Staying the Course When Risks Rise: Advice for Board Members

> Posted by Christian Ruehmer, Independent Consultant

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.

Being a board member of an MFI is challenging. As MFIs are evolving, board members face an ongoing stream of strategic questions, and more technical expertise and specific knowledge about financial products are becoming necessary. As an MFI grows, employees and stakeholders have increasingly high expectations for board members.

The challenge for the board member is to be a coach as well as to control the management, and to stay engaged despite the fact that the MFI is always changing.

Risk management is one changing area. Risk management is no longer just a small function hidden in the finance department. More risk types are becoming relevant including such “exotic” categories as reputational and legal risk. In addition, increased integration into countries’ financial systems also means a higher exposure to interest rate and liquidity risk, and increased awareness by the regulatory authorities.

How can board members play an active and useful role for the MFI that faces such challenges?

1. Stay Engaged or Increase Your Involvement in the MFI

The MFI might look different than when the board member joined, but this is not a reason to back off. More sophisticated MFIs require stronger involvement and personal commitment. The board member should spend more time with the MFI, participate in more meetings, pay visits to the institution, and test the products the MFI is offering. One suggestion is to organize social gatherings, including dinners, around the time of board meetings and invite selected employees to join. If well organized, such gatherings promote information exchange and a better understanding of the tasks and responsibilities on both sides.

2. Don’t Be Defensive

Some board members react with fear and uncertainty to change. This often leads to defensive behavior. In facing the external world, an MFI requires a board member who is approachable. Also be aware that there are high expectations from the stakeholders. A board member needs to be up-front in his or her communication.

3. Accept Personal Limitations and Use Them to Involve More Experts

The technical challenges and knowledge requirements for risk management are complex and occasionally are difficult to understand. Even if the board member has risk management expertise, the requirements over the last ten years have changed dramatically. As a consequence, it is acceptable to either ask for additional explanations or request that specific experts be added to the board or invited as coaches. A board member will not be blamed for admitting a lack of knowledge, but will be held responsible for not communicating.

4. Stick to the Strategy

Board members are responsible for the MFI’s strategy. However, in exercising oversight, they need to recognize that the execution of strategies often requires more time than hoped. While it is important to make sharp decisions if things go too badly askew, a board member should not turn to tactical adjustments as soon as the strategy is not implemented perfectly.

5. Maintain a Positive Relationship with Regulators

Regulators are powerful, and they prefer transparent and well-managed MFIs. A good reputation can be built by maintaining a positive and professional relationship with the regulators. If the communication flow is frequent and based on mutual respect, then difficult scenarios or small crises can be solved more easily.

6. Step Down to Free the Space for New Faces

If the challenges above become too much, it is the most honorable decision for a board member to step down and free the space for someone with the right expertise. Executing such a step in the regular course of business will preserve the reputation of the board member. Many companies have created advisory boards that reputable members of the community and experts are invited to join. Such advisory boards are not subject to regulations, therefore generally no liability can arise from membership. But the advisory board does allow experts to contribute to the strategic development of the MFI. A departing board member could join such an advisory board.

Board members should know that the challenges they are facing may sound unique but are actually shared among board members in many different industries and across all countries. Few board members only face problems with which they are already familiar. It is therefore useful to reach out to colleagues in similar situations. Social networks like LinkedIn might help in contacting other board members and sharing questions and concerns. Just as lifelong learning and an ongoing curiosity is expected from the staff of an MFI, it is equally relevant for board members.

This post comes from Investing in Inclusive Finance’s recently released publication Ten Risk Questions for Every MFI Board. In the publication, 10 industry risk experts each address one tough risk question, as Christian has done here. Topics such as over-indebtedness, fraud, “newer” risks, and lack of information are examined, offering insight on some of the most difficult risk issues that board members face. Christian’s section of the publication has been modified slightly for this blog post. The publication is available electronically on the CFI website, here.

Christian Ruehmer is a senior consultant in risk management for microfinance. He is the co-founder of Perfect Point Partners (PPP), a consulting company that focuses on efficiency and risk for MFIs and founder of Proyecto Horizonte, a village development project that supports over 800 children and families in Bolivia.

Have you read?

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