Université de Mons 1

Cooperation with Banks and Corporate Governance: Key Lessons for the

Development of MFIs

Marc LabieMarc.Labie@umons.ac.be

CERMi - Centre for European Research in Microfinance(UMONS - ULB) – www.cermi.eu

European Microfinance NetworkBrussels, December 17th, 2013

Université de Mons

Corporate Governance: a major issue in (micro)finance

Banana Skin Reports (2008: 2nd (on 29); 2009: 7th (on 25); 2011: 4th (on 24); 2012: 2th (on 20))

Some major crisis (at the institution and at the country level) → EIB project “Microfinance in crisis”

So, controlling microfinance growth and development properly is perceived as crucial but, often, not much effort is really made. Why ?

Because there is always a trade-off between short-term/long-term investments (governance is a long-term investment for which returns are not easily visible – governance is only seen as a major topic when there is a crisis – and then it is often (too?) late).

Because it puts constraints on top management.

Because it is not well understood and it is a complex “systemic issue” (and we have a hard time thinking in a “systemic way”).

2

Université de Mons

Understanding microfinance corporate governance:first, a definition…

“Corporate governance is a system, or a setof mechanisms, by which an organization is

directed and controlled in order to reachits mission and objectives.”

(Labie & Mersland, 2011)

3

Université de Mons

Labie & Mersland, 2011 (based on Charreaux 1997)[The Handbook of Microfinance]

4

Specific Mechanisms Non-Specific Mechanisms

Intentional Mechanisms Direct shareholders control (assembly)Board of directorsSalary and bonus mechanisms Formal Structure & organization chart Internal Auditors Ownership structure

Legal Environment (Regulation and supervision procedures) Legal Auditors Consumers AssociationsNational and international associations and networks

Spontaneous Mechanisms Informal (relationship) NetworksManagers cross-control Corporate cultureReputation (among the employees)

DepositorsFinancial Providers (MIVs and others)Labour MarketPolitical MarketMedia EnvironmentBusiness Culture

Université de Mons

The “easy” move:strengthening the intentional specific mechanisms?

5

Intentional specific mechanisms only depend on the “will” of the institution, but it does not necessarily mean that they are easy to improve: why ? The case of boards.

Mainly because of …

Frequent lack of debate and follow-up on issues such as the mission of the organization and the choices it makes;

Misunderstanding by board members and management of the functions of the board and how to assume them properly;

Constitution of boards and nature of the commitment of board members;

Weak evaluation of most boards (when in place).

Université de Mons

So, what could be discussed? Board objectives (1)

Board objectives:

Respect legal obligations

Establish strategy with management

Fiduciary Responsibility

Supervision and control

Auto-evaluation

External relationships

6

Université de Mons

So, what could be discussed? Board management (2)

What to look for when dealing with board issues :

Adequate staffing (internal, affiliated, external)

Technical skills and mission acceptance

Dialogue between the board and managers

Objective recruitment and rotations (within the board itself)

Separation of the CEO and chairman functions

Establishment and good functioning of specialized committees

Clear information from the internal audit directly to the board

Clear identification of potential conflicts of interest

7

Université de Mons 8

Thank you for your attention.

Marc LabieMarc.Labie@umons.ac.be

CERMi - Centre for European Research in Microfinance(UMONS - ULB) – www.cermi.eu