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CURRENT GOVERNANCE PRACTICES OF MICROFINANCE INSTITUTIONS A Survey Summary

October 1998 Anita Campion


Table of Contents TABLE OF CONTENTS ........................................................................................................................ i INTRODUCTION................................................................................................................................. iii PART I: GOVERNANCE SURVEY OVERVIEW: SUMMARY OF CONCLUSIONS…….……………1 KEY SUMMARY POINTS ..........................................................................................................................1 NON-PROFIT VS. FOR-PROFIT INSTITUTIONS .......................................................................................... 2 MANAGING DIRECTOR VS. BOARD MEMBER RESPONSES ........................................................................ 4 AREAS OF CONCERN IN MICROFINANCE GOVERNANCE ........................................................................... 5 REMAINING QUESTIONS FOR THE CONFERENCE ...................................................................................... 9 PART II: GOVERNANCE PRACTICES OF NON-PROFIT MICROFINANCE INSTITUTIONS 11 ORGANIZATIONAL STRUCTURE AND OBJECTIVES.................................................................................. 11 BOARD MEMBER MOTIVATION ............................................................................................................ 12 BOARD COMPOSITION ......................................................................................................................... 12 BOARD STRUCTURE............................................................................................................................. 15 BOARD MEETINGS ............................................................................................................................... 16 ROLE OF THE BOARD ........................................................................................................................... 17 INSTITUTIONAL PERFORMANCE............................................................................................................ 20 CONFLICT AND RESOLUTION................................................................................................................ 21 PART III: GOVERNANCE PRACTICES OF FOR-PROFIT MICROFINANCE INSTITUTIONS 25 OWNERSHIP STRUCTURE ..................................................................................................................... 25 BOARD COMPOSITION ......................................................................................................................... 26 BOARD STRUCTURE............................................................................................................................. 29 BOARD MEETINGS ............................................................................................................................... 30 ROLE OF THE BOARD ........................................................................................................................... 31 INSTITUTIONAL PERFORMANCE............................................................................................................ 34 CONFLICT AND RESOLUTION................................................................................................................ 35 ANNEX A MICROFINANCE INSTITUTIONS SURVEYED .......................................................... 39 ANNEX B GOVERNANCE SURVEY QUESTIONNAIRES ............................................................. 43

i

Current Governance Practices of Microfinance Institutions

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Introduction This survey was conducted in August 1998 in preparation for a conference on “Effective Governance of Microfinance Institutions” to be held in Washington, D.C. October 18-20, 1998. The conference objectives are: 1) to identify and discuss the main issues related to the governance of microfinance institutions; 2) define effective governance practices in microfinance institutions; and 3) develop guidelines that can be used to improve the accountability and effectiveness of microfinance governance. In preparing for the conference, the conference conveners, ACCION International, CALMEADOW, and the MicroFinance Network, used a survey instrument to develop baseline data and to summarize the current governance practices of some of the most advanced microfinance institutions in the world. The survey was developed to gather this information, the results of which are summarized in this document. To ensure that the development of governance guidelines based on practitioner input, this document will serve as a basis for opening the conference discussions and for comparing changes in governance practices identified by a follow-up survey. The survey was sent out to the managing director and a board member of 42 microfinance institutions from the following regions: 18 from Latin America; 13 from Africa; 10 from Asia; and 1 from Europe. Of these, 23 are non-profit organizations and 19 are for-profit, formal financial institutions. Annex A provides a complete list of all institutions that received survey questionnaires. These institutions were selected based on the following criteria: •

experienced microfinance practitioners as indicated by size, outreach, and sustainability;

•

institutional variety;

•

and geographical balance.

While other microfinance institutions also meet these criteria, limited resources demanded an efficient selection of institutions that were most accessible to the conference conveners and that could respond in a timely and thoughtful manner. This document summarizes the findings of the 44 survey responses representing 25 different MFIs. The document is divided into three sections. “Part I: Governance Survey Overview” highlights the major findings, areas of concern, and remaining questions to be addressed in more detail at the conference. The remaining two sections summarize the governance practices of non-profit and for-profit MFIs. “Part II: Governance Practices of Non-Profit Microfinance Institutions” summarizes survey responses from 14 managing directors and 13 board members from non-profit foundations, public and noniii


governmental institutions. “Part III: Governance Practices of For-Profit Institutions” summarizes survey responses from 11 managing directors and 6 board members from formal financial institutions, of which 3 are cooperatives/credit unions. GOVERNANCE SURVEY RESPONSES Managing Directors

Board Members

Total

Non-Profit

14

13

27

For-Profit

11

6

17

Total

25

19

44

Institutional Type

The survey questionnaires were adapted by institutional type (non-profits and for-profits) and type of respondent (managing directors and board members), resulting in four different variations of the survey. In each case, the managing director was asked to select the board member to complete the other questionnaire for their organization. The surveys were sent in English, Spanish, and French to ensure a maximum level of response. Annex B provides a copy of the Governance Survey Questionnaires in English. While the surveys were conducted in an anonymous fashion, it was evident that most of the board responses came from the same institutions, as the two surveys often were returned together. For this reason, it was also possible to compare board member and managing director responses from the same institution. One should note that not all questions were answered in some of the returned surveys, explaining the occasional discrepancies in the summary totals. These findings are not representative of all microfinance institutions or of statistical significance given the limited number of responses by each type of institution and respondent. They do, however, provide interesting indicators of possible trends in microfinance governance among leading institutions, and enable us to draw general conclusions about governance practice. The conference conveners would like to thank the many managing directors and board members who took the time to complete this survey. The thoughtful and articulate responses provide an interesting base from which to commence the “Effective Governance of Microfinance Institutions” conference. The conference conveners are grateful to these organizations for creating the initial launching point for discussion from which governance guidelines can evolve.

September 1998

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Part I: Governance Survey Overview: Summary of Conclusions This document synthesizes the responses provided by 25 microfinance institutions (MFIs) to a series of questions concerning current governance practices. “Part I: Governance Survey Overview” reports the major findings, areas of concerns and key issues identified by the survey. “Part II: Governance Practices of Non-Profit Institutions,” compiles responses from 14 managing directors and 13 board members of non-profit microfinance institutions which reach from 6 thousand to 2.1 million clients and manage loan portfolios ranging from US$750,000 to $100 million. “Part III: Governance Practices of For-Profit Institutions” summarizes responses from 11 managing directors and 6 board members of for-profit institutions that serve from 2,500 to 229,865 clients and manage loan portfolios from US$548,175 to $25 million.

Key Summary Points While a survey of a limited number of institutions does not serve to draw final conclusions about governance, responses provide some interesting indicators of possible trends in microfinance governance, and allows us to make general assumptions about current governance practices of microfinance institutions (MFIs). The main findings, areas of concern, and remaining questions listed below will be presented and addressed at the “Effective Governance of Microfinance Institutions” conference to be held October 18-20, 1998 in Washington D.C. 1. The governance practices of non-profit and for-profit MFIs are more similar than different, suggesting that institutional structure alone plays a limited role in determining the governance practices of MFIs. 2. Board members responded similarly to the same questions asked of managing directors, indicating that, in general, board members are adequately informed and working closely with management. 3. Respondents highlighted several areas of concern regarding their governance practice. These are discussed in greater detail below: Ø Frequency of board meetings seems insufficient to address the variety and complexity of issues of a rapidly growing advanced institution in an infant industry. Ø MFIs tend to depend on a key person, usually the managing director or chair. Ø Boards need more formalized selection, orientation and training of members. Ø Board committees are few and appear underutilized, especially in non-profits. Ø Indicators used to measure institutional and managing director performance differ, resulting in potential confusion regarding mission and expectations of staff.

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Ø Several MFIs, non-profits in particular, do not adequately address the issue of lack of pure private capital. Ø Non-profits were reluctant to acknowledge the existence of conflicts of interest. Ø Credit unions with boards comprised primarily of net borrowers are biased towards the borrowers’ perspective and interests, which is potentially detrimental to long-term institutional sustainability. Ø An excessive percentage of internal board members works against effective governance in terms of reduced accountability, increased conflicts of interest, and stifled innovation. 4. Other remaining questions for conference discussion emerging from the summary: Ø Several boards are currently addressing issues related to transformation from a non-profit to a for-profit MFI. They are interested in learning about specific governance-related issues and appropriate structures to facilitate institutional transformation. Ø The survey has identified the current norms of MFIs’ governance practices. The conference will address the ways in which existing governance practices can be improved to enhance the overall effectiveness of MFIs. Together, the conference participants will develop guidelines of best practices in microfinance governance.

