The Key Ingredient to Success: Corporate
Governance
Opportunities and Challenges for MFIs
Dr. Martin Steindl, MBA (HEC)
Program Manager
International Finance Corporation
Tunis – May 2008
Presentation Purpose and Outline
Purpose: To explain the concept of and business case for
good corporate governance, tailored to MFIs
Outline:
•
What is corporate governance?
•
Why does corporate governance matter; how does it add value?
What can happen if you do or do not have it?
•
Specific governance issues for MFIs
•
Possible solutions and implementation
Intro >> Definition >> The business case >> Specific issues for MFIs >> Implementation >> Summary
Takeaways
By the end of this workshop, you should be able to:
• Understand what good corporate governance is
• Agree that corporate governance can add value and is indeed a key
ingredient to success
• Appreciate the main issues as they pertain to MFIs, and finally
• Identify steps you may wish to undertake to implement good
corporate governance in “your” MFI
Intro >> Definition >> The business case >> Specific issues for MFIs >> Implementation >> Summary
Governance is governance…it is not management
and it is surely not volunteering…as a board member
you have to see to it that the organization is wellmanaged rather than managing it yourself
Source: Ken Dayton, quoted from Consensus Statement
of the Council of Microfinance Equity Funds, May 2005
Intro >> Definition >> The business case >> Specific issues for MFIs >> Implementation >> Summary
What is corporate governance?
What does it ‘look and feel’ like?
Why does corporate governance matter? How does it add value?
What can happen if you do or do not have it?
Specific governance issues for MFIs
Possible solutions and implementation
Summary
Corporate Governance Defined
“Corporate governance is the system by which companies
are directed and controlled.”
Source: Sir Adrian Cadbury, UK Combined Code
“Corporate governance involves a set of relationships between a
company’s management, its board, its shareholders and other
stakeholders.
Corporate governance also provides the structure through which the
objectives of the company are set, and the means of attaining those
objectives and monitoring performance are determined.”
Source: OECD Corporate Governance Principles, 2004
Intro >> Definition >> The business case >> Specific issues for MFIs >> Implementation >> Summary
The Overall Challenge of Aligning
(Conflicting) Interests
Internal—Corporate—Perspective
External—Stakeholder—Perspective
Shareholders
- The general assembly Are
accountable to
Founder
stage:
Directors
Shareholder=Director=Manager
- The board of directors Audit
Cttee
Rem
Cttee
Guide &
control
Risk
Nom
Cttee
Report &
answer to
Managers / Executives
- CEO / mgt. team / ExCom -
Act in interest of
Provide capital to
Ext.
Audit
Elect &
dismiss
Intermediaries
Stakeholders
Reputation Agents
Law- & rule makers
• Accounting firms
• Law firms
• Investment banks
CRO
CCO
• Regulations, Listing rules
• National CG Codes
• Credit rating agencies
• Financial analysts
• Financial media
Capital & Financial
Markets
• Debt & equity markets
• Research institutes
• Competitive forces
• Educational institutions
• Market for corporate
control
• Corporate governance
institutes
• Institutes of directors
CIA
• Company, Banking,
Securities Laws
Civil society
• CSR
• HSE
Intro >> Definition >> The business case >> Specific issues for MFIs >> Implementation >> Summary
But Rest Assured: One Size Does Not Fit All!
•
No to cookie-cutting: corporate governance improvements should be
tailored to specific institution at specific point in time in specific country!
•
Focus on the following four principles:
1.
2.
3.
4.
•
Accountability
Responsibility
Fairness
Transparency
And remember: corporate governance is a journey and not a
destination
– Best to understand key issues, then implement on a step-by-step
basis
Intro >> Definition >> The business case >> Specific issues for MFIs >> Implementation >> Summary
