> Posted by Stephanie Dolan
We have seen this before: controversy around small loans making big money for a select few. An article in today’s New York Times examines the SKS IPO, and raises some familiar, difficult questions:
Can an institution built to serve a public good also be highly profitable? How profitable is too profitable, and where does the money raised from an IPO really go?
Today SKS, an Indian MFI and one of the largest in the world, finds itself at the center of a firestorm of such questions as it will soon raise up to $350 million through a stock offering.
Another question often asked during an IPO relates to compensation for investors; in the case of SKS, this includes a broad swath of players, including commercial funds like Sequoia, individual venture capitalists, non-profits like Unitus, and members of SKS’s senior management. Compensation for management can make for a particularly heated conversation: how can you do good and become rich? (According to the Times, SKS CEO Vikram Akula has already sold nearly $13 million worth of shares, and still retains stock options worth up to $55 million)
The Center for Financial Inclusion addressed precisely this question through the paper, “Aligning Interests: Addressing Management and Stakeholder Incentives during Microfinance Institution Transformations”, published with Calmeadow Foundation in 2009. The paper examines methods that have been used to recognize and align the interests of MFI leaders, investors, donors, and staff during institutional transitions as well as mergers. A common practice includes giving CEOs or members of senior management the opportunity to purchase equity shares in the new institution; this not only gives them a stake in the future success of the institution but can include future incentives for reaching social benchmarks – like reaching more low-income clients, expanding its products and services, and even targeting new markets and regions.
For more on this topic, check out our “Aligning Interests” paper. But, to be sure, there are no easy answers to these questions.