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Directors' Diversity and Board Performance: Evidencefrom East African Microfinance InstitutionsNeema Mori a ba Department of Finance , University of Dar es Salaam Business School , Dar es Salaam ,Tanzaniab Norwegian Centre for Microfinance Research , University of Agder , Kristiansand , NorwayPublished online: 23 Jul 2014.

To cite this article: Neema Mori (2014) Directors' Diversity and Board Performance: Evidence from East African MicrofinanceInstitutions, Journal of African Business, 15:2, 100-113, DOI: 10.1080/15228916.2014.920654

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Directors’ Diversity and Board Performance: Evidence fromEast African Microfinance Institutions

Neema Mori

Department of Finance, University of Dar es Salaam Business School, Dar es Salaam,Tanzania and Norwegian Centre for Microfinance Research, University of Agder,

Kristiansand, Norway

Active board participation is one of the main challenges faced by microfinance institu-tions. This article sets out to explore the effect of board of directors’ characteristics (age,gender, and education) on their ability to effectively perform their board roles (monitor-ing and resource provision). Microfinance policy makers are concerned with the role ofboards in terms of the performance of the industry. This study used the agency theoryand resource dependence theory to test the relationship between directors’ characteris-tics and boards’ performance. The empirical analysis is based on a survey conductedwith 105 board directors representing 63 microfinance institutions from three East Afri-can countries (Kenya, Tanzania, and Uganda). The results show a positive relationshipbetween directors’ age and their ability to monitor and provide the board withresources. The study also shows that the effect of directors’ level of education on boards’performance is positive, while no evidence was found with regard to the effect of femaledirectors on boards. The findings imply that board directors need to be appointed basedon their personal characteristics and their ability to perform their roles.

Key words: board roles, characteristics, directors, East Africa, microfinance institutions

INTRODUCTION

Effective boards and corporate governance haverecently been one of the main challenges facing micro-finance institutions (MFIs; Centre for the Study ofFinancial Innovation [CSFI], 2012). This has resultedin studies increasingly focusing on the influence ofboards on the performance of MFIs (Mersland &Strøm, 2011; Mori & Mersland, 2014). However, thereis still scanty evidence on what determines the effective-ness of MFI boards. Van Ees, Gabrielsson, and Huse(2009) noted that the active participation of directorsin the roles and responsibilities of the board is whatmakes it effective. This is, however, a challenge for manymicrofinance practitioners. Mori and Olomi (2012),

for example, found that most MFI directors do notparticipate actively in carrying out their roles. The activeparticipation of directors is contributed to by thecharacteristics of each individual director. This articleset out to explore the effect of MFI board directors’characteristics on their ability to perform their roles.Similar to Forbes and Milliken, (1999), I define aboard’s performance of its role as its ability to performits monitoring and resource provision roles. I thereforeask: How do directors’ characteristics affect the perfor-mance of MFI boards?

The primary interest in studying boards withinacademic and policy circles is driven by the fact thatdirectors’ active participation in board decision makingis believed to be affected by their personal character-istics. Microfinance policy makers have been concernedwith the role of boards in discussions about corporategovernance best practices and regulations (Mori,2012). Pistelli, Geake, & Gonzalez (2012) reported that,

Address correspondence to Neema Mori, Department of Finance,

University of Dar es Salaam Business School, P.O. Box 35046, Dar es

Salaam, Tanzania. E-mail: neema.mori@gmail.com

Journal of African Business, 15(2), 100–113, 2014

Copyright # Taylor & Francis Group, LLC

ISSN: 1522-8916 print=1522-9076 online

DOI: 10.1080/15228916.2014.920654

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until recently, effective boards and corporate govern-ance have been of secondary interest in analyzing themicrofinance industry. They further indicated that therecent economic downturn and the exposure to risk ofsome MFIs has led many practitioners and academi-cians in the industry to identify effective boards as theprimary differentiating factor between those institutionsthat overcome crises and those that do not.

In the microfinance academic literature, several arti-cles have analyzed the relationship between variousboard characteristics—such as board structure, boarddiversity, and chief executive officer (CEO) duality andMFI performance (Aboagye, 2009; Dato, Mersland, &Mori, 2013; Hartarska, 2005; Mersland & Strøm,2011). These articles look mainly at the structure ofboards but do not look at what is happening on boardsor the working processes of boards. Minichilli, Zattoni,and Zona (2009) argued that many studies ignore thecomplex processes that occur on boards. It is fruitfulfor studies, they argued, to focus on what directors doand what drives them to take on board roles, insteadof concentrating solely on a selected type of board struc-ture, the so-called usual suspects. Actual board pro-cesses entail the interactions, activities, and tasks doneby directors when serving on boards. The literaturefurther shows that focusing on board processes givesricher insights into board effectiveness by demonstratingwhat input variables relate to what output variables (vanEes, van der Laan, & Postma, 2008). For example, thepresence of an independent director on a board maybe seen as contributing to the organization’s perfor-mance. However, examining the independence of adirector also requires looking at how this director inter-acts and performs her roles as this is what contributes tothe performance of the organization, not just her pres-ence on the board.

The microfinance policy literature further indicatesthat ineffective boards are among the top three risks thatMFIs face (CSFI, 2012). Ineffective microfinance boardsare attributed to many factors, including their weakstructure and the way in which directors carry out theirroles. This study goes beyond the microfinance boardstructure literature by examining the different personalcharacteristics of board of directors and the extent towhich these characteristics affect their ability to exercisetheir roles on the board. Directors’ capabilities arerecognized as significant determinants of individual con-tributions and overall board performance (Brown, Hill-man, & Okun, 2012). Specifically, Hillman and Dalziel(2003) theorized that directors’ characteristics predicttheir engagement in resource provision and monitoringactivities. This study explores the effect of directors’age, gender, and education on MFI boards. Althoughage and education are important for improvingboards’ performance, relatively little research has been

conducted on their impact on directors’ behavior onMFI boards.