The ‘Look & Feel’ of Corporate Governance
- Structure
- Composition
- Procedures
- Remuneration
- Evaluation
- Training
- Internal
controls
- Compliance
- Internal audit
- External audit
- Audit cttee.
What:
- Financial
- Non-financial
Where:
- Annual report
- Website
When:
- Qrt, annually
By whom:
Protection of (minority)
shareholder rights
- Duties
- Risk mgmt.
Appropriate Control
environment & processes
Good board practices
- Role
Strong regime of
disclosure and transparency
The five key elements of
good corporate governance
- General
assembly
* Cumulative
voting
* Information
* Discussion
- Minority SH
protection
* Against RPT
& insider deal.
* Tag-along
- Dividend
policy
- Board vs mgt.
Strong commitment to corporate governance reforms
- Formalization of policies and procedures
- Appointing CG leadership
Intro >> Definition >> The business case >> Specific issues for MFIs >> Implementation >> Summary
Important to Distinguish Corporate Governance
From Other Concepts
Corporate governance  corporate/financial management
Accountability
Accountability
and
and
Supervision
Supervision
Corporate
Corporate
Governance
Governance
Strategic
Strategic
Management
Management
Executive
ExecutiveMgmt.
Mgmt.
-Decision
- Decisionand
andControlControl Operational
Mgmt.
Operational Mgmt.
Corporate
Corporate
Management
Management
Source:Source:
RobertRobert
Tricker,Corporate
Governance,
1984
I. Tricker, Corporate
Governance,
1984
Corporate governance  corporate social responsibility or business ethics
If management is about running the business, corporate governance is about
seeing that it is run properly. All companies need managing and governing.
Intro >> Definition >> The business case >> Specific issues for MFIs >> Implementation >> Summary
What is corporate governance?
What does it ‘look and feel’ like?
Why does corporate governance matter? How does it add value?
What can happen if you do or do not have it?
Specific governance issues for MFIs
Possible solutions and implementation
Summary
Benefits of Implementing Corporate Governance
Even NGOs require a return on capital to remain competitive and lend again
Optimizes Operational and Financial Performance
• Streamlines business processes, leading to better operating performance & lower capital expenditures
 Gompers, Ishii and Metrick, corporate governance and Equity Prices, August 2001
• Improves the company’s ROCE, with firms in the top cg quartile avg. 33% & in bottom quartile 15%
 Credit Lyonnais SA, 2001
• Better share price performance, higher profitability, larger dividend payouts & lower risk levels than peers
 Lawrence Brown, Georgia State University, Sept. 2003
• Global Institutional Investors managing more than 1 trillion of assets state that they will pay a premium for
well governed companies. Premiums avg. 30% in Eastern Europe & Africa and 22% in Asia and Latin
America
 McKinsey Global Investor Opinion Survey on corporate governance, 2002
Improves Valuation and Lowers the Cost of Capital
• Over 10 years, well-governed companies across a wide range of sectors have seen superior valuation
multiples of more than 8% over their badly governed peers.
 Metrick, Ishi and Gompers, Corporate Governance and Equity Prices, August 2001
• One standard-deviation improvement in governance brings an improvement in valuation multiples that
ranges from 18% for companies in major OECD markets to 33% in emerging markets.
 Clapper and Love, World Bank, 2002
Sustainability &
Competitiveness
Improves Access to Outside Capital (including donor funding)
Builds/Improves the Company’s Reputation and Trust
• CG can make or break reputations by creating confidence, establishing goodwill and building/restoring
investor trust
Intro >> Definition >> The business case >> Specific issues for MFIs >> Implementation >> Summary
Benefits Over Long Run Thought to Outweigh
Costs
Corporate governance related costs:

