MicroFinance Network

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1 CURRENT GOVERNANCE PRACTICES OF MICROFINANCE INSTITUTIONS A Survey Summary October 1998 Anita Campion

2 Table of Contents TABLE OF CONTENTS...i INTRODUCTION...iii PART I: GOVERNANCE SURVEY OVERVIEW: SUMMARY OF CONCLUSIONS. 1 KEY SUMMARY POINTS...1 NON-PROFIT VS. FOR-PROFIT INSTITUTIONS...2 MANAGING DIRECTOR VS. BOARD MEMBER RESPONSES...4 AREAS OF CONCERN IN MICROFINANCE GOVERNANCE...5 REMAINING QUESTIONS FOR THE CONFERENCE...9 PART II: GOVERNANCE PRACTICES OF NON-PROFIT MICROFINANCE INSTITUTIONS 11 ORGANIZATIONAL STRUCTURE AND OBJECTIVES...11 BOARD MEMBER MOTIVATION...12 BOARD COMPOSITION BOARD STRUCTURE BOARD MEETINGS ROLE OF THE BOARD INSTITUTIONAL PERFORMANCE...20 CONFLICT AND RESOLUTION...21 PART III: GOVERNANCE PRACTICES OF FOR-PROFIT MICROFINANCE INSTITUTIONS25 OWNERSHIP STRUCTURE...25 BOARD COMPOSITION BOARD STRUCTURE BOARD MEETINGS ROLE OF THE BOARD INSTITUTIONAL PERFORMANCE...34 CONFLICT AND RESOLUTION...35 ANNEX A MICROFINANCE INSTITUTIONS SURVEYED ANNEX B GOVERNANCE SURVEY QUESTIONNAIRES i

3 Current Governance Practices of Microfinance Institutions ii

4 Introduction This survey was conducted in August 1998 in preparation for a conference on Effective Governance of Microfinance Institutions to be held in Washington, D.C. October 18-20, The conference objectives are: 1) to identify and discuss the main issues related to the governance of microfinance institutions; 2) define effective governance practices in microfinance institutions; and 3) develop guidelines that can be used to improve the accountability and effectiveness of microfinance governance. In preparing for the conference, the conference conveners, ACCION International, CALMEADOW, and the MicroFinance Network, used a survey instrument to develop baseline data and to summarize the current governance practices of some of the most advanced microfinance institutions in the world. The survey was developed to gather this information, the results of which are summarized in this document. To ensure that the development of governance guidelines based on practitioner input, this document will serve as a basis for opening the conference discussions and for comparing changes in governance practices identified by a follow-up survey. The survey was sent out to the managing director and a board member of 42 microfinance institutions from the following regions: 18 from Latin America; 13 from Africa; 10 from Asia; and 1 from Europe. Of these, 23 are non-profit organizations and 19 are for-profit, formal financial institutions. Annex A provides a complete list of all institutions that received survey questionnaires. These institutions were selected based on the following criteria: experienced microfinance practitioners as indicated by size, outreach, and sustainability; institutional variety; and geographical balance. While other microfinance institutions also meet these criteria, limited resources demanded an efficient selection of institutions that were most accessible to the conference conveners and that could respond in a timely and thoughtful manner. This document summarizes the findings of the 44 survey responses representing 25 different MFIs. The document is divided into three sections. Part I: Governance Survey Overview highlights the major findings, areas of concern, and remaining questions to be addressed in more detail at the conference. The remaining two sections summarize the governance practices of non-profit and for-profit MFIs. Part II: Governance Practices of Non-Profit Microfinance Institutions summarizes survey responses from 14 managing directors and 13 board members from non-profit foundations, public and non- iii