Board performance means the effective functioningof the board. It is associated with two roles, which aremonitoring and the provision of resources (Hillman &Dalziel, 2003). These roles are grounded on the agencyand resource dependence theories. The study thereforeuses these theories to test the relationship betweenboards’ performance of their roles (monitoring andresource provision) and the characteristics of directors(age, gender, and education level). I argue that examin-ing these relationship enhances understanding of what ishappening on microfinance boards, which may contrib-ute to their effectiveness.

The empirical analysis is based on a survey conductedwith 105 directors representing 63 MFIs from three EastAfrican countries (Kenya, Tanzania, and Uganda). Thisregion was chosen because of the countries’ similaritiesin terms of location, past history, and microfinance his-tory. All countries have similar legal regimes, takenfrom English law, that guide the way regulations andcorporate governance are practised in the countries(La Porta, Lopez-de-Silanes, & Shleifer, 2008). ManyMFIs in this region officially started their operationsin the 1990s. In addition, most governance theories havebeen developed and primarily tested in developed econ-omies where market institutions work reasonably well(Wright, Filatotchev, Hoskisson, & Peng, 2005). Testingthese theories in a developing economy context providesa good avenue for examining the generalizability ofthese theories.

The study used a mixture of procedures to analyzethe data. First, I used factor analysis to group the vari-ables relating to the monitoring and resource roles asdependent variables. Then, ordinary least square(OLS) was used as the regression analysis tool to testthe stated hypotheses. The results show support forthe relationship between a director’s age and the abilityof this director to monitor the board and provideresources. The study also found that the effect of direc-tors’ level of education on boards’ performance waspositive. Together, these results show that age and levelof education of directors matter as regards the perfor-mance of the board and their roles on it. The study,however, found no evidence with regard to the effectof female directors on boards, implying that womendo not add value to MFI boards, especially in termsof monitoring and resource provision.

This study contributes to board literature in variousways. First, it provides an alternative way of consideringboard effectiveness by incorporating directors’ diversecharacteristics and their effect on the execution of theirroles. The study shows that board directors need to beappointed based on their diverse characteristics andtheir ability to perform their roles. In doing so, the study

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found that the proper approach to selecting directors isto look at their level of education and age to ensure thatMFIs benefit from their skills, expertise, networks, andexperience. Holmes and Moir (2007) further noted thatdirectors’ diversity is a source of innovation and com-petitive advantage; therefore, MFIs need to identifytheir directors based on the skills and expertise neededand then work with them so as to benefit their organiza-tions. The study also found that the agency and resourcedependence theories could be applied to the micro-finance industry of developing economies. This wasshown in the findings and through the Likert scalequestions in the questionnaire, whereby directorsshowed their involvement in monitoring and controllingmanagement (as suggested by the agency theory) and inproviding a variety of resources (as suggested by theresource dependence theory).

The article is organized as follows. First, I present thetheoretical background and state the hypotheses. ThenI discuss the methodology and data used in the article.The next section discusses the results followed byconclusions and implications.

THEORETICAL BACKGROUND ANDHYPOTHESES

Boards’ Performance of their Roles

The corporate governance literature includes a stream ofresearch on the multiple roles of directors (Hillman,Nicholson, & Shropshire, 2008; van Ees et al., 2008).These roles include, but are not limited to, controllingmanagerial behavior via monitoring, advising theorganization, ensuring access to critical resources, influ-encing strategic decision making,� and taking stake-holders’ interests into account (Wagner, Stimpert, &Fubara, 1998). Hillman and Dalziel (2003) integratedthe agency and resource dependence theoretical perspec-tives and identified two major roles of directors: moni-toring and resource provision. Both roles entail anumber of activities and are founded on distinct theor-etical principles. Following Hillman and Dalziel (2003)and Zona and Zattoni (2007), this article looks at direc-tors’ performance of their roles in terms of their abilityto monitor management and provide the organizationwith resources (van Ees et al., 2008).

The monitoring role refers to the responsibility ofdirectors to supervise managers on behalf of stake-holders, especially shareholders (Hillman et al., 2008;Kyereboah-Coleman & Amidu, 2008). The board’smonitoring role rests on the agency theory, whichfocuses on the potential for conflicts of interest that arisefrom the separation of ownership and control (Fama &Jensen, 1983; Gu, Langabeer, & Helton, 2010). Boards

exist to monitor the actions of ‘‘agents’’ (managers)and to protect the interests of ‘‘principals’’ (share-holders) (Jensen & Meckling, 1976). Board activitieswithin the monitoring role include supervising themanagement team and evaluating and rewardingmanagers (Hillman & Dalziel, 2003). The board herealso has a mandate to ratify strategic decisionsabout hiring, compensating, and replacing managersor management (van Ees et al., 2008). These activitieshave in common the duty to ensure that themanagement operates in the interests of stakeholders.Monitoring by boards is supposed to reduce agency costsand consequently enhance organizational performance(Thomsen & Conyon, 2012).

MFI boards also monitor managers on behalf ofdifferent stakeholders (Hartarska, 2005; Mori, Randøy,& Gholersorkhi, 2013). One difference is in terms ofstakeholders who own or have a key interest in theMFI. Some MFIs operate as shareholder organizations,some as not-for-profit and others as cooperatives(Mersland & Strøm, 2008). All of these involve differentstakeholders. For example, not-for-profit MFIs aremostly owned by one, or a combination of founders,donors, and the government, while cooperatives aremostly owned by their customers. Nevertheless, theseprincipals would want to have representatives on theboards in order to monitor the managers (Mersland,2011). Other stakeholders with a variety of character-istics are also important to MFIs, as their presence onboards enables them to supervise management (Mori& Mersland, 2014).

The second aspect of boards’ performance of theirrole is the provision of resources. This role is based onthe resource dependence theory, which views organiza-tions as open systems, dependent on external organi-zations and environmental contingencies (Pfeffer &Salancik, 1978). Here boards are viewed as those thatmanage external dependency, reduce environmentaluncertainty, and reduce the transaction costs associatedwith environmental interdependency, by linking theorganization with its external environment. The role ofa board of directors from this perspective is to serve asresource providers. Each director is supposed to bringdifferent linkages and resources to a board. The boardtherefore reflects the matching of an organization’sdependency with the resource acquisition potential ofits directors (Hillman, Cannella, & Paetzold, 2000).

