12 Practices to Improve Governance

> Posted by Danielle Piskadlo, Senior Program Specialist, CFI

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

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Governance challenges vary greatly between institutions and regions, and that is why there is such a great opportunity for boards and MFIs to learn from each other by sharing their personal experiences.

Earlier this month the CFI’s Investing in Inclusive Finance program, along with Calmeadow and Boulder Institute of Microfinance, hosted a governance seminar in Mexico called Governance Leadership in a Competitive World. The seminar was structured as a peer-to-peer learning opportunity to engage board members and CEOs in an active dialogue. Participants discussed the challenges they face in governance and risk, and their roles and responsibilities in setting and monitoring the MFI’s mission and strategy. The cases, tools, and materials presented at this seminar created an opportunity for board members to share their experiences and to learn governance best practices from each other. While there are many complexities and nuances to governance, below are 12 practices we hope will be implemented from our governance seminar.

1. Speak up – It is the fiduciary responsibility of board members to ensure that they are protecting the assets of the institution. This requires board members to be well-informed and to speak up when they feel like something might be out of place. But raising your concerns at a board meeting, or even over email, can be easier said than done – especially if you feel like perhaps you are a junior board member, not well prepared, or if the board chair has a dominant personality. But ultimately, it is extremely important that board members make sure they voice their concerns, and follow-up on them until there is clarity and/or a resolution.

2. Dig deep – Many boards that have experienced crises in the past had what from the surface appeared to be perfect board packages. But underneath, there were a plethora of problems waiting to explode. And often times, when board members did ask questions or raise concerns to management, they received partial or unsatisfactory answers, or they were promised follow-up that never happened. If board members feel like they are receiving inaccurate or incomplete information, they need to dig deeper and continue to question and follow-up until they feel comfortable with the answers or information they receive.

3. Know (and stick to) limits – Excessive growth is often the main driver behind crisis or failure at institutions. And it is surprising how often growth limits and other specific financial limits are broken, exceeded, or ignored by boards. It is very difficult as a board to put the brakes on growth when everything seems to be fine and everyone is happy and profits are high. But there is a reason why growth targets and financial limits are set, and it is important that boards heed the red flag when any rules, targets, or limits are broken. Institutions should be bold, but like management, it is a responsibility of the board to make sure that they are being realistic, and that growth is happening in a controlled, sustainable manner.

4. Seek independence – Independent board members play a critical role on boards as they are not financial vested in the institution. Some may argue that causes independent board members to be less active as they don’t have any “skin in the game.” But it is precisely this impartiality that makes independent board members so valuable.

5. Seek local knowledge – Local board members typically know the operating environment intuitively. There are things about a market that just can’t be researched or learned or known by an outsider, and local board members can provide boards with these invaluable local insights. They likely understand the markets and clientele that are being served much better than any foreign board member that is flying in from thousands of miles away to attend a board meeting. Additionally local directors may have a more vested interest in seeing the institution have an impact because that impact directly affects their home and the quality of living in their community. Ideally, boards would have a balance of both foreign and local directors, as foreign board members do no doubt bring their own advantages, such as knowledge of international best practices and standards.

6. Diversify the board – Groupthink is a very real phenomenon, and it can be especially hindering and dangerous on boards where a diversity of ideas and thinks can drastically improve as well as compromise an institution’s bottom-line. As such, boards should seek to diversify their board composition. Having women on your board has been shown to improve performance.  A recent IFC publication highlights how women can improve board dynamics.

7. Hold executive sessions – One of the main roles of the board is to hold management accountable, which includes evaluating the performance of and structuring the compensation for the CEO and other senior managers. It is very difficult to perform this role well and have honest conversations about management when they are in the room (and it is even harder to have these conversations when the board chair and CEO role are not split). Yet, it can also be uncomfortable to ask management to leave a board meeting as it might make them nervous or suspicious. As such, boards should plan to have regularly scheduled executive sessions for the board to meet without any management (or even note-takers) present.

8. Evaluate board performance – Boards should also be accountable for their performance and they should incorporate an evaluation process (either self, peer evaluations, or an independent third-party evaluation) to identify ways in which they can improve their operations and performance as a board.

9. Have a succession plan – Many institutions rely heavily on one or a few key individuals – maybe the founders or particularly strong and valuable managers. It is up to the board to think about what would happen (Who would replace them? How would the institution run without them?) if these individuals up and left.

10. Be explicit about risk – Boards can’t assume that everyone is on the same page when it comes to the risk appetite of the institution. Boards should be clear about the risks that the institution faces, and be very explicit about how much risk is acceptable.

11. Be prepared – Individual board members need to make sure that they are prepared for the board meetings, which also means they need to insist on receiving the board package far enough in advance to ensure adequate time for preparation. Board members should be provided with trend analysis, relevant benchmarks, and key performance indicators, among other information.

12. Question assumptions – One of the biggest challenges for boards is to “know what they don’t know.” Some boards even find it useful to appoint one person at each board meeting to be a naysayer or devil’s advocate, questioning every assumption that is put on the table. By being given this role, it may make it easier for individuals to speak up since it is their appointed job to do so.

Have you read?

Does Good Governance Guarantee Good Business

Peer Pressure for Good: Applying Peer Learning to Governance Leadership

Banana Skins 2012: Improving MFI Governance