5 Current Governance Practices of Microfinance Institutions governmental institutions. Part III: Governance Practices of For-Profit Institutions summarizes survey responses from 11 managing directors and 6 board members from formal financial institutions, of which 3 are cooperatives/credit unions. GOVERNANCE SURVEY RESPONSES Institutional Type Managing Directors Board Members Total Non-Profit For-Profit Total The survey questionnaires were adapted by institutional type (non-profits and for-profits) and type of respondent (managing directors and board members), resulting in four different variations of the survey. In each case, the managing director was asked to select the board member to complete the other questionnaire for their organization. The surveys were sent in English, Spanish, and French to ensure a maximum level of response. Annex B provides a copy of the Governance Survey Questionnaires in English. While the surveys were conducted in an anonymous fashion, it was evident that most of the board responses came from the same institutions, as the two surveys often were returned together. For this reason, it was also possible to compare board member and managing director responses from the same institution. One should note that not all questions were answered in some of the returned surveys, explaining the occasional discrepancies in the summary totals. These findings are not representative of all microfinance institutions or of statistical significance given the limited number of responses by each type of institution and respondent. They do, however, provide interesting indicators of possible trends in microfinance governance among leading institutions, and enable us to draw general conclusions about governance practice. The conference conveners would like to thank the many managing directors and board members who took the time to complete this survey. The thoughtful and articulate responses provide an interesting base from which to commence the Effective Governance of Microfinance Institutions conference. The conference conveners are grateful to these organizations for creating the initial launching point for discussion from which governance guidelines can evolve. September 1998 iv

6 Part I: Governance Survey Overview: Summary of Conclusions This document synthesizes the responses provided by 25 microfinance institutions (MFIs) to a series of questions concerning current governance practices. Part I: Governance Survey Overview reports the major findings, areas of concerns and key issues identified by the survey. Part II: Governance Practices of Non-Profit Institutions, compiles responses from 14 managing directors and 13 board members of non-profit microfinance institutions which reach from 6 thousand to 2.1 million clients and manage loan portfolios ranging from US$750,000 to $100 million. Part III: Governance Practices of For-Profit Institutions summarizes responses from 11 managing directors and 6 board members of for-profit institutions that serve from 2,500 to 229,865 clients and manage loan portfolios from US$548,175 to $25 million. Key Summary Points While a survey of a limited number of institutions does not serve to draw final conclusions about governance, responses provide some interesting indicators of possible trends in microfinance governance, and allows us to make general assumptions about current governance practices of microfinance institutions (MFIs). The main findings, areas of concern, and remaining questions listed below will be presented and addressed at the Effective Governance of Microfinance Institutions conference to be held October 18-20, 1998 in Washington D.C. 1. The governance practices of non-profit and for-profit MFIs are more similar than different, suggesting that institutional structure alone plays a limited role in determining the governance practices of MFIs. 2. Board members responded similarly to the same questions asked of managing directors, indicating that, in general, board members are adequately informed and working closely with management. 3. Respondents highlighted several areas of concern regarding their governance practice. These are discussed in greater detail below: Frequency of board meetings seems insufficient to address the variety and complexity of issues of a rapidly growing advanced institution in an infant industry. MFIs tend to depend on a key person, usually the managing director or chair. Boards need more formalized selection, orientation and training of members. Board committees are few and appear underutilized, especially in non-profits. Indicators used to measure institutional and managing director performance differ, resulting in potential confusion regarding mission and expectations of staff. 1

7 Current Governance Practices of Microfinance Institutions Several MFIs, non-profits in particular, do not adequately address the issue of lack of pure private capital. Non-profits were reluctant to acknowledge the existence of conflicts of interest. Credit unions with boards comprised primarily of net borrowers are biased towards the borrowers perspective and interests, which is potentially detrimental to long-term institutional sustainability. An excessive percentage of internal board members works against effective governance in terms of reduced accountability, increased conflicts of interest, and stifled innovation. 4. Other remaining questions for conference discussion emerging from the summary: Several boards are currently addressing issues related to transformation from a non-profit to a for-profit MFI. They are interested in learning about specific governance-related issues and appropriate structures to facilitate institutional transformation. The survey has identified the current norms of MFIs governance practices. The conference will address the ways in which existing governance practices can be improved to enhance the overall effectiveness of MFIs. Together, the conference participants will develop guidelines of best practices in microfinance governance. Non-Profit Vs. For-Profit Institutions Governance practices of non-profit and for-profit MFIs are more similar than different. The similarity of responses to the governance survey questionnaires suggest that institutional structure alone plays a limited role in determining governance practices of microfinance institutions. This may be related to the fact that many for-profit MFIs are still primarily owned by non-profit organizations. The survey identified the following similarities between non-profit and for-profit governance norms: Organizational Objectives - Both non-profits and for-profits main overall objective is providing maximum access to financial services. Profitability and financial selfsufficiency were the primary financial objectives. Board Member Motivation - The social aspect of the institution s mission is the primary motivator for board members of both types of institutions. For-profit board members also desire to use their technical expertise for the common good. Board Composition - The most common skills represented on MFIs boards are financial skills, represented on 20 of 25 boards. Managing directors expressed the greatest desire for additional banking/economic expertise on their boards. 2

