Soulémane DJOBO opened with a definition of governance, in particular stressing the need to balance interests of all stakeholders. He indicated how legal status, products and partners need to be taken into account when considering governance risk.
Emmanuelle JAVOY stated that responsibilities for governance link a general assembly, who as shareholders determine mission and vision; a Board of Directors develop these into goals, supervising and addressing critical issues; a management team translate goals into milestones, indicators, planning and implementation; and executive staff. Governance also takes external factors into account: clients, the target market, investors,
regulatory and supervisory developments and competition.
Key success factors for good governance are alignment in interests between shareholders, commitment at staff and management level on organisational goals, and accountability across the organisation based on measurable goals. Furthermore, the right information, knowledge and skills are needed at all levels. Good governance requires foresight to anticipate risks and respond adequately and timely to critical situations.
She gave several examples of “bad” governance. For NGOs issues can arise when assemblies and boards do not have “skin in the game”, leading to weak oversight or low accountability. She gave an example where a strong founder appointed his personal business contacts to his board who did not provide critical checks to his decisions. Commercial entity shareholders can be tempted to high return/risk strategies if they are not at risk, for example for deposit taking institutions without sufficient regulatory oversight, or highly leveraged institutions. Here she mentioned a leasing company whose new product line was highly attractive to MIVs and where excess capital was used for high risk investments. Finally, for cooperatives, assemblies might lack skills and knowledge to control the board or management. Also, if members are net-borrowers, interest in the institutions long-term viability can be low, leading to high-risk investments. Javoy concluded that having “skin in the game” is important, which can be financial, reputational or in terms of time invested.
According to Giovanni CALVI governance is of increasing interest to the microfinance community as a source of risks. He focused on three aspects. Firstly, he introduced social governance as requiring an adjusted concept of risk management, defining risk as “the probability of incurring financial and social losses” instead of only financial. He mentioned that although social losses eventually have financial implications (e.g. loss of client trust), there is a tendency among boards to look more closely at MFI finances. Guarding against mission drift can be addressed through board composition, where he cautions that a numerical balance only is not sufficient. Instead there is a call for improvement of social performance understanding and capacities across the board.
Secondly, he stressed the direct relationship between quality of information and governance. Good governance requires close consideration of what indicators are used, against which targets and timelines, the form in which information is provided, by whom (independence) and to whom (are they financially educated). Distorting reality is a risk when members are not financially educated.
Thirdly, in terms of credit products, Calvi provided examples from Latin America on imbalances between assets and liabilities among credit unions, for example providing 30 months’ working capital loans while deposit terms are only for nine months. He showed how this is caused through governance deficits, with a board leaning too much towards member needs (more loans at lower rates) and management goals (growth).
To overcome governance deficits, external support might be needed. Calvi stressed that external support needs to be sensitive to institutional history. As such, combining support with self-assessment is important to ensure well-balanced interventions.
Birgit GALEMANN focused on boards within cooperatives, stating that many lessons learned during her work can also be applied to commercial MFIs. Although in general the role of boards is well understood i.e. defining and upholding strategic objectives, establishing annual strategic targets and supervising management staff, good governance in cooperatives is under pressure. Empowering non-professional/volunteer boards (of cooperatives), vis-à-vis management and staff not only requires access to the right information at the right time and in the right format, but also external support on how to break down big issues into small actions, and deciding on where to start.
Galemann showed an Excel format she developed which provides one-sheet overviews of key indicators. These allow the analysis of trends, and to filter information in order to determine where action is required, either per product, per client group, per loan officer or region. It provides a board with an understandable overview which allows for quick appraisal and the development of strategy on key issues, instead of providing abstract indicators which are difficult to understand for volunteers.
The discussion firstly revolved around how to include social indicators in the tool presented, and how to train the board in using those. Calvi indicated that this firstly requires engagement at the general assembly level to build awareness. As regulators focus on financial sustainability, boards tend to focus on financial indicators as well. Although social governance requires social indicators to be measured, some financial indicators, such as PAR can be used as proxy.
The discussion then turned to governance vis-a-vis external factors. Javoy indicated that this requires that the board has sufficient information on the context in which the MFI operates. Where in smaller cooperative organisations, and those operating in a particular geographic area, members are an important source of such information, larger organisations need to assign staff to, for example, provide information on general indicators or changes in legislation or supervisory procedures. Djobo concluded that an important main issue is whether such information is incorporated in governance effectively.