Staff, e.g., a corporate secretary, independent directors

Structures, e.g., committees

Disclosure, e.g., annual and quarterly reporting, IFRS accounts

Control, e.g., publicly recognized external auditor, internal
controller and auditor
However, benefits from implementing
corporate governance generally thought
to outweigh costs over long run
Intro >> Definition >> The business case >> Specific issues for MFIs >> Implementation >> Summary
What is corporate governance?
What does it ‘look and feel’ like?
Why does corporate governance matter? How does it add value?
What can happen if you do or do not have it?
Specific governance issues for MFIs
Possible solutions and implementation
Summary
Specific Issues and Challenges for MFIs
• A dual mission: Balancing profit-seeking with social objective of
reaching poor clients
– Make point to discuss right balance at highest level
– Develop KPIs for social objectives
– Right mix of directors
• Ownership of MFIs
–
–
–
–
Informality of governance policies
Weakness of control environment
Entrepreneurial founders
Aligning interests of individual directors with interests of institution is key
• Fiduciary responsibilities of MFIs
– Greater than that of other corporate entities
– issues to consider: i) low-income microentrepreneurs, ii) responsibility with donors,
iii) threat of insolvency and its potential repercussions on national and international
microfinance sector
Intro >> Definition >> The business case >> Specific issues for MFIs >> Implementation >> Summary
Specific Issues and Challenges for MFIs (cont.)
• Many MFIs are incorporated as NGOs/NPOs, COOPs (and not
FIs)
–
–
Principal-agent equation non-existent or shifts due to depositors
Informality of governance structures and weak oversight
• Many MFIs are financial institutions, with own set of distinct
issues
–
–
–
Strict regulation, e.g., on fit & proper, risk, and controls
Opaqueness of financial information
Relationship to regulator
• Managing transformation: Developing from an NGO to a more
complex organization
–
–
–
Risk assessment in MFIs
Extended fiduciary duties, vis-à-vis shareholders and depositors
Succession planning
Intro >> Definition >> The business case >> Specific issues for MFIs >> Implementation >> Summary
Different Board Types: The Good, Bad, and Ugly
‘Rubber
Stamp’ Board
‘Yes-men’
Board
‘Good Old
Boys’ Board
‘Shareholder’
Board
‘Hands-on’
Board
‘Executive’
Board
‘Country Club’
Board
‘Trophy’
Board
‘Paper’
Board
Intro >> Definition >> The business case >> Specific issues for MFIs >> Implementation >> Summary
What is corporate governance?
What does it ‘look and feel’ like?
Why does corporate governance matter? How does it add value?
What can happen if you do or do not have it?
Specific governance issues for MFIs
Possible solutions and implementation
Summary
Specific Recommendations for MFIs
• Separate Ownership/oversight from control/management
– For the board to better provide strategic guidance and oversight
• Professionalize board
– Clarify roles and responsibilities
– Nominate outside and skilled directors
– Ensure for appropriate mix-of-skills
– Adopt appropriate working procedures
– Create committees
– Appoint women to board
• Strengthen risk management and control frameworks
– Understanding and managing risk key for financial institution
– Robustness of control structure to provide assurance to board,
investors
– For larger MFIs: internal audit function
Intro >> Definition >> The business case >> Specific issues for MFIs >> Implementation >> Summary
How Involved is the Board?
High Involvement
Low Involvement
The Passive
Board
 At discretion of
the CEO
 Limited activity
& participation
 Limited
accountability
 Ratifies mgmt.
preferences
The Certifying
Board
The Engaged
Board
 Certifies to SHs
 Provides insight,
that CEO meets
expectations
advice & support
to mgmt.
 Takes corrective
action only as
very last resort
 Understands its
responsibility to
oversee mgmt.
 Understands role  Guides & judges
of independent
directors
 Informed about
CEO’s
performance
 Establishes a
succession plan
the CEO
The Intervening
Board
 Intensely
The Operating
Board
 Makes key
involved in
decision-making
around key
issues
 Frequent &
intense
meetings, often
on short notice
decisions that
mgmt. then
implements
 Fills gaps in
mgmt.
experience
 Has right skills
mix to add value
 Define roles and
responsibility of
Board vs.
management
Source: HBR, David A. Nadler,
Building Better Boards
Intro >> Definition >> The business case >> Specific issues for MFIs >> Implementation >> Summary
Executive, Non-Executive &
Independent Directors
Definition & Role
The role of executive, non-executive and independent directors
Executive
directors

Definition: Executive directors hold an operational position in the company

Role: Executives are responsible for the day-to-day operations and results;
best placed to develop, set and implement strategy
Non-executive
directors

Definition: Non-executive directors (NEDs) do not hold an executive position
in the company. A NED may or may not be independent

Role: NEDs contribute (i) an outside perspective and greater impartiality in
their judgments; (ii) additional external experience and knowledge; (iii) useful
contacts