8 Boards have an average of 9 members, with less than 2 women per board. The smallest non-profit board has only 3 members while the smallest for-profit has 4 members. The largest board size was 15 for both non-profit and for-profits. Most of the boards (18 of the 25) have no foreign board members, with most others (5 of 7) having only one board member that resides overseas. Nominating and Selecting Board Members - The chair and other board members most often nominate and select new board members. The most common board term is months for board members. Indefinitely renewable terms were the most common, used by 11 of the 25 MFIs. None of the boards had non-renewable board terms. Board Meeting Procedures - The most common quorum requirement (the number of members required to conduct business per the institution s by-laws) is 51% or 50% plus one vote. Usually, the chair and the managing director together create the agenda for board meetings. There was little consensus as to who sets the calendar for board meetings. The most common response was that the entire board sets it, which were only 6 of the 19 board members responses. Board Responsibilities - The majority of the sample s managing directors and board members characterize their board as involved in strategic planning and policy decisions but not involved with operational decision making, striking a healthy balance of input and oversight over operations, without being excessively involved. Most boards require board approval to select or change external auditors, mandated by 91% of all institutions surveyed. A high percentage, 81% of for-profits and 50% of non-profits, also require board approval for changes to credit policy, such as a change in interest rates. Strengths and Weaknesses of the Board - Commitment, expertise and union or shared vision were the most often cited strengths of both for-profit and non-profit boards. In many cases, homogeneity or shared visions were used to express the cohesiveness of the board, while a few others cited diversity of skills and backgrounds as board strengths. The responses point to the delicate balance a board must strike in building a unified force while encouraging diversity. Commitment is an especially key factor in building board members ownership through personal investments of time, money and reputations. Lack of availability of the board members and over dependence on the managing director were the most commonly cited weaknesses. These will be addressed in more detail under areas of concern. Institutional Documentation and Reporting The surveyed institutions generally report that they have good formalized processes for documenting policies and procedures. The majority of MFIs surveyed have developed and utilize the following written documents: organizational policies (e.g. personnel policies), credit policy, board meeting minutes, strategic/business plan, employee job descriptions. Most institutions by-laws and statutes include details on the following topics: number of board members, term lengths, board member selection, meetings per year, roles and responsibilities, and quorum requirements. 3

9 Current Governance Practices of Microfinance Institutions For-profit and non-profit institutions have similar reporting norms. The most commonly produced report in both for-profits and non-profits is the portfolio or arrears report, produced 11 times per year on average by the non-profits and 13 times per year on average by the for-profits. The next most frequently produced reports are the balance sheet and income statement, generated 8 to 9 times per year on average. Boards tend to receive all the reports but only half as frequently as they are generated by the institution. This frequency of reporting seems low given that these are among the most advanced microfinance institutions and many are currently experiencing rapid change and growth. Also, many for-profits are required to report weekly to regulatory authorities. Conflict Management - Almost all board members responded that they were able to address difficult issues with management. Yet, few cited concrete examples. The most frequent complex issues that microfinance institutions reported were diminishing quality of loan portfolio and overzealous growth. Managing Director Vs. Board Member Responses Board members and managing directors responses were similar, indicating that, in general, board members are adequately informed and working closely with management. Most managing directors and board members surveyed have similar understandings and perspectives on governance practices. This finding suggests that most board members are adequately informed and working effectively with management. However, one can not assume that this finding is applicable to all board members or to the board as a whole. The managing directors selected the board member to respond to this survey. Therefore, it is likely that the managing director selected a board member with whom there was a close relationship. The few exceptions in which responses from board members and managing directors differed were in prioritizing the roles of the board and describing who creates the board meeting agenda. Role of the Board The most important role played by the board according to non-profit managing directors is assessment of the managing director s performance. However, the most important board roles from the perspective of non-profit board members are monitoring the financial status of the institution and approving the budget. The role considered most important by for-profit managing directors is strategic planning, while for-profit board members selected strategic planning and approving the budget. Creating the Board Meeting Agenda - According to most of the sample s managing directors, the chair and the managing director together create the agenda for board meetings. However, their board members perspective is different, with non-profit board members stating that the managing director alone creates the agenda most of the time. Perhaps non-profit managing directors propose a certain board meeting agenda and then solicit input from the chair or the entire board. Board members may disregard their input in the process of creating the agenda. 4