Non-Profit Vs. For-Profit Institutions Governance practices of non-profit and for-profit MFIs are more similar than different. The similarity of responses to the governance survey questionnaires suggest that institutional structure alone plays a limited role in determining governance practices of microfinance institutions. This may be related to the fact that many for-profit MFIs are still primarily owned by non-profit organizations. The survey identified the following similarities between non-profit and for-profit governance norms: Organizational Objectives - Both non-profits’ and for-profits’ main overall objective is providing maximum access to financial services. Profitability and financial selfsufficiency were the primary financial objectives. Board Member Motivation - The social aspect of the institution’s mission is the primary motivator for board members of both types of institutions. For-profit board members also desire to use their technical expertise for the common good. Board Composition - The most common skills represented on MFIs’ boards are financial skills, represented on 20 of 25 boards. Managing directors expressed the greatest desire for additional banking/economic expertise on their boards.

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Boards have an average of 9 members, with less than 2 women per board. The smallest non-profit board has only 3 members while the smallest for-profit has 4 members. The largest board size was 15 for both non-profit and for-profits. Most of the boards (18 of the 25) have no foreign board members, with most others (5 of 7) having only one board member that resides overseas. Nominating and Selecting Board Members - The chair and other board members most often nominate and select new board members. The most common board term is 25-36 months for board members. Indefinitely renewable terms were the most common, used by 11 of the 25 MFIs. None of the boards had non-renewable board terms. Board Meeting Procedures - The most common quorum requirement (the number of members required to conduct business per the institution’s by-laws) is 51% or 50% plus one vote. Usually, the chair and the managing director together create the agenda for board meetings. There was little consensus as to who sets the calendar for board meetings. The most common response was that the entire board sets it, which were only 6 of the 19 board members’ responses. Board Responsibilities - The majority of the sample’s managing directors and board members characterize their board as “involved in strategic planning and policy decisions but not involved with operational decision making,” striking a healthy balance of input and oversight over operations, without being excessively involved. Most boards require board approval to select or change external auditors, mandated by 91% of all institutions surveyed. A high percentage, 81% of for-profits and 50% of non-profits, also require board approval for changes to credit policy, such as a change in interest rates. Strengths and Weaknesses of the Board - Commitment, expertise and union or shared vision were the most often cited strengths of both for-profit and non-profit boards. In many cases, “homogeneity” or “shared visions” were used to express the cohesiveness of the board, while a few others cited “diversity of skills and backgrounds” as board strengths. The responses point to the delicate balance a board must strike in building a unified force while encouraging diversity. Commitment is an especially key factor in building board members’ ownership through personal investments of time, money and reputations. Lack of availability of the board members and over dependence on the managing director were the most commonly cited weaknesses. These will be addressed in more detail under areas of concern. Institutional Documentation and Reporting – The surveyed institutions generally report that they have good formalized processes for documenting policies and procedures. The majority of MFIs surveyed have developed and utilize the following written documents: organizational policies (e.g. personnel policies), credit policy, board meeting minutes, strategic/business plan, employee job descriptions. Most institutions’ by-laws and statutes include details on the following topics: number of board members, term lengths, board member selection, meetings per year, roles and responsibilities, and quorum requirements.

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For-profit and non-profit institutions’ have similar reporting norms. The most commonly produced report in both for-profits and non-profits is the portfolio or arrears report, produced 11 times per year on average by the non-profits and 13 times per year on average by the for-profits. The next most frequently produced reports are the balance sheet and income statement, generated 8 to 9 times per year on average. Boards tend to receive all the reports but only half as frequently as they are generated by the institution. This frequency of reporting seems low given that these are among the most advanced microfinance institutions and many are currently experiencing rapid change and growth. Also, many for-profits are required to report weekly to regulatory authorities. Conflict Management - Almost all board members responded that they were able to address difficult issues with management. Yet, few cited concrete examples. The most frequent complex issues that microfinance institutions reported were diminishing quality of loan portfolio and overzealous growth.

Managing Director Vs. Board Member Responses Board members’ and managing directors’ responses were similar, indicating that, in general, board members are adequately informed and working closely with management. Most managing directors and board members surveyed have similar understandings and perspectives on governance practices. This finding suggests that most board members are adequately informed and working effectively with management. However, one can not assume that this finding is applicable to all board members or to the board as a whole. The managing directors selected the board member to respond to this survey. Therefore, it is likely that the managing director selected a board member with whom there was a close relationship. The few exceptions in which responses from board members and managing directors differed were in prioritizing the roles of the board and describing who creates the board meeting agenda. Role of the Board – The most important role played by the board according to non-profit managing directors is assessment of the managing director’s performance. However, the most important board roles from the perspective of non-profit board members are monitoring the financial status of the institution and approving the budget. The role considered most important by for-profit managing directors is strategic planning, while for-profit board members selected strategic planning and approving the budget. Creating the Board Meeting Agenda - According to most of the sample’s managing directors, the chair and the managing director together create the agenda for board meetings. However, their board members’ perspective is different, with non-profit board members stating that the managing director alone creates the agenda most of the time. Perhaps non-profit managing directors propose a certain board meeting agenda and then solicit input from the chair or the entire board. Board members may disregard their input in the process of creating the agenda.

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These findings provide some insight into how board members and the executive perceive governance, and suggest that there may be other key differences in perspectives between board members and managing directors that have an impact on effective governance of microfinance institutions.

Areas of Concern in Microfinance Governance Several areas of concern about governance practices emerged from the survey responses. Infrequent Board Meetings Both non-profit and for-profit boards meet fairly infrequently. The non-profit boards meet on average 6 times per year while for-profits meet approximately 5 times per year. However, the most common number of meetings per year was 4 in both cases. Board meeting frequency seems insufficient to address the variety and complexity of issues of a rapidly growing advanced institution in an infant industry. Dependence on Key Person The survey findings indicate a dependence on a key person, usually the managing director or chair of the board. The most often cited weaknesses of both for-profit and non-profit MFIs were over-dependence on the managing director and lack of availability of board members which implies inordinate dependence on management. Infrequent board meetings also imply a less active board, placing more responsibility on management. There were several indications that the boards surveyed rely heavily on the chair. The majority of chair terms are indefinitely renewable in both for-profit ad non-profit institutions, allowing the chair to remain in their position for a long time. A few MFIs reported that they do not have set terms for the chair. One explained that the chair has held the position since inception and therefore has no existing policy for replacing them. These findings suggest that the chair is either considered to be particularly important to the proper functioning of the board and the institution, and/or that they are especially difficult to replace or irreplaceable. This finding leads one to ask what level of dependence on one key person should be considered acceptable in an MFI? What risks does the institution take in depending primarily on one person to oversee its growth and development? One must also ask whether board members fully understand their fiduciary responsibilities and the potential implications of entrusting them to one individual. Need for More Formalized Board Orientation and Training The common weakness cited, lack of availability and low participation of board members, may suggest a need for a more formalized process of selection, orientation, and training of board members. Perhaps board members do not realize the level of commitment requested at the time of selection. Or maybe this issue is not caused by

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board members’ busy schedule, but rather by their lack of understanding of what additional roles or services they should provide. It is essential that boards view the membership selection process as a combined marketing and recruitment campaign. It is one of the most crucial functions of the board. Most would argue that new member identification and recruitment should not be left solely to the managing director. The best candidates may need to be identified and courted much as a large corporation would go about hiring senior managers. Underutilized Board Committees There were few committees identified by non-profit institutions. The for-profit boards utilize more committees, usually including a credit committee. Non-profit boards have fewer and more varied committees represented on their boards. The 11 for-profit managers reported a total of 20 committees whereas the14 non-profit managing directors reported a total of only 10 committees with almost no conformity in committee type. Furthermore, the committees did not seem to be very well defined or utilized, especially in the non-profit MFIs surveyed. Many met on an “as needed” basis only. Surprisingly, only one New Member Selection Committee was mentioned as an aide in the identification and nomination of new board members. This finding suggests an important board shortcoming, since a nominating committee can help prevent excess influence over board selection by a strong managing director. There appears to be some correlation between the level of importance given to each committee and the number of meeting times per year. Organizations that listed more than one committee tended to rank the committee that met most frequently as most important to the proper functioning of the institution. These findings suggest that for-profit institutions could have lessons they could share with non-profit MFIs regarding the effective use of board committees, credit committees in particular. Conflicting Performance Indicators According to non-profit board members, the most important institutional performance indicator to track is outreach to poor entrepreneurs. For-profit board members attributed greater importance to portfolio quality, operational efficiency and capital adequacy. As one would expect, this finding implies a greater emphasis placed on the social mission by non-profit boards than for-profit boards that focus as much or more on the profitability and sustainability objectives. While these two objectives are not mutually exclusive, responses indicate a difference in institutional emphasis. Non-profit board members cited institutional self-sufficiency as one of the most common indicators for measuring the managing director’s performance, whereas for-profit board members selected client outreach. Interestingly, this finding appears to contradict the one cited in the preceding paragraph. The emphasis placed on the managing director’s