The resource provision role is important in the micro-finance industry because it is young and entrepreneurialin nature. MFIs need various resources to effectivelymeet their dual objectives. Different microfinance direc-tors have different experiences and expertise to share forthe benefit of MFIs. Depending on their educationalbackground and experience, directors can help MFIslearn about financial management, competition, and

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strategic decision making. They also provide (a) uniqueinformation about policy processes, which due to theircomplexity are often expensive or difficult to obtain(Hillman, 2005), (b) a channel of communication oraccess to existing politicians, bureaucrats, and othergovernment decision makers with whom the boardmember is aligned, and (c) potential access to govern-ment decision makers that may result in influence overpolitical decisions (Neville & Menguc, 2006). Somedirectors have information on women and markets,which they can also share when sitting on MFI boards(Mersland & Strøm, 2009).

The Council of Microfinance Equity Funds (CMEF;2012) further elaborated the roles of MFI boardsas shown in Table 1. As seen from the table, all eightroles have elements of both monitoring and resourceprovision. For example, the board has the role offulfilling the mission of the MFI. In this case the boardhas to ensure that it guards and promotes the mission,establishes social objectives, and evaluates the CEOaccording to those objectives. Evaluating the CEO is partof the monitoring role, while directors provide resourcesto the board through promoting the mission andestablishing the social objectives of MFIs. Since MFIdirectors have to perform these roles, it is importantfor studies to look at the extent to which these roles arepracticed and implemented using the theories employedby the corporate world. This study set out to do so.

Related Microfinance Studies

Corporate governance and weak boards are among thegreatest challenges facing MFIs. Other challenges are(a) overindebtedness of microfinance clients; (b) poorquality of top management attributed to the shortageof skilled personnel; (c) credit risk resulting fromirresponsible lending practices; (d) political interference;and (e) low level of risk awareness resulting in poor

risk management (CSFI, 2011, 2012). Most of thesechallenges can be overcome by having boards that per-form their roles effectively. Recognizing this, severalmicrofinance studies have examined the importance ofboards for the performance of MFIs.

A study by Hartarska (2005) examined the effect ofgovernance mechanisms on the performance of MFIs.She showed that boards with a larger proportion of out-side directors attain better return on assets and outreach.The study also showed that donor directors improvedepth of outreach but worsen sustainability. This resultcontradicts that of Mori and Mersland (2014), whofound that donors on boards improve both outreachand sustainability.

Similarly, Mersland and Strøm (2009) studiedgovernance mechanisms in the microfinance industrycovering a range of performance measures using a data-set of 278 MFIs from 60 countries. Their results showedthat financial performance improves when the board haslocal rather than international directors and when itemploys an internal board auditor. Hartarska andMersland (2012) also evaluated the effectiveness ofgovernance mechanisms on MFIs’ efficiency in reachingmany poor clients. Their results in regard to board sizeshow that there are performance gains with a largerboard.

Looking at other aspects of boards, Mori and Olomi(2012) studied the effect of board composition on theoutreach performance of MFIs. They looked at theindependent, international, female, and founder rep-resentation on boards. Their results reveal that boardswith independent, female, and international directorsperform much better in terms of outreach to the poor.Dato, Mersland, and Mori (2013) looked at the effectsof board committees on the performance of MFIs. Theyfound that strategy committees have a positive effect onMFIs’ performance while the monitoring committeesdid not.

TABLE 1

Roles and Responsibilities of MFI Boards

Role Board

i. Fulfilment of Mission Guard and promote mission; establish social objectives; evaluate CEO according to those objectives.

ii. Financial Performance Ensure financial survival and solvency; protect shareholders’ rights; set key financial targets; evaluate CEO on

financial objectives.

iii. Responsible Performance Approve code of ethics for organization and for own operations; receive and act on reports from internal audit.

iv. Staff Performance Select and evaluate CEO; ensure organization has succession plan; oversee internal auditor.

v. Strategic Planning Establish strategic framework and approve strategic plan.

vi. Organizational Policies Oversee board policies and procedures.

vii. Liaison with Stakeholders Uphold the interests of shareholders; represent the organization in public when appropriate.

viii. Regulation Liaise officially with regulators regarding compliance and liability; respond to directives by regulators.

Source: Adapted from CMEF, 2012.

Note. MFI¼microfinance institutions, CEO¼ chief executive officer.

This table shows various roles and responsibilities of directors of MFI boards.

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All these studies mainly focus on the relationshipbetween board structure, composition or other corpor-ate governance mechanisms, and MFI performance.They do not specifically examine what these directorsdo when sitting on boards. There is also a lack of knowl-edge on how demographic characteristics may influencethe performance of boards’ roles.

Furthermore, in all these studies, the dependent vari-able has been the financial and=or social performance ofthe MFI. This implies that the studies jump a stage bynot looking at how different directors’ attributes con-tribute to the performance of their roles on the board.This article argues that directors should first carry outtheir roles effectively as this will contribute to the goodfinancial and social performance of the MFI. This studyfills this gap by examining how directors’ characteristicsenhance the execution of their roles on the board (moni-toring and resource provision). The next section devel-ops hypotheses based on directors’ characteristics.

Hypotheses Development

Directors’ characteristics are argued to be an importantpart of board diversity (Dagsson & Larsson, 2011; vanEes et al., 2009; Walt & Ingley, 2003). Each directorappointed to a board has a unique skill set. Hillmanand Dalziel (2003) referred to this as human capital. Itrepresents the experience, expertise, and reputation ofthe individual, as well as the ties the individual has withother networks and organizations. Diversity in theboardroom is needed not only in terms of gender andethnicity, but also in age, educational experience andbackground, status, and income level (Walt & Ingley,2003). MFIs may utilize these skills in order to enhanceboards’ performance of their roles. MFIs will alsochange the composition of their boards to acquiredifferent human capital in response to changes in theirexternal environment (CMEF, 2012; CSFI, 2011). Inthis case, I expect that MFIs would choose individualsfor their boards based on the unique skills they possessand the resource needs. The diversity aspects examinedin this study are directors’ personal characteristics ofage, gender, and education level. I argue that these threeare important as they have implications for other aspectsof diversity, such as expertise, experience, and skills. Forexample, directors with higher levels of education arelikely to have more expertise, skills, and the ability to con-tribute to the board. I recognize, however, that these threecharacteristics do not exhaust all the variables suggestedby the diversity literature (e.g., Walt & Ingley, 2003).