10 These findings provide some insight into how board members and the executive perceive governance, and suggest that there may be other key differences in perspectives between board members and managing directors that have an impact on effective governance of microfinance institutions. Areas of Concern in Microfinance Governance Several areas of concern about governance practices emerged from the survey responses. Infrequent Board Meetings Both non-profit and for-profit boards meet fairly infrequently. The non-profit boards meet on average 6 times per year while for-profits meet approximately 5 times per year. However, the most common number of meetings per year was 4 in both cases. Board meeting frequency seems insufficient to address the variety and complexity of issues of a rapidly growing advanced institution in an infant industry. Dependence on Key Person The survey findings indicate a dependence on a key person, usually the managing director or chair of the board. The most often cited weaknesses of both for-profit and non-profit MFIs were over-dependence on the managing director and lack of availability of board members which implies inordinate dependence on management. Infrequent board meetings also imply a less active board, placing more responsibility on management. There were several indications that the boards surveyed rely heavily on the chair. The majority of chair terms are indefinitely renewable in both for-profit ad non-profit institutions, allowing the chair to remain in their position for a long time. A few MFIs reported that they do not have set terms for the chair. One explained that the chair has held the position since inception and therefore has no existing policy for replacing them. These findings suggest that the chair is either considered to be particularly important to the proper functioning of the board and the institution, and/or that they are especially difficult to replace or irreplaceable. This finding leads one to ask what level of dependence on one key person should be considered acceptable in an MFI? What risks does the institution take in depending primarily on one person to oversee its growth and development? One must also ask whether board members fully understand their fiduciary responsibilities and the potential implications of entrusting them to one individual. Need for More Formalized Board Orientation and Training The common weakness cited, lack of availability and low participation of board members, may suggest a need for a more formalized process of selection, orientation, and training of board members. Perhaps board members do not realize the level of commitment requested at the time of selection. Or maybe this issue is not caused by 5

11 Current Governance Practices of Microfinance Institutions board members busy schedule, but rather by their lack of understanding of what additional roles or services they should provide. It is essential that boards view the membership selection process as a combined marketing and recruitment campaign. It is one of the most crucial functions of the board. Most would argue that new member identification and recruitment should not be left solely to the managing director. The best candidates may need to be identified and courted much as a large corporation would go about hiring senior managers. Underutilized Board Committees There were few committees identified by non-profit institutions. The for-profit boards utilize more committees, usually including a credit committee. Non-profit boards have fewer and more varied committees represented on their boards. The 11 for-profit managers reported a total of 20 committees whereas the14 non-profit managing directors reported a total of only 10 committees with almost no conformity in committee type. Furthermore, the committees did not seem to be very well defined or utilized, especially in the non-profit MFIs surveyed. Many met on an as needed basis only. Surprisingly, only one New Member Selection Committee was mentioned as an aide in the identification and nomination of new board members. This finding suggests an important board shortcoming, since a nominating committee can help prevent excess influence over board selection by a strong managing director. There appears to be some correlation between the level of importance given to each committee and the number of meeting times per year. Organizations that listed more than one committee tended to rank the committee that met most frequently as most important to the proper functioning of the institution. These findings suggest that for-profit institutions could have lessons they could share with non-profit MFIs regarding the effective use of board committees, credit committees in particular. Conflicting Performance Indicators According to non-profit board members, the most important institutional performance indicator to track is outreach to poor entrepreneurs. For-profit board members attributed greater importance to portfolio quality, operational efficiency and capital adequacy. As one would expect, this finding implies a greater emphasis placed on the social mission by non-profit boards than for-profit boards that focus as much or more on the profitability and sustainability objectives. While these two objectives are not mutually exclusive, responses indicate a difference in institutional emphasis. Non-profit board members cited institutional self-sufficiency as one of the most common indicators for measuring the managing director s performance, whereas for-profit board members selected client outreach. Interestingly, this finding appears to contradict the one cited in the preceding paragraph. The emphasis placed on the managing director s 6