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performance indicators implies the opposite, that non-profit boards are more concerned about sustainability and for-profits with social mission. If the emphasis placed on institutional performance differs from that placed on the managing director’s performance, one must ask whether this leads to conflicting and confusing messages being communicated to managing directors and staff. Given that in most cases managing directors’ compensation is linked to performance indicators, boards must recognize that those indicators that link performance to compensation will receive the most attention from management. Lack of Pure Private Ownership in MFIs There is indication that several MFIs, particularly non-profit institutions, do not adequately address the issue of lack of pure private capital. Pure private capital comes from private individuals, corporations, investment funds and financial institutions with a primary objective of making a return on investment. It is believed by some that the existence of pure private capital helps to improve the profitability and accountability of an organization. Despite the increasing number of non-profit MFIs transforming into formal for-profit institutions, there is little or no pure private capital in most microfinance institutions. An institution can compensate for its lack of pure private capital by building accountability through alternative mechanisms. One method is to utilize an effective employee incentive system linked to institutional performance indicators. Most of the surveyed MFIs link the managing director’s compensation to institutional performance in some manner, with 5 of the 19 board members indicating that the managing director’s entire salary was based on performance. Five of the 13 non-profits and 1 of 6 for-profits reported that the managing director’s compensation is not at all linked to institutional performance. However, they do not indicate what other factors, besides institutional performance, determine compensation. It seems particularly important to link non-profit managing director’s compensation to performance as a way of building ownership and accountability in the institution that can not be built through other means such as through equity ownership. Another method for building accountability is to clearly define and communicate the institutional mission to the various stakeholders, including donors, lenders, staff and clients. However, the findings of this survey indicate a clouding of the institutional mission resulting from the board’s use of different indicators for monitoring the managing director’s and the institution’s performance. Conflicts of Interest Most non-profit board members (7 of 12) reported that their institutions do not have a policy that addresses conflicts of interest, while most for-profit board members (3 of 5) reported that the institution does have such a policy. Correspondingly, half the nonprofit board members said that conflicts of interest simply do not arise whereas most (4 of 5) for-profit board members recognize that such conflicts do arise, however rarely (approximately once every 2 years).

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Are non-profits less likely to experience conflicts of interest than for-profits? Or are they just less likely to be aware of potential conflicts of interest? Or perhaps, given that the potential legal implications are fewer for non-profits, there is legitimately less need for a formal policy to address conflicts of interest. Borrower Bias in Cooperatives The cooperative or credit union structure has an inherent conflict of interest in that its board members are also clients of the institution. This survey attempted to explore this issue by asking the managing directors of credit unions to answer an additional question regarding what percentage of net savers and net borrowers their boards comprised. The responses raise an important issue. Some credit union boards responded that their boards are comprised of 100% net borrowers, which suggests that their boards would tend to view things from a borrower’s perspective rather than that of a saver or investor in the organization. A borrower bias could lead to excessive downward pressure on interest rates and a focus on client services at the potential cost of institutional efficiency and profitability. Perhaps cooperatives should try to avoid and correct imbalances in board representation. This could be done through a shift in services to attract more savings-oriented owners by raising interest rates, reducing use of subsidized credit and aggressive marketing of savings products. Safeguards could be implemented to protect against this potential borrower bias. Brian Branch and Christopher Baker in Credit Unions: Overcoming Governance Problems, suggest that credit unions set clear rules governing the roles and responsibilities of board directors, require regular external audits, implement insider operation controls, and enforce prudential disciplines and standards for loan risk controls. Excessive Internal Board Representation Few MFIs had more than one or two internal staff represented on their boards. Forprofit and non-profit microfinance institutions had 9% and 15% of the board comprised of staff, respectively. However, the internal members are concentrated in one or two institutions. While a few staff represented on the board is good for insuring that the board is in close contact with people directly involved with operations, a high level of internal board representation can have negative consequences. First, having the technical expert of the institution also representing that technical expertise on the board impedes accountability. For example, if the Finance Director also plays the role of financial expert on the board, some of the normal checks and balances within the system are eliminated. Second, there may be conflicts of interest that result, such as an excessive push for salary increases at the cost of financial efficiency. Third, new outside perspectives will not have a chance to influence institutional development which can result in stagnation due to the board being too close to the institution to evaluate it objectively.

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Remaining Questions for the Conference A few additional questions remain for conference discussion. Transformation Issues According to the survey, many of the main issues that MFIs are currently addressing relate to institutional transformation, either as a result of or in preparation for transforming from a non-profit into a for-profit MFI. Transformation-related issues raised included: work with regulatory authorities, savings mobilization, raising equity funding, managing exponential growth, financial restructuring, and balancing the financial and social objectives of microfinance. Survey respondents would like to know what specific governance-related issues need to be addressed when contemplating or experiencing transformation from a non-profit into a regulated, for-profit MFI. How can the governance structure be changed to facilitate or accommodate such an institutional transformation? Norms Versus Best Practices This document has presented some possible norms or trends in microfinance governance among advanced microfinance institutions. It serves as a basis for opening the discussions of the “Effective Governance of Microfinance Institutions” conference and will later be used to compare changes in governance practices implemented over the next year, to be identified by a follow-up survey. The conference will explore the extent to which norms or trends of these leading institutions are representative of best practices in governance of MFIs and in what ways existing governance practices can be improved to enhance the overall effectiveness of MFIs. After the conference, other MFIs desiring to evaluate and compare their governance practices to those recommended in the forthcoming governance guidelines can use the governance survey as a initial starting tool.

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Part II: Governance Practices of Non-Profit Microfinance Institutions This section compiles responses from 14 managing directors and 13 board members from non-profit microfinance institutions whose outreach ranges from 6 thousand to 2.1 million clients and whose loan portfolios are between $758,000 and $100 million. Fourteen non-profit managing directors responded out of 23 surveyed, from institutions representing a total of 3,051,933 clients and with combined loan portfolios valued at over US$200 million. These figures, provided by the institutions, are based on their most recent information generally the last six months.

Organizational Structure and Objectives Of the 14 non-profit institutions, 8 are non-governmental organizations, 4 are foundations, one is an association, and one is a public institution. Financial Objectives In regard to their financial service operations, 10 of the 14 non-profit managing directors chose financial self-sufficiency as their primary financial objective. Three selected operational efficiency. None identified “ability to cover Renewal of Board Terms costs with donor and other 10 income” as their highest Non-Profit Board 8 Terms financial objective. The 6 4 representative board members 2 responded identically. 0 Indefinitely Renewable

Renewable for One Term

NonRenewable

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Non-Financial Objectives The institutions’ overall objectives were more mixed. Six of the 14 non-profit managing directors and 4 board members responded that their organization’s primary non-financial objective was to provide maximum access to financial services. Three managing directors and 4 board members selected poverty alleviation as their primary non-financial Non-Profit Non-Financial Objectives objective. Three managing directors and 14 Board Members 12 2 board members 10 Managing Directors 8 selected 6 4 microenterprise 2 0 development. Only 1 managing director as compared with 3 board members selected job creation as the top non-


financial institutional objective.

Board Member Motivation Thirteen non-profit board members responded to this question out of 23 surveyed. These board members expressed a variety of motives for serving on their respective boards, most alluding to a social objective, including: • Commitment to social and economic development of the country; • Attraction to the institution’s mission; • Selection by the board members; • Admiration for the managing director and institution’s philosophies; • Interest in helping the poor in an ongoing, sustainable way; • Desire to be useful • Friendship with Founder of institution and commitment to the cause.

Board Composition These 14 non-profit seeking institutions have a total of 129 board members, with an average of 9 members per board (median also 8-9). The smallest board has only 3 members, while the largest has 15 which was the case in two organizations. Representation Of the 129 board members, 22 are women (17%), resulting in an average of less than 2 women per board (median also 1-2). Four of the organizations had no female board members, whereas one had 5 out of its 7 board members that were Non-Profit Board Representation women. 150 100

Non-Profit Board Members

50

S N taff on -S ta ff

Fo re ig n Lo ca l

Fe m al e M al e

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Four of the 14 non-profits each had one board member that resides overseas. The rest had only members from their respective country.