Age

When addressing age as an element of board diver-sity, there are many factors to consider. One may believethat older directors bring more experience to the board

while younger directors bring more energy and a newoutlook. Gail (2009) argued that a board that hasa good age mix of directors balances the insights andexperience that older directors with longer tenure bringwith the new ideas introduced by younger and perhapsless experienced directors. A few studies have examinedthe effect of age on organizational performance. A studyby Wegge, Roth, Neubach, Schmidt, and Kanfer (2008)argued that age diversity affects the performance ofan organization. The study further concluded that,depending on the nature of the tasks to be undertakenby boards, age has an effect. Murphy and McIntyre(2007) hypothesized that organizational performance willbe poorer with greater variation in the ages of directors.Their study showed that organizations whose board ofdirectors varied greatly in age performed poorly.

Age diversity has the potential to enhance theperformance of the board because directors of differentages will have different backgrounds, skills, experience,and social networks. Dagsson and Larsson (2011)argued that different age groups have varied access toinformation and expertise. Today’s younger generationhas grown up with computers and access to the Internetat home, and may be better informed and more experi-enced on the subject of online business, for example. Theolder generation may, however, be more experienced indealing with business offline, as they have greater experi-ence in this field through their careers. By ensuring agediversity, a board’s aggregated human and social capitalcan be maximized. Carter, D’Souza, Simkins, andSimpson (2010) further argued that ‘‘diversity holdsthe potential to improve the information provided bythe board to managers due to the unique informationheld by diverse directors’’ (p. 398). To my knowledgeno microfinance study has focused on the age character-istic of directors, but this would seem to have an effecton the way in which an MFI board conducts its roles.Based on this, the following is hypothesized:

H1: There is a positive association between the ageof directors and the performance of their boardroles.

Gender (Female)

Microfinance and being female are intrinsically linked(Adusei & Appiah, 2011). The Microcredit SummitCampaign, which plays a central role in the promotionof microfinance, has the following objective: ‘‘to ensurethat 175 million of the world’s poorest families, especiallyfemales, have access to financial and business services’’(Strøm, D’Espallier, & Mersland, 2010, p. 6). SeveralMFIs in East Africa, for example, are designed to targetwomen only. Mersland and Strøm (2009) reported that73% of customers in their global dataset are female. They

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argue that having women on boards or in managementreduces information asymmetry vis-a-vis customers morethan male directors (Mersland & Strøm, 2009). Womenalso know better what products women want and canset terms that appeal to female customers. Dunn (2012)suggested that the gender diversity discussion is no longerabout women on boards bringing democracy and equal-ity but on organizational effectiveness and the businessbenefits obtained. Adams and Ferreira (2009) showedthat women on boards are good monitors and contributeto the performance of organizations. This was furthershown by Mori, Randøy, and Gholersorkhi (2013), whofound that having women on MFI boards is associatedwith greater outreach to poor clients by them.

This means that having women on MFI boards notonly brings equality but also benefits the MFI businessthrough, among other things, providing informationon what female customers need (Mersland & Strøm,2009) and enhancing monitoring by boards. Nielsenand Huse (2010) further identified female values andattitudes as among the unique features that help themexert an influence on boards’ monitoring and resourceprovision roles. The authors showed that women havegreater compassion and do not tolerate ethical lapses.They further found that having women on boards bringsa high level of diversity, which is valuable, as it increasesthe level of debate, reduces information asymmetry, andgenerates alternatives in the boardroom (Nielsen & Huse,2010). These arguments led to the following hypothesis:

H2: There is a positive association between femaledirectors and the performance of their boards’roles.

Education Level

The education level and background of directorsis important if members are to exercise their roleseffectively. Arfken, Bellar, and Helms (2004) noted thatdirectors with a good education are needed because ofthe social contacts, experience, and expertise they bring.The goal of a board is to provide richness of perspective,which frequently comes from including people witha variety of education levels and experience. To ourknowledge, no MFI study has directly looked at theeffect of directors’ education level on MFIs. The levelof education of directors is important in microfinancesince the board needs people with a variety of skillsand expertise who can effectively exercise their roles.CMEF (2012) and BBVA (2011) suggested that MFIboards should have directors with a wide of range ofuseful skills in banking, accounting or finance, legalaffairs, and community development or other socialskills. This implies that directors’ level of education isassociated with them having expertise in the areas

suggested. In addition, Hartarska (2005) argued thatthe skills directors bring to MFI boards matters. Shenoted that skills coupled with education level maycontribute to directors’ ability to exercise their monitor-ing roles. The unique nature of microfinance activitiesrequires that board members have financial and bankingskills as well as social services experience (BBVA, 2011).Pascal, Mersland, and Mori (2013) examined the effectof the education level of the CEO (who is part of theboard) on the performance of MFIs. They found thatCEOs with a high education level (for instance, havinga master’s degree) were positively associated with thesocial performance of MFIs. In this regard, I argue thateducation level matters as it contributes to the abilityof directors to perform their monitoring and resourceprovision roles. Therefore, I hypothesize that:

H3: There is a positive relationship between directors’level of education and the performance of theirboard roles.

The relationships hypothesized in this study are sum-marized in Figure 1. On the left side are the directors’characteristics variables of age, gender, and educationlevel, which are expected to be positively associatedwith the performance of the role variables of monitoringand resource provision.