12 performance indicators implies the opposite, that non-profit boards are more concerned about sustainability and for-profits with social mission. If the emphasis placed on institutional performance differs from that placed on the managing director s performance, one must ask whether this leads to conflicting and confusing messages being communicated to managing directors and staff. Given that in most cases managing directors compensation is linked to performance indicators, boards must recognize that those indicators that link performance to compensation will receive the most attention from management. Lack of Pure Private Ownership in MFIs There is indication that several MFIs, particularly non-profit institutions, do not adequately address the issue of lack of pure private capital. Pure private capital comes from private individuals, corporations, investment funds and financial institutions with a primary objective of making a return on investment. It is believed by some that the existence of pure private capital helps to improve the profitability and accountability of an organization. Despite the increasing number of non-profit MFIs transforming into formal for-profit institutions, there is little or no pure private capital in most microfinance institutions. An institution can compensate for its lack of pure private capital by building accountability through alternative mechanisms. One method is to utilize an effective employee incentive system linked to institutional performance indicators. Most of the surveyed MFIs link the managing director s compensation to institutional performance in some manner, with 5 of the 19 board members indicating that the managing director s entire salary was based on performance. Five of the 13 non-profits and 1 of 6 for-profits reported that the managing director s compensation is not at all linked to institutional performance. However, they do not indicate what other factors, besides institutional performance, determine compensation. It seems particularly important to link non-profit managing director s compensation to performance as a way of building ownership and accountability in the institution that can not be built through other means such as through equity ownership. Another method for building accountability is to clearly define and communicate the institutional mission to the various stakeholders, including donors, lenders, staff and clients. However, the findings of this survey indicate a clouding of the institutional mission resulting from the board s use of different indicators for monitoring the managing director s and the institution s performance. Conflicts of Interest Most non-profit board members (7 of 12) reported that their institutions do not have a policy that addresses conflicts of interest, while most for-profit board members (3 of 5) reported that the institution does have such a policy. Correspondingly, half the nonprofit board members said that conflicts of interest simply do not arise whereas most (4 of 5) for-profit board members recognize that such conflicts do arise, however rarely (approximately once every 2 years). 7

13 Current Governance Practices of Microfinance Institutions Are non-profits less likely to experience conflicts of interest than for-profits? Or are they just less likely to be aware of potential conflicts of interest? Or perhaps, given that the potential legal implications are fewer for non-profits, there is legitimately less need for a formal policy to address conflicts of interest. Borrower Bias in Cooperatives The cooperative or credit union structure has an inherent conflict of interest in that its board members are also clients of the institution. This survey attempted to explore this issue by asking the managing directors of credit unions to answer an additional question regarding what percentage of net savers and net borrowers their boards comprised. The responses raise an important issue. Some credit union boards responded that their boards are comprised of 100% net borrowers, which suggests that their boards would tend to view things from a borrower s perspective rather than that of a saver or investor in the organization. A borrower bias could lead to excessive downward pressure on interest rates and a focus on client services at the potential cost of institutional efficiency and profitability. Perhaps cooperatives should try to avoid and correct imbalances in board representation. This could be done through a shift in services to attract more savings-oriented owners by raising interest rates, reducing use of subsidized credit and aggressive marketing of savings products. Safeguards could be implemented to protect against this potential borrower bias. Brian Branch and Christopher Baker in Credit Unions: Overcoming Governance Problems, suggest that credit unions set clear rules governing the roles and responsibilities of board directors, require regular external audits, implement insider operation controls, and enforce prudential disciplines and standards for loan risk controls. Excessive Internal Board Representation Few MFIs had more than one or two internal staff represented on their boards. Forprofit and non-profit microfinance institutions had 9% and 15% of the board comprised of staff, respectively. However, the internal members are concentrated in one or two institutions. While a few staff represented on the board is good for insuring that the board is in close contact with people directly involved with operations, a high level of internal board representation can have negative consequences. First, having the technical expert of the institution also representing that technical expertise on the board impedes accountability. For example, if the Finance Director also plays the role of financial expert on the board, some of the normal checks and balances within the system are eliminated. Second, there may be conflicts of interest that result, such as an excessive push for salary increases at the cost of financial efficiency. Third, new outside perspectives will not have a chance to influence institutional development which can result in stagnation due to the board being too close to the institution to evaluate it objectively. 8