Nineteen of the 129 board members were reported to be staff of the institution. However, the bulk of these are from one institution in which all 12 of its board members are staff. Six of the 14 institutions reported no employees on their board of directors, with the rest having one or two employees on the board. Skills Represented on Boards The most common skills represented on the boards of the 14 non-profit microfinance institutions were financial skills, represented on 10 of the 14 boards. The second most common skill was

Skills Represented on Boards tions Rela c li b Pu prise enter Micro ls l Skil Lega ting coun g/Ac in it d kills Au cial S Finan

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auditing/accounting, represented on 8 of the 14 boards. Legal skills were next on the list, represented on 7 of the boards, followed by microenterprise expertise, represented on 6 of the boards. Five organizations reported having public relations expertise amongst its board members. Five of the institutions reported some combination of representation from corporate management, banking or economic expertise. One identified community development as a skill represented on their board. Five of the 14 managing directors expressed the greatest desire for additional banking/economic expertise on their boards. All desired additional skills are listed below, followed by the number of managing directors that indicated the desire: • Banking/economic Expertise (5) • Public Relations (3) • Marketing Expertise (2) • Human Resources (1) • Sociology (1) • Legal Skills (1) • Advertising (1) • Policy Formulation (1) • Microenterprise Expertise (1) Nominating and Selecting Board Members The most common manner in which board members are nominated and selected amongst these 14 institutions is by the chair and other board members, with 6 of the institutions using this approach. Three institutions’ new board members are nominated and elected by board members, not including the chair or the managing director. Two non-profit organizations’ board members are nominated and elected by the chair Who Selects Board Members? and other board members along Chair and Other with the managing director. None Board Members 18% of the organizations use an executive search firm or a Other Board Members (not Nominating Committee in the 55% Chair) 27% nomination and selection process. Chair, Board Members, Managing Director

Board Member Terms The most common term for board members amongst these institutions is 2536 months, with 5 of the 14 non-profit institutions using this length of term. Four non-profits use board terms of 13-24 months. Three have no set term limits and one has term limits of 1 year or less.

Board Term Lengths

25-36 Months

23% 38% 8%

1-12 Months 31%

Eight of the non-profit boards have

13

13-24 Months

No Set Term Limits


indefinitely renewable terms. Three have renewable terms but only for one additional term. None of the non-profit boards have non-renewable terms. Two of the institutions that reported to have no set terms considered this question not applicable.

Renewal of Board Terms

10 8 6 4 2 0

Non-Profit Board Terms

Indefinitely Renewable


NonRenewable

Chair Nomination and Selection In 4 of the 14 institutions the other board members nominate and select the chair. The general body or members of the general assembly nominate and select the chair in three of the non-profit institutions. In one non-profit, the managing director along with the board nominates and elects the chair.

Who Selects the Non-Profit Chair? 13%

Other Board Members

49% 38%

General Assembly Board and Managing Director

Chair Terms Six of the 14 non-profit institutions have no set terms for Non-Profit Chair Term Lengths their chair. Of those non-profit 15% 25-26 Months institutions with terms for the 13-24 Months chair, the medium length term of 47% 23% 1-12 Months 13-24 months is most common, with three falling into this range. No Set Terms 15% Two have longer chair terms of 25-36 months, and two have shorter chair terms of 1-12 months. None of these institutions had a chair term of over 37 months. The majority, 7 of 12 responses, indicated their chair terms were indefinitely renewable. Three non-profits have renewable Non-Profit Chair Term Renewal chair terms, with one indicating that it is renewable for only one 8 additional term. One non-profit 6 Non-Profit Chair organization has a non-renewable 4 Terms chair term. The question of whether 2 0 Indefinitely Renewable

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NonRenewable


Chair terms are renewable is considered not applicable by one of the institutions that reported to have no set term for the chair. Officers of the Board Eight of 12 non-profit boards elect all officers, including the chair, the vice president, the treasurer and the secretary. One non-profit board elects the chair and the general manager. Another elects the chair and the treasurer. One board elects only the chair. All managing directors believe board officers are very important or important to the proper functioning of the board. Most non-profit managing directors, 9 out of 13, feel that the officers are very important. The remaining 4 responses indicated that the board officers are important to the board’s proper functioning.

Board Structure The non-profit managing directors reported a variety of different committees that are part of their board structure. Three non-profit managing directors listed an Executive Committee as part of the board structure. One Executive Committee is made up of 3 board members and meets 6 times per year. Another has 3 members that meet 24 times per year. The third is comprised of 4 board members that meet 8 times per year. All three indicated that the Executive Committee is the link between the board and management, responsible for providing executive guidance to management, addressing policy issues, and dealing with matters that require attention in between board meetings. One non-profit listed its General Assembly as a committee that is more important to the proper functioning of the board than its governing board. This General Assembly meets 2 times per year to approve the budget and activities of the institution, to appoint an auditor, and elect the Executive Committee. Six different task-oriented committees were each identified by one of the non-profits: 1. Advisory Committee - meets once per year to evaluate the board officer’s contributions. 2. Audit Committee - 5 members that meet 4 times per year to oversee internal control and risk management. 3. Remuneration Committee - 5 members that meet once per year to review executive salaries. 4. Board Development Committee - 3 members that meet 3-4 times per year that is responsible for board membership and developing board skills and relations. 5. Community Development Committee - 5 members that meets 12 times per year to execute board decisions. 6. Transformation Committee - 5 members that meet 15 times per year to aid in the transformation of the non-profit into a for-profit financial institution. In general, all the committees were considered effective according to the non-profit board members because they assist in identifying and recommending “specific and sensible actions.” The one limitation noted to a committee’s ability to be effective was “due to the fact that board members are spread throughout the country.”

15


Documentation The majority of non-profits, 8 of 13 respondents, have developed and made use of all of the following written policy and planning documents: • organizational policies (e.g. personnel policies); • credit policy; • board meeting minutes; • strategic/business plan; • employee job descriptions. Two maintained all but written employee job descriptions. One had all except a written credit policy. Another had all but a written business plan. One non-profit did not maintain written board minutes or employee job descriptions. The majority of the non-profits by-laws and statutes included details on the following issues: • number of board members (all 12); • term lengths (9 of 10); • board member selection (10 of 11); • meeting per year (all 11); • roles and responsibilities (all 11); and • quorum requirements (10 of 11).

Board Meetings Meeting Frequency The non-profit boards meet an average of 6 times per year, with one board meeting as often as 24 times per year and one meeting only twice per year. The most common number of meeting times per year was 4 times/year, which was the practice of 6 nonprofit boards. Quorum Requirements The average percentage of board representation required to constitute a quorum (the number of members required to conduct business per the institution’s by-laws) was 55.25% percent. The highest percentage requirement for a quorum stated was 75%, the lowest was 34%. The most common response was 51% or 50% plus one vote, which was identified as the required percentage to constitute a quorum by 7 out of 12 of the nonprofit managers. Creating the Board Meeting Agenda From the perspective of the non-profit managing directors, in 7 out of 12 non-profits, the chair and the managing director together create the agenda for board meetings. Three non-profit’s managing directors create the board meeting agenda by themselves. In one non-profit, the managing director and the secretary sets the agenda. In another, the secretary, alone, creates the agenda.

16


Who Creates the Agenda? Chair & Managing Director Managing Director Alone Managing Director And Secretary Secretary Alone Chair Alone Chair and Secretary *MD= Managing Director Responses **BM=Board Member Responses

MD* 7 3 1 1 0 0

BM** 4 5 0 1 1 1

However, from the board members’ perspective, the agenda is most often created by the managing director alone, according to 5 of 13 board members responses. The next most common response (4 of 13) was that the chair and the managing director together create the agenda.

Setting the Board Meeting Calendar According to the 13 non-profit board members surveyed, who sets the annual calendar varies greatly from institution to institution. The most common response in this survey, 4 out of 13 boards, was that the annual calendar is set by board consensus. Two boards each reported that the annual calendar is set by the regulatory institution, by the chair alone, by the managing director alone, and by the chair and the managing director together. One board has their secretary general set the annual calendar. Board Meeting Preparation Time Eleven board members estimated that they spend from 0 to 20 hours (6 hours on average) in preparation for each board meeting. Three responses fell in the 1-2 hour range and three estimated 8 hours of preparation time.

Who Meets with Managing Director Between BM* Board Meetings? Chair and Other Board Members 4 Chair Only 3 Other Board Members (excluding Chair and 2 Executive Committee) Chair, Executive Committee, and Other Board 1 Members Chair and Executive Committee 1 No one 1 *BM = Board Member Responses

Meetings Between Board Meetings The most common response, from 4 of the 13 non-profit board members, was that the chair and other board members meet with the managing director between board meetings. Other responses are summarized in the table.

Role of the Board Responsibilities of the Board Most non-profit managing directors, 8 out of 13, as well as most board members, 10 out of 13, described their board as “involved in strategic planning and policy decisions but not involved with operational decision making.” Four managing directors and 2 board members stated that their boards “monitor organizational activities but leave most decisions up to management.” Only one non-profit managing director and one board member characterized the board as “actively involved in many levels of decision making including operational decisions.”

