclusion is very pleased to host the Governance Working Group it continues its important work. Click here to read more about plans over the next year!

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