METHODOLOGY

Why East Africa

The United Nation geographic scheme1 mentionsthat East Africa has five countries: Burundi, Kenya,Rwanda, Tanzania, and Uganda. These five countriesare also members of the East African Community. Thethree countries Kenya, Tanzania, and Uganda, whichare the focus of this study, have more similarities witheach other than with Burundi and Rwanda. In termsof language, Swahili has at least 80 million speakers(as a first or second language), is an important trade

FIGURE 1 Directors’ Characteristics and Performance of Their

Roles.

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language, and is an official language in the three coun-tries. Also, these countries have similar legal regimestaken from English law that guide how regulationsand corporate governance are practiced in them (LaPorta, Lopez-de-Silanes, & Shleifer, 2008). In addition,the region is recognized as being the mostmicrofinance-developed region in Africa. Most MFIsin this region officially started their operations in the1990s. This makes grouping these countries easier asthere are fewer variations among them. Last but notleast, MFI directors and CEOs in these countries havea lot of interactions and networks that necessitate move-ment between them. It is common to find many Kenyansbeing directors of MFIs in Tanzania or Uganda and,similarly, Tanzanians or Ugandans serving on boardsin the other two.

Furthermore, the study focused on this region dueto the fact that most international funding is channeledto the East African microfinance industry, with Ugandabeing the leading country in Africa (CGAP, 2009).Funders (donors, investors, and lenders) in the regionprovide funding and technical assistance in various areas.In terms of funding, funders are able to influence thegovernance of MFIs. For example, some funders specifyhow the MFI board should operate before they providefunding (CMEF, 2012). It is also the funders who reportedthat board and corporate governance is the greatestrisk for MFIs (CSFI, 2012). Focusing on this regionmay shed light on what can be done to reduce this risk,which is perceived by investors=funders as number one.

Sample and Data Collection

The study used the data obtained from a survey of a ran-dom cross-section sample of board directors from MFIsin Kenya, Tanzania, and Uganda. This information wascollected by distributing questionnaires to the directorsof these institutions, which were collected by theauthor between January and August 2010. The authorcontacted the umbrella associations of MFIs in therespective countries and obtained MFI directories.2

These directories included information on MFIs, CEOs’names, and MFI locations and addresses. All MFIs wereidentified from the directories and the CEOs contacted.These CEOs were able to provide contact details oftheir board directors. In Tanzania, directors basedin three regions (Dar es Salaam, Arusha, and Iringa)were contacted. Those willing to participate were visitedand given a questionnaire to fill in.

In Kenya and Uganda, apart from the contactsobtained from the directories, the author also usedumbrella associations’ conferences, which were beingconducted in Nairobi (Association of Microfinance inKenya) and Kampala (Association of MFIs in Uganda)during the data-collection exercise. The author asked the

coordinators of these conferences to add a questionnaireto the package of each conference participant. The coor-dinators asked the participants, who were directors ofMFI boards, to fill in these questionnaires.

This exercise led to the collection of 157 filled in ques-tionnaires (out of 300 questionnaires distributed in allthree countries); 105 of which were usable, giving aresponse rate of 52%. This response rate may be associa-ted with the face-to-face administration of the question-naire in Tanzania and the emphasis on conferencecoordinators in Kenya and Uganda. Table 2 shows theresponses from the three countries. As indicated, therewas a balance of respondents from each country, withUganda having 37%, followed by Tanzania with 34%,and Kenya with 29%.

I recognize that, since the sampling of directors wasbased on direct contacts, directories, and conferenceattendees, it is possible that some directors were leftout and that I have a biased sample. However, I arguethat these represent directors of MFIs in the selectedEast African countries and that most of the establishedMFIs (with boards and audited financial statements) aremembers of umbrella associations and therefore listedin the directories and attend the associations’ annualconferences.

VARIABLES

Dependent Variables

The dependent variables are two aspects of theperformance of boards’ role: monitoring and resourceprovision (Hillman & Dalziel, 2003; van Ees et al.,2008). Questions were developed to measure these roles.Monitoring is defined as the director’s ability to controland evaluate top management of the MFI (Mori &Mersland, 2014). The monitoring role had questionsfocusing on the extent to which directors are ableto actively monitor top management and evaluatethe CEO and top management team and the extent towhich directors do not interfere with top managementin implementing MFI plans. Resource provision is definedas the directors’ ability to provide a variety of resources

TABLE 2

Respondents by Country

Country Frequency Percent

Kenya 30 29

Tanzania 36 34

Uganda 39 37

Total 105 100

Note. This table shows number and percentage of respondents in

each of the three countries studied.

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to the board and the MFI (Hillman et al., 2000; Hillman,Withers, & Collins, 2009). This role had questions onthe extent to which the directors lobby and networkwith stakeholders for the benefit of MFIs, advisetop management about market affairs, such as targetmarkets, finance, and management issues, and howdirectors use their skills and knowledge to fulfil boardtasks and to actively search for relevant informationbefore board meetings.

For all questions I used a standard Likert scale,where 1¼ ‘‘strongly disagree,’’ 2¼ ‘‘disagree,’’ 3¼‘‘neutral,’’ 4¼ ‘‘agree,’’ and 5¼ ‘‘strongly agree.’’ Foreach of these concepts I created construct variablesbased on factor analysis. This method is useful foranalyzing the underlying variability of the observationsin a dataset (Hair, Balck, Babin, Anderson, & Tatham,2008). More precisely, by using factor analysis, I wasable to establish which sets of questions shared the sameunderlying variability and which underlying factors (theunobserved latent variables) were an accurate represen-tation of the observed variables (i.e., the answers to thequestions in the questionnaire). Ideally, the analysisshould establish that the subsets of questions for eachof the dimensions (or factors) were indeed related toeach other on statistical grounds. I used a principal-axisfactor to extract the factors with an eigenvalue higherthan 1. To increase the interpretability of the resultingfactor solution I rotated the factors by using a standardvarimax rotation, which maximizes the sum or thevariances of the squared loading (Hair et al., 2008).