17


The following table outlines first the number of non-profit managing directors and second the number of board directors that gave the following ratings on each of the board responsibilities listed below. The board member responses are highlighted for easy comparison. Board Responsibility

Very Important MD BM

Important MD

BM

Somewhat Important MD BM

Not Important MD BM

8 Assessment of 3 1 0 8 3 0 Managing Director’s Performance 7 Oversee Effective 4 1 0 4 6 1 Management of Institution Monitor Financial 7 4 1 0 9 2 0 Status of Institution Approve Budget 6 3 1 0 9 3 1 Review Audit 5 5 0 0 6 7 0 Reports Strategic Planning 5 3 3 0 7 4 1 Assess Board’s 4 2 3 0 5 4 1 Performance Fundraising 2 4 1 2 5 4 0 Hiring/Firing of 2 4 3 1 5 3 2 Senior Management Public Relations 1 4 4 1 3 2 6 Identify Sources of 0 3 4 3 0 2 4 Technical Assistance MD=Managing Director Responses BM=Board Member Responses

Not Applicable MD BM

0

0

1

0

0

1

0

0

1

0 0

0 0

0 0

0 1

0 2

1 2

1 2

1 1

2 1

1 3

1 2

1 3

The most commonly identified role of the board, considered very important by 8 of 12 non-profit managing directors and important by 3 others, was the assessment of the managing director’s performance. The second most important board responsibilities listed were to oversee the effective management of the institution and to monitor its financial status. Both responsibilities were rated very important by 7 and important by 4 non-profit managing directors. The responsibility rated third on average in order of importance by non-profit managing directors was to approve the budget, receiving 6 very important and 3 important ratings. Board Approval Out of 12 respondents, the following number of non-profits require board approval for the operational activities listed below:

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Operational Activity: Selecting or Changing Auditors Changes in Credit Policy Expenses Above a Certain Amount Introducing New Products Opening a New Branch Hiring/Firing Senior Management

# Requiring Board Approval 11 (91%) 6 (50%) 6 (50%) 6 (50%) 5 (42%) 5 (42%)

In addition to the above list of operational activities, the following additional activities were identified as requiring board approval in one of the twelve non-profit institutions: incurring loan obligations, overseas travel, opening bank accounts, and other policy decisions. Strengths of the Board Three main strengths were identified by ten of the non-profit managing directors. Six mentioned “commitment” in their description of the greatest strength of their board. Four mentioned the expertise the board brings to guide and support management. Two commented on the board’s union and ability to function as a group in a supportive manner. From the board members’ perspective, commitment, expertise, and homogeneity were the most commonly noted strengths of the board. Seven board members mentioned commitment and motivation to help the poor in their description of the board’s strength. Four commented on the board’s professional qualities and expertise. Three referred to the fact that board members have had similar experiences, are “like-minded,” and share the same vision. In contrast, one mentioned the board’s diversity as a strength, made up of representatives from different areas/environments. Weaknesses of the Board The greatest weaknesses identified by 7 of the non-profit managing directors were more varied. Three did comment on the lack of availability of their board members. Other comments were the board’s inability to confront sensitive issues, their lack of ownership due to the non-profit status of the organization, their lack of program knowledge, and having all board members on staff creating many conflicts of interest. The greatest weaknesses as identified by the board members were also varied. Lack of availability was noted, however, in five instances. The second comment mentioned twice was the boards’ tendency to rely too heavily on management for guidance. Other weaknesses included: incomplete board, all board members were new to the organization, and low socio-economic and educational backgrounds.

19


Institutional Performance Reporting The table below provides an average and a range of the 11 responses in terms of the frequency (# times/year) that each of the listed reports are produced by the non-profit institution and received by the board. These tables were completed by both managing directors and board members with almost identical responses. Report (Times Per Year) Balance Sheet Income Statement Portfolio Report Cash Flow Report Strategic Plan Internal Audit Report External Audit Report* Market Share Information Performance/Loan Product Social Impact Statistics Marketing Plan

Institution Produces Average x/yr Range x/yr 9 1-12 9 1-12 11 4-12 9 0-12 1 0.5-1 4 0-12 1 0-4 2 0-12 6 0-12 1 0-4 .5 0-1

Board Receives Average x/yr Range x/yr 5 1-12 5 1-12 6 1-12 4 0-12 1 0.5-1 2 0-12 1 0-12 1 0-4 3 0-12 1 0-4 .5 0-1

*The External Audit Report is not produced by the institution but made available to the institution by the external auditor. Institutional Indicators The non-profit board members were asked to prioritize the importance of tracking the following institutional indicators. The table below summarizes the number of responses per level of importance. Performance Indicator Reaching Poor Entrepreneurs Profitability, Self-Sufficiency Quality of Portfolio (Arrears, etc.) Client Growth Operational Efficiency (Cost/Loan, etc.) Capital Adequacy

Very Important 12 9 9 4 4 4

Important 1 4 4 9 8 7

Somewhat Important 0 0 0 0 1 1

Not Important 0 0 0 0 0 0

Additional performance indicators each considered important by one of the non-profit board members are maintaining a gender balance in the portfolio, identifying low cost funds or grants, and achieving a social impact. Managing Director’s Performance Indicators The most common key performance indicators cited for measuring the managing director’s performance were portfolio quality and institutional self-sufficiency. Six of the 20


13 board members identified these indicators as key in their response. Below is a more comprehensive list provided by the non-profit board members: • Portfolio Quality • Operational and Financial Self-Sufficiency • Client Outreach • Institutional Growth • Visibility of the Organization • Staff and Client Retention • Fundraising • Commitment to Group Goals • Operational Efficiency • Profitability Managing Director’s Compensation The most common response, 5 out of 13 non-profit board members, reported that the managing director’s compensation is not at all linked to institutional performance. Three non-profit boards reported that the Managing Director’s Compensation: BM* managing director’s entire salary is Not Linked to Performance 5 based on performance. Two indicated Entire Salary Based on Performance 3 that the managing director was eligible Bonuses Based on Performance 2 for bonuses based on performance. In Part of Salary Based on Performance 1 one non-profit, part of the managing Part of Salary and Bonuses Based on 1 director’s regular salary is based on Performance performance. In another, part of the *BM= Board Member Responses salary and bonuses are based on the managing director’s performance.

Conflict and Resolution Confronting Management Nine out of 12 non-profit board members said the board is able to address difficult issues with management. Only one board member said they could not and two replied “not applicable.” Board members were asked to provide examples in which their boards had confronted management on a difficult issue. Few concrete responses were provided. One board member said that they were “called on by a dissident group to form an impartial investigation team to look into certain allegations against management. They all proved to be false and the ring leader was dismissed.” Another board member offered that conflicts had arisen because the staff was not able to reach proposed goals. Dealing with Complex Issues The table below summarizes the responses from 9 non-profit managing directors and 12 non-profit board members regarding the frequency with which the board has had to deal with various conflicts and complex issues. Next to each issue is the number of non-profit

21


managing directors and the number of board members (in bold) that gave the indicated response. Issue:

Most Common MD BM 0 0

Fairly Common MD BM 2 3

Diminishing Quality of Loan Portfolio Poor Communication 0 2 0 0 (Board/Management) Insufficient Information from 0 1 0 1 Management Suspected Fraud 0 1 0 0 Inactive Board Members 0 1 0 0 Overzealous Growth, Exceeding 0 1 2 0 Resources Staff Morale Problems 0 1 0 2 1 Board Unable to Reach Consensus 0 0 0 Liability Issue, e.g. law suit 0 0 0 1 Different Visions Affecting Strategic 0 0 0 0 Planning (Board/Mgmt.) Legal Issue, e.g. change in tax status 0 0 0 1 Personality Conflicts Between Board 0 0 0 0 and Management Personality conflicts within Board 0 0 0 0 MD=Managing Director Responses BM=Board Member Responses

Infrequent

Never

MD 4

BM 3

MD 3

BM 6

2

3

5

8

5

4

3

7

4 4 4

4 6 3

4 4 4

7 6 6

1 0 5 5

2 4 5 2

7 8 4 4

8 8 5 9

3 1

7 2

6 8

4 10

1

1

8

11

Examples of Resolving Difficult Issues One non-profit microfinance institution describes how it resolved the issue of the board’s reluctance to charge commercial interest rates on one product. Management convinced the board to allow a test pilot of the product. When the board saw that the borrowers did not complain and in fact accepted the commercial rates, they no longer considered it an issue. A second non-profit institution brought up the difficulty of overcoming the NGO mindset as it related to microfinance. They addressed the issue of reluctance to increase interest rates by turning over authority to each branch, which would then operate as a profit center. When branch managers are held responsible for covering all expenses with interest earnings, they are less reluctant to charge commercial interest rates. Another non-profit highlighted how some issues simply can not be resolved within the institution. They had one employee law suit that had to go to Supreme Court in order to be settled.

