> Posted by Andrea Horak, Program Coordinator, 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.
When you hear the word “democracy,” you probably think of equality, elected representatives, voting rights, and so on. You probably also think of specific contexts. In the United States, for example, many of its citizens pride themselves on living in a democratic country. But what about democracy in business? Or more specifically, democracy in microfinance institutions (MFIs)? Should democracy extend to the decision-making in their governing boardrooms?
Although good governance has become a top priority for microfinance investors, donors, and regulators worldwide (CGAP’s Microfinance Gateway lists it as a Hot Topic), the structures of boardrooms and views on governance vary from institution to institution, country to country, and continent to continent. None of these structures, however, seem to be “democratic” in the way we define the word – representative of all parties involved. For example, as we covered in a previous blog post, the Anglo-American model of governance empowers CEOs to also serve as chair of their corporate board, which can result in management dominance of decision-making.
At the CMEF’s most recent meeting in April in Lima, Peru, a portion of the discussion was dedicated to asking why the client voice is not heard in the boardroom. Although it was generally agreed that financial institutions should strive to incorporate clients at the governance level in some way, the response on “how” varied greatly.
FINCA, for example, advocated for and currently uses market research through client surveys, focus groups, and social audit committees that ensure that the client voice is being considered in decision-making. Another suggestion was establishing mechanisms for receiving and integrating client feedback. Not all CMEF members agreed with these suggestions, however, and asserted that the methods for incorporating the client voice should be determined by each organization.
Financial Inclusion 2020’s Addressing Customer Needs Working Group’s suggestions of conducting quarterly client panels or including client representatives on boards were also considered. One concern expressed was that if a client did serve on a board, it would be difficult to choose one client that would best represent a large and diverse group of clients. Note that this discussion was framed with the assumption that MFI boards would be the ones selecting the client representatives.
But what if client representatives were selected, not by the board or the management, but by other clients? Wouldn’t it be more representative of the client voice if the clients could elect their own representative? Clients are major stakeholders of their MFIs, so shouldn’t they have the right to vote for someone who best represents their voice at the governance level? In the same way that union leadership is elected democratically, clients should be afforded the same due process. As the United Service Workers Union (USWU) explains, unions give individual workers a voice in decisions and events that directly affect their work, and give the individuals a say in changing and negotiating workplace conditions and solving workplace problems.
Clients are integral stakeholders in MFIs, and whether it is done through an elected representative, a market research function, quarterly client panels, or a social audit committee, their views should be represented in the boardroom. As is expected, the “how” will likely vary from institution to institution, but in order to reach a greater level of democracy in boardrooms, a way to include the client voice in every MFI must be found.
Have you read?
Stakeholders vs. Shareholders: Which Side Are You On?
How Can MFI Boards Be Explicit about Risk Strategy and Appetite?
Banana Skins 2012: Improving MFI Governance