14 Remaining Questions for the Conference A few additional questions remain for conference discussion. Transformation Issues According to the survey, many of the main issues that MFIs are currently addressing relate to institutional transformation, either as a result of or in preparation for transforming from a non-profit into a for-profit MFI. Transformation-related issues raised included: work with regulatory authorities, savings mobilization, raising equity funding, managing exponential growth, financial restructuring, and balancing the financial and social objectives of microfinance. Survey respondents would like to know what specific governance-related issues need to be addressed when contemplating or experiencing transformation from a non-profit into a regulated, for-profit MFI. How can the governance structure be changed to facilitate or accommodate such an institutional transformation? Norms Versus Best Practices This document has presented some possible norms or trends in microfinance governance among advanced microfinance institutions. It serves as a basis for opening the discussions of the Effective Governance of Microfinance Institutions conference and will later be used to compare changes in governance practices implemented over the next year, to be identified by a follow-up survey. The conference will explore the extent to which norms or trends of these leading institutions are representative of best practices in governance of MFIs and in what ways existing governance practices can be improved to enhance the overall effectiveness of MFIs. After the conference, other MFIs desiring to evaluate and compare their governance practices to those recommended in the forthcoming governance guidelines can use the governance survey as a initial starting tool. 9

15 Current Governance Practices of Microfinance Institutions x

16 Part II: Governance Practices of Non-Profit Microfinance Institutions This section compiles responses from 14 managing directors and 13 board members from non-profit microfinance institutions whose outreach ranges from 6 thousand to 2.1 million clients and whose loan portfolios are between $758,000 and $100 million. Fourteen non-profit managing directors responded out of 23 surveyed, from institutions representing a total of 3,051,933 clients and with combined loan portfolios valued at over US$200 million. These figures, provided by the institutions, are based on their most recent information generally the last six months. Organizational Structure and Objectives Of the 14 non-profit institutions, 8 are non-governmental organizations, 4 are foundations, one is an association, and one is a public institution. Financial Objectives In regard to their financial service operations, 10 of the 14 non-profit managing directors chose financial self-sufficiency as their primary financial objective. Three selected operational efficiency. None Renewal of Board Terms Indefinitely Renewable Renewable for One Term Board Members Managing Directors Job Creation Microenterprise... Non-Profit Non-Financial Objectives Poverty Alleviation identified ability to cover costs with donor and other income as their highest financial objective. The representative board members responded identically. Non-Financial Objectives The institutions overall objectives were more mixed. Six of the 14 non-profit managing directors and 4 board members responded that their organization s primary non-financial objective was to provide maximum access to financial services. Three managing directors and 4 board members selected poverty alleviation as their primary non-financial objective. Three managing directors and 2 board members selected microenterprise development. Only 1 managing director as compared with 3 board members selected job creation as the top non- Non- Renewable Non-Profit Board Terms Max. Access to