22


Conflicts of Interest Seven out of 12 boards reported that their microfinance institution does not have a policy that addresses the issue of conflicts of interest, whereas the other five do. Most, half of the twelve, reported that conflicts of interest never arise. Two indicated that they arise approximately once per year. One institution indicated that they come up as frequently as once per semester and another said approximately once every two years. When conflicts of interest do arise, three of the 12 institutions resolve them at the board level. One institution noted that they are resolved at both the board level and at the committee level. Another institution resolves these issues strictly at the committee level. One uses the Executive Committee and while another defers to the chair. Current Board Issues Three non-profit managing directors surveyed identified transformation and commercialization as the leading issue their board is currently addressing. One offers that the motivation behind the transformation is to be able to collect savings deposits which requires them to work with the regulatory authorities in the country. Another suggests it will employ a strategy of managed growth, equity funding, savings mobilization, good governance, risk management, and quality control to confront the issue. Another non-profit is most concerned about minimizing conflicts of interest, which will be done through changes and improvements to the governance structure. Another institution is also addressing management succession. They have commissioned a study on this and plan to take the proper steps to strengthen governance and ensure orderly succession.

23


24


Part III: Governance Practices of For-Profit Microfinance Institutions This section compiles responses from 11 managing directors and 6 board members from for-profit microfinance institutions, from this point on referred to as for-profit board members and for-profit managing directors, whose outreach range from 2,500 to 230,000 clients and whose loan portfolios range from $548,000 to $25 million. Eleven for-profit managing directors responded out of 19 surveyed, from institutions representing a total of 513,153 clients and with combined loan portfolios valued at over US$130 million. These figures were given by the institutions based on their most recent information (the last six months).

Ownership Structure Of the 11 institutions, 7 are for-profit regulated financial institutions, 3 are credit unions or savings and credit cooperatives, and one is on the verge of transforming from a nonprofit into a for-profit, regulated microfinance institution. These institutions had a variety of ownership structures, from the credit union, which is comprised 100% of client owners, to the for-profit institution, privately owned by three individuals. A couple of the recently transformed microfinance institutions were still largely owned by their parent NGO, maintaining approximately 75% ownership. One microfinance institution is a subsidiary of a traditional formal sector bank. Out of 6 for-profit responses, only 1 managing director is expected to invest personal funds in the microfinance institution. Of the cooperatives, one stated that 16.5% of its board members were net borrowers while 16.6% were net savers. Another explained that 100% of its board members were net borrowers, while none were net savers. Board Member Motivation Six for-profit board members responded out of 19 surveyed. These board members expressed a variety of motives for serving on their respective boards, including: • Desire to share development and commercial banking experience with a microlending institution; • Commitment to uplifting the quality of life for poor people; • Drafted by the board members; • Opportunity to utilize banking expertise and experience in microfinance – an emerging area in the local financial sector; • Desire to improve the quality of meetings at the village level.

25


Non-Financial Objectives In regard to the non-financial results of the for-profit microfinance institutions, providing maximum access to financial services was the most common objective, selected by three of the 6 board members. One for-profit selected poverty alleviation, while another chose microenterprise development. One institution identified a combination of poverty alleviation and job creation as dually important For-Profit Non-Financial Objectives organizational objectives. 3.5 3 2.5 2 1.5 1 0.5 0

Board Member Responses

Similar to the non-profit boards, these 11 profitseeking institutions have a total of 96 board members, Max. Access to Poverty Financial Alleviation with an average of 9 Services members per board (median also 8-9). The smallest board has only 4 members, while the largest has 15. Representation Of the 96 board members, 19 are women (19%), resulting in an average of less than 2 women per board (median also 1-2). Three of the institutions had no female board members, whereas one had 4 out of its 7 board members that were women.

100 80 60 40 20 0 Fe

For-Profit Institutions

prise enter Micro l Skills Lega g ountin g/Acc in it d Au kills cial S Finan

26

5

10

15

Fo re ig n Lo ca l

m

al e M al e

For-Profit Baord Members

Skills Represented on Boards

0

Job Creation

For-Profit Board Representation

Eight of the 11 for-profits had no foreign board members. The other three boards had one, three and four respectively.

g ankin ess/B Busin tions c Rela Publi

Microenterprise Development

S N taf on f -S ta ff

Board Composition

Nine of the 96 board members were reported to be staff of the institution. However, most of these are from one institution in which all 5 of its board members are also staff and another in which 3 of the four board members are staff. Six


of the 11 reported no employees on their board of directors. Skills The most common skills represented on the boards of the 11 for-profit microfinance institutions were financial skills, represented on 10 of the 11 boards. The second most common skill was microenterprise expertise, represented on 9 of the 11 boards. Legal skills were next on the list, represented on 8 of the boards, followed by auditing/accounting expertise, represented on 5 of the boards. Only two organizations reported having public relations expertise amongst its board members. Three of the institutions reported some form of representation from business, commerce, or banking. Other backgrounds identified on these boards include: architecture, religion, politics, academia, research, agriculture and animal husbandry. The for-profit managing directors expressed the greatest desire for additional banking/microfinance and microenterprise expertise on their boards, with 4 of the 11 expressing this desire. Other additional skills on the wish lists included: auditor/accountant, economist, and a social scientist with experience dealing with gender issues.

Who Selects Board Members in a For-Profit MFI ?

9% 9% 37% 9%

Chair and Other Board Members Other Board Members (not Chair) Chair, Board Members, Managing Director Managing Director Alone Chair Alone Parent Bank

9% 9%

9%

9%

Shareholders Borrowers/Member Representatives

Nominating and Selecting Board Members The most common manner in which board members are nominated and selected amongst these 11 institutions are by the chair and other board members, with 4 of the institutions indicating this approach. Other manners of nominating and selecting board members are noted in the pie chart. None of the organizations use an executive search firm in the nomination and selection of board members. Chair and Other Board Members

W ho Selects Board Members Board Member Terms in a F o r - P r o f i t M F I ? The most common term for board members 9% amongst these institutions is 25-36 months, with 4 9% 37% of the 11 for-profit institutions using this length of 9% term. 9% 9% 9% Two 9% Board Term Renewals forprofits For-Profit Board Terms use board terms of 13-24 months and two use

O ther Board Members (not Chair) Chair, Board M e m b e r s , M a n a g in g D irector M a n a g ing Director A lone Chair Alone Parent Bank Shareholders Borrowers/Member Representatives

5 4 3 2 1 0

Indefinitely Renewable


NonRenewable

27


1-12 months terms. Two for-profits have no set term limits. Four of the for-profit boards have indefinitely renewable terms. Four have renewable terms but only for one term. One institution reported using a combination of indefinitely renewable and limited renewable terms. None of the for-profit boards have nonrenewable terms. The question of whether board terms are renewable is considered not applicable by two of the institutions that reported to have no set terms. Chair Nomination and Selection In 4 of the 11 institutions, the other board members nominate and select the General Assembly chair. The general body or members of 13% Board and Managing the general assembly nominate and 13% Director select the chair in one of the 49% Shareholders 13% cooperatives. In one for-profit, the No Defined Process managing director along with the board 12% nominates and elects the chair. In another, the shareholders hold this responsibility. One for-profit admitted that they have no nomination or selection process as the major shareholder/managing director has served as the chair since inception.

Who Selects the Chairs in a For-Profit MFI?

Other Board Members

Chair Terms Four of the 11 for-profit boards use a 1-12 month term for the chair, another 4 for-profits use a 25-36 month term. One board’s term fell in between these, using a 13-24 month term. None of these institutions had a chair term of over 37 months. Two of the 11 for-profit institutions have no set terms for their chair.

Chair Term Lengths 25-26 Months

18% 37%

13-24 Months 1-12 Months

36%

9%

No Set Terms

The majority, 6 of 11 responses, indicated their chair terms were indefinitely renewable. Three 8 for-profits have renewable chair 6 terms, with two indicating that it For-Profit Chair 4 Terms is renewable for only one 2 additional term. None of the for0 profit institutions have a nonIndefinitely Renewable for NonRenewable One Term Renewable renewable chair term. The question of whether chair terms are renewable is considered not applicable by the two institutions that reported to have no set terms for the chair. Renewal of Chair in For-Profit MFIs

28


Officers of the Board Two each of 11 for-profit boards elect the following officers: a chair only; a secretary only; a chair and a vice president; a chair, vice president and a secretary. One for-profit board elects the chair and the general manager. Another elects the chair and the secretary. One board elects all officers: a chair, vice president, treasurer and a secretary. All managing directors believe board officers are very important or important to the proper functioning of the board. Most for-profit managing directors, 7 out of 11, feel that the officers are very important to the proper functioning of the board. The remaining 4 responses indicated that the officers are important to the board’s proper functioning.