The factors’ reliability was assessed using alpha coef-ficient. Table 3 presents the detailed questions for eachrole (dependent variable), its factor loadings, and thereliability result (Cronbach a). The results of the factor

loadings obtained ranged between .60 and .86. The acoefficients apparently met Nunnally’s criterion, whichsuggests that an a coefficient of .60 and above issatisfactory for exploratory research (Hair et al., 2008;Milanzi, 2012).

Independent Variables

The independent variables were the three directors’characteristics hypothesized earlier. I defined age asthe number of years from when the board director wasborn up to 2010 when the data was collected. Thisvariable was transformed into logarithm of age (ln-age)to normalize its distribution. Gender is defined as binaryvariable 1 if the respondent was a female director and

TABLE 3

The Dimensions of Board Role Performance

Board Role Performance Factor Loadings Alpha Coefficients

Dependent variables

A Monitoring .785

1 The board is actively involved in strategic decision making 0.70317

2 Board directors actively monitor top management 0.75265

3 Board directors do not interfere with top management in the implementation of plans 0.60569

4 Board directors regularly evaluate the performance of the CEO 0.77121

5 Board directors regularly evaluate the performance of top management 0.73381

6 Board directors inform each other about issues concerning the operation of the MFI 0.63309

B Resource provision .850

1 Board directors make use of stakeholder networks 0.67008

2 Board directors lobby important stakeholders 0.70672

3 Board directors advise top management about market affairs such as target markets 0.78348

4 Board directors provide top management with advice on management issues 0.86372

5 Board directors advise on financial affairs such as making a profit 0.81341

6 Board directors use their skills and knowledge to fulfil board tasks 0.71214

7 Board directors actively search for relevant information before board meetings 0.5798

Note. MFI¼microfinance institutions, CEO¼ chief executive officer.

This table shows factor analysis for questions measuring dependent variables Monitoring and Resource Provision.

TABLE 4

Summary Statistics of Variables

Variable Obs. Mean Median

Std.

Dev. Min Max

Monitoring 104 3.96 4.00 0.59 1.67 5.00

Resource provision 102 4.06 4.14 0.63 2.14 5.00

Age 100 46.00 44.50 9.84 26.00 72.00

Ln-age 100 3.81 3.79 0.21 3.26 4.28

Gender-female 105 0.22 0.00 0.42 0.00 1.00

Education1 (binary) 105 0.58 1.00 0.49 0.00 1.00

Education2 (years of

school)

86 16.3 13.00 2.37 11.00 23.00

Ln-education2 86 2.78 2.78 0.15 2.40 3.14

Expertise 105 0.66 1.00 0.47 0.00 1.00

Experience 100 5.84 4.00 4.50 1.00 20.00

Ln-experience 100 1.49 1.39 0.77 0 2.99

Note. This table shows the summary results of all variables

included in analysis.

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0 if the respondent was a male director (Adams &Ferreira, 2009). Level of education is defined by twoindicators. First education1 is defined as a binary vari-able equal to 1 if the director has a bachelor’s degreeand above and zero if the director’s level of educationis below a bachelor’s degree. Education2 is defined asthe number of years the director spent at school. Thisvariable was transformed into logarithm of education2to normalize its distribution.

Control Variables

Directors have other demographic characteristics whichmay affect their performance on the boards of MFIs. Itherefore included other characteristics as control vari-ables in my analysis. These are director’s experience ona board (not necessarily the current board) and direc-tor’s expertise. Experience is defined as the number ofyears the director has served on different boards. Thismay have an impact due to the different experiencesobtained. I transformed this variable in the analysisand used a logarithm to normalize its distribution.

Expertise is defined as a binary variable equal to 1 ifthe director has business and microfinance expertiseand 0 if otherwise (Pascal et al., 2013).

Data Analysis

The data were analyzed in two steps. The first step wasdescriptive analysis. This included factor analysis for thedependent variables, which were loaded on each depen-dent variable. Based on the loadings, I scaled and for-mulated one variable for monitoring and the other forresource provision. These variables together with theindependent and control variables were analyzeddescriptively, by examining the mean, median, and stan-dard deviation of each variable (Table 4). Next, I per-formed Pearson’s correlation analysis for all variables(Table 5). The second step was econometric analysis.Here I used regression analysis, OLS method (Hair,Balck, Babin, Anderson, & Tatham, 2008), wherebyeach independent variable was tested individuallytogether with the control variables (Table 6). To checkfor robustness, all independent variables were regressed

TABLE 6

Regression Results for Board Role Performance and Directors’ Diversity

(1) (2) (3) (4) (5) (6) (7) (8)

Monitoring Monitoring Monitoring Monitoring Resource Resource Resource Resource

Ln-age 0.585�� (2.06) 1.078��� (3.81)

Female �0.008 (�0.06) �0.119 (�0.80)

Education1 0.209� (1.77) 0.404��� (3.35)

Education2 0.789� (1.82) 1.413�� (2.70)

Expertise 0.017 (0.13) 0.052 (0.42) 0.025 (0.20) 0.136 (0.13) �0.177 (�1.38) �0.141 (�1.07) �0.192 (�1.53) �0.031 (�0.20)

Experience 0.012 (1.12) 0.023�� (2.04) 0.042 (0.20) 0.154 (0.08) �0.189 (�1.38) �0.134 (�1.07) �0.135 (�1.53) 0.239�� (2.30)

cons 1.718 (1.59) 3.928��� (36.96) 3.822��� (32.77) 1.588 (1.24) 0.069 (0.06) 4.180��� (37.35) 3.954��� (33.30) �0.058 (�0.04)

N 99 104 104 49 98 102 102 46

R2 0.043 0.002 0.032 0.132 0.142 0.018 0.113 0.227

adj. R2 0.023 �0.018 0.013 0.074 0.124 �0.002 0.095 0.172

Note. This table shows results of ordinary least square regression for dependent variables regressed with each independent and control variable.

Figures in the parentheses are t-statistics.

Significance levels: �p> 0.10, ��p> 0.05, ���p> 0.001.

