What Do Governance and Parenting Have in Common?

> Posted by Deborah Drake, Vice President and Program Manager, Investing in Inclusive Finance, CFI

The Investing in Inclusive Finance program at the Center for Financial Inclusion at Accion explores the intersection of investment and financial inclusion. Across areas including risk, governance, stakeholder alignment, and fund management, this blog series will highlight what’s being done to help the industry better utilize private capital to develop commercially sustainable financial institutions.

As the head of the CFI’s Investing in Inclusive Finance program area, I spend a lot of my time focusing on how to create behavioral change at the board level – with the goal of improving the governance of microfinance institutions. I recently attended a University of Rochester Faculty Perspective Webinar given by Edward Deci called “Self-Determined: What Motivates You?” with the professional objective of better understanding what motivates board members and how that impacts behavioral change. Yet, throughout the webinar, I found myself drawing many parallels to my other job: mother to three sons.

The webinar focused on self-determination theory (SDT), which is based on the belief that “we do our most creative work, when we feel that we are acting according to our own will on behalf of goals we find meaningful.” Research leading to this theory has shown that “rewards such as prizes and money were not only less effective than behavioral psychologists had long supposed, but under some circumstances could actually diminish people’s feelings of engagement and motivation.”

The main takeaways were:

  • The importance of autonomy in being able to respond creatively to challenges;
  • The importance of focusing on the process over the outcome.

From a parenting perspective, children respond better to an environment where they are given choices, share in decision-making, and understand why goals and rules exist, as opposed to a strongly authoritarian environment.

And children should be praised for the process, not the outcome. We teach them that having fun playing a sport is more important than winning, and that working hard on a project or studying for a test is more important than the ultimate grade they receive.

Many of these same principles apply in the boardroom. Boards that encourage open discussions, where all members feel their ideas are heard and valued, and where all members share in the decision-making, are ultimately going to result in the best decision-making and most creative problem solving, as opposed to boards operating under the authoritarian rule of an overpowering chair or suffering from management capture.

Boards should also focus on the process, not only the outcome. Sure, highly ambitious growth targets might sound great but not if the risk mitigation processes aren’t in place to support that growth. Low portfolio at risk (PAR) is another outcome boards love, but it makes sense to look inside the number. Once a board looks at how portfolio at risk affects clients, investors, staff incentives, potential investment opportunities, etc., it might be worth allowing a slightly higher PAR to avoid other risks or missed opportunities.

Self-determination theory recognizes the reality of both parenting and governance: “control is easy,” but creating an atmosphere in which people feel free to act autonomously and creatively toward shared goals “is much, much harder.” And rewarding process in an outcome-driven world is easier said than done!

Image credit: Your Teen Magazine

Have you read? 

Banana Skins 2012: Improving MFI Governance

A Core Reference Tool Updated: CMEF’s Governance Guidelines

Governance: The Buck Has to Stop Somewhere