Board Structure The 11 for-profit microfinance institutions have several different committees. Finance and Credit Committees are the most common, represented in 6 institutions. These committees have 3 or 5 members each on them, with an average of 4 members per credit/finance committee. They meet on average 17 times per year, ranging from 4 to 48 times per year. A couple committees meet on an “as needed” basis only. Responsibilities of these committees include approving loans, reflecting on the management of financial resources, and making recommendations to the board. The next most common committees were Audit, Conflict Resolution, and Strategy, each represented in two of the for-profit institutions. The two Audit Committees have 4 and 5 members on them. They meet 3 and 12 times per year respectively. The Audit Committee is responsible for supervising the internal control function, ensuring that policies are being carried out, supporting the Bank Superintendence, and aiding in the preparation of required fiscal reports. The two Conflict Resolution Committees have 3 and 4 members each that meet as needed to aid in the resolution of disputes. The two Strategy Committees have 2 and 3 members each that meet 36 times per year and as needed, respectively, to discuss longterm, strategic operational and policy decisions. Other committees each identified by one institution were: • Management Committee - 3 members that meet twice per year to provide control and follow-up to management. • Training Committee - 3 members that meet twice a year to monitor the training plan. • Human Resources Committee - 4 members that meet as needed to resolve personnel problems. • Property Committee - 3 members that meet as needed to discuss property acquisition and management. • Executive Committee - 13 members who meet weekly to approve new guidelines and loan proposals in excess of $100,000. • Bank Project Committee - 3 members that meet as needed to oversee a development bank project.

29


Other committees mentioned but not described include: • Education Committee • New Member Selection Committee According to two for-profit board members, the Executive Committee was considered the most effective committee due to “well defined roles and functions, regular meetings, and decisions that are acted on.” The Credit Committee was highlighted as the most effective by one board member also because of its regular and frequent meetings. The Property Development Committee was considered the least effective committee by one board member as it was only useful in selecting a contractor for the construction of the headquarters office. Another board member said the Conflict Resolution Committee was not very effective due to there being few disputes to resolve. Documentation The majority of for-profits, 10 of 11 respondents, have developed and make use of all of the following written policy and planning documents: • organizational policies (e.g. personnel policies); • credit policy; • board meeting minutes; • strategic/business plan; • employee job descriptions. One for-profit maintained all but written board minutes. The majority of the for-profits by-laws and statutes included details on the following issues: • number of board members (9 of 10); • term lengths (8 of 10); • board member selection (8 of 9); • meeting per year (10 of 11); • roles and responsibilities (8 of 9); and • quorum requirements (9 of 10).

Board Meetings Meeting Frequency According to the board members of for-profit MFIs, their boards meet an average of 5.2 times per year, with one board meeting monthly and one meeting only twice per year. Half (3 out of 6) hold board meetings 4 times per year. Quorum Requirements The average percentage of board representation required to constitute a quorum (the number of members required to conduct business per the institution’s by-laws) was 56.82% percent. The highest percentage requirement for a quorum stated was 75%, the lowest was 29%. The most common response was 51% or 50% plus one vote, which was

30


identified as the required percentage to constitute a quorum by 5 out of 11 of the forprofit managers. Creating the Board Meeting Agenda From the perspective of the for-profit managing directors, in 7 out of 11 for-profits, the chair and the managing director together Who Creates the Agenda? MD* create the agenda for board meetings. In Chair & Managing Director 7 two for-profits, the agenda is set by the Managing Director Alone 1 managing director and the secretary. Managing Director And Secretary 2 One for-profit’s chair creates the board Managing Director and Board 0 meeting agenda by themselves. In Chair Alone 1 another, either the managing director *MD= Managing Director Responses alone or the managing director with the **BM=Board Member Responses chair creates the agenda. However, from the for-profit board members’ perspective, the agenda is most often created by the managing director and the board, according to 4 of 6 board members responses. The other two for-profit board members stated that the agenda is created by the chair alone and the managing director alone, respectively. Setting the Board Meeting Calendar According to the 6 for-profit board members surveyed, who sets the annual calendar varies from institution to institution. Two for-profits said that it is the chair alone that sets the calendar. Two others indicated it was the chair in conjunction with the managing director. The final two claimed the overall board set the calendar for itself. Board Meeting Preparation Time Six for-profit board members estimate that they spend from 1.5 to 24 hours (9 hours on average) in preparation for a board meeting. Meetings Between Board Meetings According to 3 of the 6 for-profit board members, the chair and the Executive Committee meet with the managing director between board meetings. Two other boards stated that the chair and other board members meet with managing director between meetings. One for-profit responded that the chair is the only one to meet with the managing director between meetings.

Role of the Board Responsibilities of the Board in For-Profit MFIs Most for-profit managing directors, 6 out of 11, as well as most board members, 5 out of 6, described their board as “involved in strategic planning and policy decisions but not involved with operational decision making.” Three for-profit managing directors and one board member characterized the board as “actively involved in many levels of decision making including operational decisions.” Only one managing director opines that their board “monitors organizational activities but leaves most decisions up to management.”

31

BM** 0 1 0 4 1


The most commonly identified role of the board considered to be very important by 9 of 11 for-profit managing directors and important by 1 other, was strategic planning. The second most important board responsibilities were the assessment of the managing director’s performance and approval of the budget. Both responsibilities were rated very important by 8 and important by 2 and 3 for-profit managing directors, respectively. The responsibilities rated third on average in order of importance by for-profit managing directors were to monitor the financial status of the institution, receiving 6 very important and 3 important ratings, to review audit reports (6 very important, 3 important) and the hiring and firing of senior management (6 very important, 2 important). The following table outlines first the number of non-profit managing directors and second the number of board directors that gave the following ratings on each of the board responsibilities listed below. The board member responses are highlighted in bold for easy comparison. Board Responsibility:

Very Important

Important

Somewhat Important

Not Important

Not Applicable

MD

MD

BM

MD

BM

MD

BM

MD

BM

2

3

1

2

0

0

1

0

6

1

0

0

0

0

0

0

5

1

0

0

0

0

0

0

3 3

0 2

0 1

0 0

0 0

0 0

0 0

0 0

1 5

0 2

0 0

0 1

0 1

0 0

1 1

0 0

2

1

2

1

1

1

4

2

2

2

1

0

0

1

1

0

6 4

2 0

1 3

2 2

1 1

0 2

1 2

0 0

BM

Assessment of 8 1 Managing Director’s Performance Oversee Effective 5 4 Management of Institution Monitor Financial 6 4 Status of Institution Approve Budget 8 5 Review Audit 6 3 Reports Strategic Planning 9 5 Assess Board’s 2 1 Performance Facilitate Access to 2 0 Capital Markets Hiring/Firing of 6 2 Senior Management Public Relations 1 1 Identify Sources of 0 1 Technical Assistance MD=Managing Director Responses

BM=Board Member Responses

Board Approval Out of 11 respondents, the following number of for-profits require board approval for the operational activities listed below:

32


Operational Activity Selecting or Changing Auditors Hiring/Firing Senior Management Changes in Credit Policy Expenses Above a Certain Amount Introducing New Products Opening a New Branch

# Requiring Board Approval 10 (91%) 10 (91%) 9 (81%) 8 (73%) 7 (64%) 7 (64%)

In addition to the above list of operational activities, the following additional activities were each identified as requiring board approval in one of the 11 for-profit institutions: property acquisitions, incurring major capital expenditures, disposal of assets, and significant changes in the organization. Strengths of the Board Four main strengths were identified by 10 of the for-profit managing directors. Four commented on the board’s union and ability to function as a group in a supportive manner. Three mentioned “commitment” in their description of the greatest strength of their board. Three others wrote about the diversity of skills represented on the board. Two mentioned the expertise the board brings to guide and support management. From the for-profit board members’ perspective, commitment, expertise, and “sharing the same vision” were the most commonly noted strengths of the board. Two board members mentioned commitment in their description of the board’s strength. Two commented on the board’s professional qualities and expertise. Three referred to the union of the board, with members sharing the same vision and conviction to succeed. In contrast, one mentioned the board’s diverse representation as a strength. Weaknesses of the Board The greatest weaknesses identified by 9 of the for-profit managing directors were more varied. Two commented on the lack of financial expertise of their board members. Two others commented on the diversity of the members in terms of cultural differences and motivations for being on the board. Other comments were that there were no written by-laws and statutes ensuring effective governance, no term limits, and a low level of education (few literate board members). The greatest weaknesses as identified by the for-profit board members were also varied. Lack of availability was noted, as well as, over dependence on the managing director. Other comments included: lack of clear by-laws and statutes to govern the board, lack of banking and legal experience, diversity of languages spoken and low educational backgrounds of the members.