17 Current Governance Practices of Microfinance Institutions financial institutional objective. Board Member Motivation Thirteen non-profit board members responded to this question out of 23 surveyed. These board members expressed a variety of motives for serving on their respective boards, most alluding to a social objective, including: Commitment to social and economic development of the country; Attraction to the institution s mission; Selection by the board members; Admiration for the managing director and institution s philosophies; Interest in helping the poor in an ongoing, sustainable way; Desire to be useful Friendship with Founder of institution and commitment to the cause. Board Composition These 14 non-profit seeking institutions have a total of 129 board members, with an average of 9 members per board (median also 8-9). The smallest board has only 3 members, while the largest has 15 which was the case in two organizations. Representation Of the 129 board members, 22 are women (17%), resulting in an average of less than 2 women per board (median also 1-2). Four of the organizations had no female board members, whereas one had 5 out Non-Profit Board Representation of its 7 board members that were women Female Male Foreign Local Staff Non-Staff Non-Profit Board Members Four of the 14 non-profits each had one board member that resides overseas. The rest had only members from their respective country. Nineteen of the 129 board members were reported to be staff of the institution. However, the bulk of these are from one institution in which all 12 of its board members are staff. Six of the 14 institutions reported no employees on their board of directors, with the rest having one or two employees on the board. Skills Represented on Boards The most common skills represented on the boards of the 14 non-profit microfinance institutions were financial skills, represented on 10 of the 14 boards. The second most common skill was Auditing/Accounting 12 Public Relations Microenterprise Legal Skills Financial Skills Skills Represented on Boards Non-Profit Institutions

18 auditing/accounting, represented on 8 of the 14 boards. Legal skills were next on the list, represented on 7 of the boards, followed by microenterprise expertise, represented on 6 of the boards. Five organizations reported having public relations expertise amongst its board members. Five of the institutions reported some combination of representation from corporate management, banking or economic expertise. One identified community development as a skill represented on their board. Five of the 14 managing directors expressed the greatest desire for additional banking/economic expertise on their boards. All desired additional skills are listed below, followed by the number of managing directors that indicated the desire: Banking/economic Expertise (5) Public Relations (3) Marketing Expertise (2) Human Resources (1) Sociology (1) Legal Skills (1) Advertising (1) Policy Formulation (1) Microenterprise Expertise (1) Nominating and Selecting Board Members The most common manner in which board members are nominated and selected amongst these 14 institutions is by the chair and other board members, with 6 of the institutions using this approach. Three institutions new board members are nominated and elected by board members, not including the chair or the managing director. Two non-profit organizations board members are 18% 27% Who Selects Board Members? 55% Chair and Other Board Members Other Board Members (not Chair) Chair, Board Members, Managing Director nominated and elected by the chair and other board members along with the managing director. None of the organizations use an executive search firm or a Nominating Committee in the nomination and selection process. Board Member Terms The most common term for board members amongst these institutions is months, with 5 of the 14 non-profit institutions using this length of term. Four non-profits use board terms of months. Three have no set term limits and one has term limits of 1 year or less. Board Term Lengths 23% Months 38% Months 8% 1-12 Months No Set Term Limits 31% Eight of the non-profit boards have 13

19 Current Governance Practices of Microfinance Institutions Renewal of Board Terms Indefinitely Renewable Renewable for One Term Non- Renewable Non-Profit Board Terms indefinitely renewable terms. Three have renewable terms but only for one additional term. None of the non-profit boards have non-renewable terms. Two of the institutions that reported to have no set terms considered this question not applicable. Chair Nomination and Selection In 4 of the 14 institutions the other board members nominate and select the chair. The general body or members of the general assembly nominate and select the chair in three of the non-profit institutions. In one non-profit, the managing director along with the board nominates and elects the chair. Who Selects the Non-Profit Chair? 38% 13% Other Board Members 49% General Assembly Board and Managing Director Chair Terms Six of the 14 non-profit Non-Profit Chair Term Lengths institutions have no set terms for their chair. Of those non-profit 15% Months institutions with terms for the 47% 23% 15% No Set Terms with three falling into this range. Two have longer chair terms of Months chair, the medium length term of 1-12 Months months is most common, months, and two have shorter chair terms of 1-12 months. None of these institutions had a chair term of over 37 months. The majority, 7 of 12 responses, indicated their chair terms were indefinitely renewable. Three non-profits have renewable chair terms, with one indicating that Non-Profit Chair Term Renewal it is renewable for only one additional term. One non-profit organization has a non-renewable Non-Profit Chair Terms chair term. The question of whether Indefinitely Renewable Renewable for One Term Non- Renewable