Definition: An independent director (ID) is a director who has no material
relationship with the company beyond his or her directorship
Role: Ensure that the board includes individuals who can effectively exercise
objective judgment for the exclusive benefit of the company and its
shareholders
Independent
directors

Intro >> Definition >> The business case >> Specific issues for MFIs >> Implementation >> Summary
Board Chairperson and the CEO
‘There should be a clear division of responsibilities at the head of
the company between the running of the board and the executive
responsibility for the running of the company’s business. No one
individual should have unfettered powers of decision.’
Source: UK Combined Code 2003
The chairperson
is responsible for
The CEO
is responsible for
• The leadership of the board,
setting its agenda and ensuring
effective contribution of all its
members acting in the best
interest of the bank’s
shareholders
• The day to day running of
the bank within the risk
parameters defined by the
board and delivering the
bank’s strategy endorsed
by the board
Intro >> Definition >> The business case >> Specific issues for MFIs >> Implementation >> Summary
Example of a Board’s Composition
Non-executive
Chairperson
Non-executive /
independent Director
Non-executive /
independent Director
Non-executive /
independent Director
Non-executive /
independent Director
Non-executive /
independent Director
Non-executive /
independent Director
General Manager
Retail Services
General Manager
Business/Corporate
Company Secretary
Chief Financial Officer
In attendance
Executive Directors
Chief Executive Officer
Non-executive/ independent Directors
Intro >> Definition >> The business case >> Specific issues for MFIs >> Implementation >> Summary
Corporate Governance & Audit Committee
General Assembly
Central Bank
Rating Agencies
Feedback
Board of Directors
Board Committees
Audit Committee
Risk Committee
Exec Committee
Other Committees
Investment Analysts
International Financial
Services Industry
Press
Customers
Institutional Investors
Strategy
Policies
Risk Appetite
Performance
Advice
Concerns
Senior Management
Bank Infrastructure
Internal Audit
Compliance
Risk Management
Business And Support Units
Intro >> Definition >> The business case >> Specific issues for MFIs >> Implementation >> Summary
Bank
Remuneration
Trust
Respect
External Stakeholders
External Audit
Reporting
Election
Transparency
Professionalism
Dynamism
Capital Markets
Authority
(Shareholders)
Audit Committee – Terms of Reference
The audit committee:
 Reviews integrity of the financial statements, and endorses and
reviews accounting policies in use
 Reviews the bank’s systems of internal control
 Reviews the effectiveness of internal audit
 Oversees external audit independence, work, and engagement
 Reviews legal and regulatory compliance
 Acts as central coordination point for investigation of complaints
relating to financial statements, compliance & internal controls
It then:
 Provides regular updates to the board
 Alerts the board to problems
 Pursues and resolves areas of concern
Intro >> Definition >> The business case >> Specific issues for MFIs >> Implementation >> Summary
How Risk Aware is Your Board?
Red Flags for Directors!
As a board member you should ask the following questions:
 Does your board ever discuss current and future risks as an agenda
item?
 Do you receive intuitive reportage which enables you to understand
and be comfortable with your bank’s risks?
 Are you sure your bank is being properly rewarded for the risks it
takes?
 Is your bank on track with delivering its strategy?
 What are the serious challenges it is facing at the moment?
Intro >> Definition >> The business case >> Specific issues for MFIs >> Implementation >> Summary
What is corporate governance?
What does it ‘look and feel’ like?
Why does corporate governance matter? How does it add value? What
can happen if you do or do not have it?
Specific governance issues for MFIs
Possible solutions and implementation
Summary
Summary and Conclusions
 Put most simply, corporate governance is defined as a series of
structures and processes for the direction & control of a company; it
must not to be confused with public governance, CSR or business ethics
 Corporate governance improvement planning is a journey and not a
destination
 There are a number of behaviors and practices that will need to change,
in addition to the company’s framework, policies, and procedures
 In general, MFIs can improve their governance by (i) professionalizing
their board of directors, i.e., creating a committee structure, separating
the role of the board chair and managing director, etc., and (ii)
strengthening risk management and control frameworks
Intro >> Definition >> The business case >> Implementation for MFIs >> IFC Methodology >> Summary
Thank you for your attention