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Institutional Performance Reporting The table below provides an average and a range of the 11 responses in terms of the frequency (number of times/year) that each of the listed reports are produced by the forprofit institution and received by the board. These tables were completed by both managing directors and board members with almost identical responses. Report (Times Per Year) Balance Sheet Income Statement Portfolio Report Cash Flow Report Strategic Plan Internal Audit Report External Audit Report* Market Share Information Performance/Loan Product Social Impact Statistics Marketing Plan

Institution Produces Average x/yr Range x/yr 8 1-12 8 1-12 13 1-52 6 0-12 1 0.2-2 6 0-12 1.5 0-6 3 0-6 5 0-12 2 0-12 2 0.2-12

Board Receives Average x/yr Range x/yr 5 1-12 5 1-12 10 1-52 2 0-12 1 0.2-2 3 0-12 1 0-2 3 0-6 2 0-12 1 0-4 1 0.2-4

*The External Audit Report is not produced by the institution but made available to the institution by the external auditor. Repercussions of Insolvency In the event of insolvency of the microfinance institution, the most common repercussions to the board members would be fines (in 5 of 6 for-profit institutions) and bad press (4 of 6 institutions). Two institutions said other possible repercussions were that the board members could be held financially responsible for loss of citizens’ savings or imprisoned for negligence of duty. Other possible consequences noted were confiscation of assets and being judged by the general assembly for possible suspension. Institutional Indicators The for-profit board members were asked to prioritize the importance of tracking the following institutional indicators. The table below summarizes the number of responses per level of importance. Performance Indicator Reaching Poor Entrepreneurs Quality of Portfolio (Arrears, etc.) Client Growth Operational Efficiency (Cost/Loan, etc.) Capital Adequacy

Very Important 2 4 4 3 4

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Important 3 1 1 2 1

Somewhat Important 0 0 0 0 0

Not Important 0 0 0 0 0


Additional performance indicators each considered to be important by one of the forprofit board members are savings mobilization and innovation with regards to new service ideas in particular. Managing Director’s Performance Indicators The most common key performance indicators cited for measuring the managing director’s performance were portfolio quality and client outreach. Two of the 6 for-profit board members identified these indicators as key in their response. Below is a more comprehensive list provided by the for-profit board members: • Portfolio Quality • Client Outreach • Institutional Growth • Savings Deposits • Profitability • Staff Team Spirit • Operational Efficiency • Accuracy of Reports • Promptness Managing Director’s Compensation Two out of 6 for-profit board members reported that the managing director’s compensation is entirely based on Managing Director’s Compensation: institutional performance. Another two Not Linked to Performance reported that the managing director Entire Salary Based on Performance compensation is not at all linked to Bonuses Based on Performance institutional performance. In one forprofit, part of the managing director’s Part of Salary Based on Performance regular salary is based on performance. In Part of Salary and Bonuses Based on another, the managing director was eligible Performance for bonuses based on performance. *BM= Board Member Responses

Conflict and Resolution Confronting Management All six for-profit board members said the board is able to address difficult issues with management. However, only 4 provided an example. One example provided was of one credit union branch in crisis in which there were differing views between employees and the board on how to handle the situation. Another example given by a for-profit board member was the issue of needing business to drive growth rather than a focus on serving members’ home areas. Another offered that in cases where budget limits are to be exceeded, the Executive Committee can ask management for an explanation. Dealing with Complex Issues The table below summarizes the responses from 10 for-profit managing directors and 5 for-profit board members regarding the frequency with which the board has had to deal with various conflict and complex issues. Next to each issue is the number of for-profit

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BM* 5 3 2 1 1


managing directors and the number of board members (in bold) that gave the indicated response. Issue:

Most Common MD BM 0 1

Fairly Common MD BM 5 2

Diminishing Quality of Loan Portfolio Poor Communication 0 1 1 1 (Board/Management) Insufficient Information from 0 1 0 2 Management Suspected Fraud 0 2 0 3 Inactive Board Members 0 2 1 0 Overzealous Growth, Exceeding 0 4 0 2 Resources Staff Morale Problems 0 1 0 1 0 Board Unable to Reach Consensus 0 1 0 Liability Issue, e.g. law suit 0 0 1 0 Different Visions Affecting Strategic 0 1 0 2 Planning (Board/Mgmt.) Legal Issue, e.g. change in tax status 0 1 1 0 Personality Conflicts Between Board 0 1 1 1 and Management Personality conflicts within Board 0 0 0 1 MD=Managing Director Responses BM=Board Member Responses

Infrequent

Never

MD 5

BM 2

MD 0

BM 0

3

1

6

2

8

2

1

1

6 4 2

1 2 2

2 4 4

1 2 1

4 6 4 5

4 3 2 1

5 3 6 4

0 1 2 2

6 4

4 1

3 5

0 2

4

2

6

2

Examples of Resolving Difficult Issues A credit union described the situation that occurred at the transfer of management from the institution founders to the locals. The Executive Committee exercised its rights over the European partners and had them removed. One for-profit managing director explained how it was difficult to maintain staff morale in the face of very low staff remuneration. This issue was somewhat resolved by involving staff in designing capacity building programs resulting in improved employment conditions and remuneration linked to productivity. Another for-profit managing director described a liquidity crisis situation in which money did not come in from a donor, threatening the continuation of regular activities. So, the board and management mobilized their own personal savings and that of their relatives in order to protect the integrity of the institution. Conflicts of Interest Three out of 5 for-profit boards reported that their microfinance institution does have a policy that addresses the issue of conflicts of interest, whereas the other two do not. Most, 4 out of the 5 board members, reported that conflicts of interest do arise, however

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rarely. Two indicated that they arise approximately once per every two years. One institution indicated that they come up as frequently as once a year and another said only once every five years. One for-profit marked that they have never had a conflict of interest issue arise. When conflicts of interest do arise, one of the 6 institutions resolves them at the board level. One institution noted that they are resolved at both the board level and at the committee level. Another institution resolves these issues strictly in executive session. While another uses a combination of the board and the Executive Committee. Current Issues One institution, recently transformed from a non-profit into a for-profit regulated financial institution, is attempting to manage its exponential growth. They have planned a massive expansion with some controls to maintain long-term viability and sustainability. Another institution is re-capitalizing through a financial restructuring to increase profitability and by attracting potential investors to be shareholders. Another institution is trying to maintain market share in an increasingly competitive environment. Yet another is in the process of paying its first dividend. One for-profit is working on improving employee motivation and reducing arrears on loans through staff training and new product development. Another institution is struggling with balancing the financial and social objectives by covering management costs and product diversification.

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ANNEX A MICROFINANCE INSTITUTIONS SURVEYED

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ANNEX A - MICROFINANCE INSTITUTIONS SURVEYED Non-Governmental Organizations 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23.

ACLEDA, Cambodia Alexandria Business Association (ABA), Egypt Association for Social Advancement (ASA), Bangladesh BancoSolidario (Enlace), Ecuador Bangladesh Rural Advancement Committee (BRAC), Bangladesh CHISPA, Nicaragua Compartamos, Mexico Cooperativa Emprender, Colombia Emprender, Argentina Funadeh, Honduras Fundacion Ecuatoriana de Desarrollo (FED), Ecuador Fundusz Mikro, Poland Genesis Empresarial, Guatemala Get Ahead Financial Services, South Africa Grameen Bank, Bangladesh PADME, Benin PRIDE, Tanzania PRIDE/VITA, Guinea PRODEM, Bolivia SHARE, India Small Enterprise Foundation, South Africa TSPI Development Corporation, Philippines Zambuko Trust, Zimbabwe

Formal Financial Institutions 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18.

Agence de Credit pour l'Entreprise Privee (ACEP), Senegal BancoADEMI, Dominican Republic Banco de Desarrollo, Chile BancoSol, Bolivia Bank Rakyat Indonesia (BRI) Unit Desa, Indonesia CARD Bank, Philippines Centenary Rural Development Bank (CERUDEB), Uganda Citi Savings and Loan, Ghana Cooperativa de Ahorro y Credito, Colombia FECECAM, Benin Financiera Calpia, El Salvador FINAMERICA S.A., formerly Corposol, Colombia Hattan Bank, Sri Lanka Kafojiginew, Mali K-REP Bank, Kenya Los Andes, Bolivia MiBanco, Peru Multicredit Bank, Panama 19. SEWA, India

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ANNEX B GOVERNANCE SURVEY QUESTIONNAIRES

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