TABLE 5

Correlation Analysis

Variable Monitoring Resource Age Female Education1 Education2 Expertise VIF

Monitoring

Resource 0.687���

Age 0.207�� 0.354�� 1.41

Female �0.004 �0.083 �0.143 1.02

Education1 0.177� 0.303�� 0.384��� �0.110 1.13

Education2 0.296�� 0.404��� 0.229� �0.015 0.544��� 1.03

Expertise 0.420 �0.109 0.065 0.032 0.136 �0.051 1.03

Experience 0.098 0.215 0.423 �0.033 0.029 �0.065 �0.016 1.26

Note. VIF¼ variance inflation factor.

This table shows correlation results for dependent, independent, and control variables.

Significance levels: �p> 0.10, ��p> 0.05, ���p> 0.001.

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together. The empirical model used to test the hypo-theses is of the following form:

Role Performance¼ constant b1 ln-ageþ b2 femaleþ b3 educationþ b4 control variablesþE

RESULTS AND DISCUSSION

Descriptive Results

Table 4 presents the summary statistics of the variablesused. Monitoring by board had an average of 3.96 (andmedian of 4.00), meaning that most directors are neutralabout their monitoring role. They do not see themselvesas monitors of top management nor do they control andevaluate the performance of management. On the otherhand, most directors had a strong opinion that their roleis to provide MFIs with variety of resources, such asadvice, networking, and counsel. This is shown by ahigh mean (4.06 and median of 4.14) for the resourceprovision variable, which is also accompanied by amaximum range of 5.00.

The average age of MFI directors was 46, witha maximum age of 72. This shows that most directorsare old enough to have accumulated a variety of experi-ences. The percentage of female directors was 22% of thewhole sample, showing that MFI boards are male domi-nated. This is consistent with the other microfinanceliterature, which found that few women sat on boardsdespite the fact that most MFI clients are female(Mersland & Strøm, 2009).

In addition, 58% of directors in our sample havea bachelor’s degree and above, indicating that MFIschoose directors with a high level of education, therebyexpecting to benefit from them. This is also indicated inthe number of years the directors spent at school, whichon average was 16 years. The MFI boards were full ofdirectors (66%) with banking and microfinance expert-ise. The results also show that, on average, directorshave 5 years’ experience of being on boards. This impliesthat most members have some experience of sittingon boards and so are expected to know their roles andcontribute effectively to them and their organization’sperformance (Hillman et al., 2008).

Correlation Analysis

Looking at the correlation among dependent variables,the results in Table 5 show that there is a high levelof association between the monitoring and resourceprovision roles (coefficient 0.687, p> 0.001). This showsthat the roles complement each other and both areimportant for boards and MFIs (Dorado & Molz,2005). Directors should strive to execute both roles.

The correlation among independent variables wasweak for most variables, the highest being between

education1 and education2 (coefficient 0.544, p> 0.001).This suggests that there was not much of a multi-collinearity problem since none of the independentvariables related to each other (Hair et al., 2008).Kennedy (2008) held that correlations need to be above0.7 to detect multicollinearity between two variables.Not one of the coefficients was this high, but significantcoefficients are a warning signal that multicollinearityproblems may arise. To further crosscheck this, I rana variance inflation factor (VIF) test, which tests themulticollinearity problem among independent variables.The VIF results, as shown in Table 5, ranged between1.02 and 1.41, suggesting that multicollinearity was nota problem.

The results of the correlation analysis between theindependent and dependent variables showed preliminarysupport for the hypotheses. The correlation between ageand monitoring (coefficient 0.207, p> 0.05) and betweenage and resource provision (coefficient 0.354, p> 0.05)were both positive. This suggests that there is a positiveassociation between the age of an MFI board directorand her ability to perform her roles. The results furthershowed a positive association for variables education1and monitoring (coefficient 0.177, p> 0.10) andeducation1 and resource provision (coefficient 0.303,p> 0.05), suggesting that education matters if directorsare to fulfil their roles. Similar results were found forthe correlation between education2 and monitoring(coefficient 0.296, p> 0.05) and education2 and resourceprovision (coefficients 0.404, p> 0.001). Other variableswere not significantly associated with each other.

Econometric Results

Table 6 shows the regression findings for the OLSestimations. Models 1, 2, 3, and 4 report the resultsfor the monitoring role, while models 5, 6, 7, and 8report the results for the resource provision role.

H1: The Relationship Between Director’s Age andPerformance of Roles

Model 1 (coefficient 0.585, p> 0.05) and model 4(coefficient 1.078, p> 0.001) provide support for myhypothesis that the older the director the better thecontribution toward the board’s performance. Theseresults confirm arguments concerning the effect of agediversity. Directors’ age has the potential to enhanceboard performance, since older directors have differentbackgrounds, skills, experience, and social networks(Siciliano, 1996). The experience of board directorshelps them to monitor well and provide MFIs witha variety of resources. Dagsson and Larsson (2011)argued that older people have more experience indealing with businesses, as they have greater experience

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in the field through their careers. In our dataset, theaverage age was 46, implying that most directors havemixed experience, older ones of offline business andyounger ones of the current technological workplace.This enables them to make a great contribution toboards and organizations in general. The microfinanceindustry is still young and needs directors who are ableto understand the nature and dynamics of the industryand its uniqueness (Mersland, Randøy, & Strøm,2011). Directors who are able to see the dual objectivesof MFIs and translate them into the execution of theirroles will certainly improve the performance of MFIs.

H2: A Positive Relationship Between FemaleDirectors and Board Performance

Our results in model 2 (coefficient �0.0079) and model 5(coefficient �0.119) failed to support this hypothesis. Itwas expected that since MFIs’ main clients are female,having female directors would be an added advantageto the board. The results, though insignificant, are nega-tive, implying that having women on boards negativelyaffects their performance. This may be a result of havingvery few female directors on MFI boards. Only 22% ofdirectors in the dataset were female. Mersland andStrøm (2009) conducted a global microfinance studyand female directors in their dataset comprised only23%, which may be because of the poor performanceof female directors on boards. Another explanationcould be that there are very few women with experienceof the microfinance industry who could fit into and con-tribute to boards. Terjesen, Sealy, and Singh (2009), forexample, found that most female board directors havebeen educated in law and the social sciences. Microfi-nance is a banking business and it needs directors withfinancial and social skills (Battilana & Dorado, 2010;Dorado & Molz, 2005). It may be that women are lessrepresented on MFI boards because those who aremembers do not have the needed skills and expertiseto contribute to the board.

H3: A Positive Relationship Between Directors’Education and Boards’ Performance

Both education1 and education2 provide support forthis hypothesis. The results for education1 were model3 (coefficients 0.209, p> 0.10) and model 6 (coefficients0.404, p> 0.001), while for education2 they were model4 (coefficient 0.789, p> 0.10) and model 8 (coefficient1.413, p> 0.05). Directors’ level of education has a posi-tive influence on their ability to contribute to boardmonitoring and resource prevision roles. This was alsosupported by Hartarska (2005), who argued that thatthe skills coupled with the education directors bringto the board matters. Pascal et al. (2013) also found

evidence of the relationship between CEOs (who arealso directors on boards) with a higher level of edu-cation and the social performance of MFIs. This meansthat MFIs need directors with a high level of educationin order to benefit from their skills and knowledge.

The results for Hypotheses 1 and 3 supportarguments of the agency and resource dependencetheories, which advocate that there should be a diversityof directors as it contributes to the board’s performance(Mori & Mersland, 2014; Walt & Ingley, 2003). Ina young and entrepreneurial industry like microfinance,having a diversity of directors may provide clarityand strategic direction (Lapenu & Pierret, 2005). Thesedirectors, due to their experience, detailed knowledge,and expertise, will be able to provide MFI managementwith information, help them maintain a clear strategicfocus and connect them to other key stakeholders. Thedirectors are also able to monitor and control theactivities of management without hesitation becausethey know the advantage of monitoring the board.

For robustness, I ran the OLS estimations byregressing all the independent variables with eachdependent variable simultaneously. Following Hartarska& Mersland (2012), I also transformed the age variableby squaring it to see whether the effects of age couldchange as members get older. The results in bothregressions were no different from the results presentedin the table and so I argue that they are efficient.

CONCLUSION AND IMPLICATIONS

This study examined the relationship between MFIdirectors’ characteristics (age, education, and gender)and the performance of their board roles (monitoringand resource provision). I defined performance of theboard’s role as its ability to perform its monitoringand resource provision roles. The study used the agencyand resource dependence theoretical pillars. The empiri-cal analysis was based on a survey conducted with 105board directors representing 63 MFIs from three EastAfrican countries (Kenya, Tanzania, and Uganda).The results show support for the relationship betweendirectors’ age and their ability to monitor and provideresources to the board. The study also proved that theeffect of directors’ level of education on the performanceof their roles was positive. Together, these results showthat age and level of education of directors mattersfor the execution of their board roles. The study howeverfound no evidence of the effect of female directors onboards, implying that women do not add value to MFIs,especially as regards monitoring and resource provision.The study built on existing models by examiningdirectors’ attachment to the organizational mission,through their participation on boards. With a focus on

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the individual behavior of directors, this study providesinsights for both research and practice.

Theoretical and Practical Implications

This article contributes to the board literature by showingthe extent to which the diversity of board directors isimportant for the execution of their roles. In recent years,corporate governance has been hotly debated in themicrofinance literature. One of the topics that has resultedin an escalation of research is the board’s involvement instrategic decision making and monitoring. Fostering theactive participation of directors in the roles and responsi-bilities of the MFI board is a challenge for practitionersthat has been acknowledged by scholarly researchers(CMEF, 2012; CSFI, 2012). Brown and Guo (2010)reported that when MFI CEOs are asked to identify themost important roles of directors, they identified ‘‘activeparticipation’’ as among the top five things board direc-tors should do. Active participation by board directorsis their contribution to monitoring the management andto providing a variety of information.

These roles are grounded on the agency and resourcedependence theories. My study contributes to these the-ories first by linking them to MFI boards’ responsibil-ities and the characterists of MFI directors. Boththeories advocate that greater diversity of directors isnecessary if the board is to perform its roles efficiently(Alonso, Palenzuela, & Merino, 2009). I found similarevidence for the microfinance industry that age andeducation bring more experience and expertise that isnecessary for the execution of board roles. My insignifi-cant results concerning female directors indicate thateven though the number of female board directors isincreasing, few MFIs are actively recruiting women,and there is still a gender bias, stereotyping, andtokenism on boards despite the fact that the MFIs’major customers are female.

With the growth of the microfinance industry and thefailure of some of the once most successful MFIs, it isimportant that MFIs start to consider the importanceof having a variety of directors. Holmes and Moir(2007) noted that diverse directors are a source of inno-vation and competitive advantage; therefore, MFIs needto find directors who are mature and have expertise sothat they may benefit from them. The literature furthershows that boards’ performance of their roles is crucialto organizational performance (Forbes & Milliken,1999; Mori et al., 2013), and individuals who cancontribute to it should sit on boards.

Limitations and Further Research

This article is limited in that it focuses on only a fewMFI directors in East Africa, and so its results must

be interpreted with caution. The article also focuses onthree aspects of diversity. As noted by Walt and Ingley(2003), diversity in the boardroom may comprise aspectssuch as age, gender, ethnicity, culture, religion, constitu-ency representation, independence, professional back-ground, knowledge, technical skills and expertise,commercial and industrial experience, and career andlife experience. Because of this, I suggest that additionalresearch should empirically examine other aspects ofdiversity and should focus on other parts of the world.

NOTES

1. The United Nations geo-scheme is a scheme devised by the Uni-

ted Nations Statistics Division based on the M49 coding classification,

which divides the world into macro-geographical regions and sub

regions.

2. The MFIs’ associations are Tanzania Association of Microfi-

nance Institutions (TAMFI), Association of Microfinance Institutions

in Kenya (AMFI), and Association of Microfinance Institutions in

Uganda (AMFIU).

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