20 Chair terms are renewable is considered not applicable by one of the institutions that reported to have no set term for the chair. Officers of the Board Eight of 12 non-profit boards elect all officers, including the chair, the vice president, the treasurer and the secretary. One non-profit board elects the chair and the general manager. Another elects the chair and the treasurer. One board elects only the chair. All managing directors believe board officers are very important or important to the proper functioning of the board. Most non-profit managing directors, 9 out of 13, feel that the officers are very important. The remaining 4 responses indicated that the board officers are important to the board s proper functioning. Board Structure The non-profit managing directors reported a variety of different committees that are part of their board structure. Three non-profit managing directors listed an Executive Committee as part of the board structure. One Executive Committee is made up of 3 board members and meets 6 times per year. Another has 3 members that meet 24 times per year. The third is comprised of 4 board members that meet 8 times per year. All three indicated that the Executive Committee is the link between the board and management, responsible for providing executive guidance to management, addressing policy issues, and dealing with matters that require attention in between board meetings. One non-profit listed its General Assembly as a committee that is more important to the proper functioning of the board than its governing board. This General Assembly meets 2 times per year to approve the budget and activities of the institution, to appoint an auditor, and elect the Executive Committee. Six different task-oriented committees were each identified by one of the non-profits: 1. Advisory Committee - meets once per year to evaluate the board officer s contributions. 2. Audit Committee - 5 members that meet 4 times per year to oversee internal control and risk management. 3. Remuneration Committee - 5 members that meet once per year to review executive salaries. 4. Board Development Committee - 3 members that meet 3-4 times per year that is responsible for board membership and developing board skills and relations. 5. Community Development Committee - 5 members that meets 12 times per year to execute board decisions. 6. Transformation Committee - 5 members that meet 15 times per year to aid in the transformation of the non-profit into a for-profit financial institution. In general, all the committees were considered effective according to the non-profit board members because they assist in identifying and recommending specific and sensible actions. The one limitation noted to a committee s ability to be effective was due to the fact that board members are spread throughout the country. 15

21 Current Governance Practices of Microfinance Institutions Documentation The majority of non-profits, 8 of 13 respondents, have developed and made use of all of the following written policy and planning documents: organizational policies (e.g. personnel policies); credit policy; board meeting minutes; strategic/business plan; employee job descriptions. Two maintained all but written employee job descriptions. One had all except a written credit policy. Another had all but a written business plan. One non-profit did not maintain written board minutes or employee job descriptions. The majority of the non-profits by-laws and statutes included details on the following issues: number of board members (all 12); term lengths (9 of 10); board member selection (10 of 11); meeting per year (all 11); roles and responsibilities (all 11); and quorum requirements (10 of 11). Board Meetings Meeting Frequency The non-profit boards meet an average of 6 times per year, with one board meeting as often as 24 times per year and one meeting only twice per year. The most common number of meeting times per year was 4 times/year, which was the practice of 6 nonprofit boards. Quorum Requirements The average percentage of board representation required to constitute a quorum (the number of members required to conduct business per the institution s by-laws) was 55.25% percent. The highest percentage requirement for a quorum stated was 75%, the lowest was 34%. The most common response was 51% or 50% plus one vote, which was identified as the required percentage to constitute a quorum by 7 out of 12 of the nonprofit managers. Creating the Board Meeting Agenda From the perspective of the non-profit managing directors, in 7 out of 12 non-profits, the chair and the managing director together create the agenda for board meetings. Three non-profit s managing directors create the board meeting agenda by themselves. In one non-profit, the managing director and the secretary sets the agenda. In another, the secretary, alone, creates the agenda. 16

22 Who Creates the Agenda? MD* BM** Chair & Managing Director 7 4 Managing Director Alone 3 5 Managing Director And Secretary 1 0 Secretary Alone 1 1 Chair Alone 0 1 Chair and Secretary 0 1 *MD= Managing Director Responses **BM=Board Member Responses However, from the board members perspective, the agenda is most often created by the managing director alone, according to 5 of 13 board members responses. The next most common response (4 of 13) was that the chair and the managing director together create the agenda. Setting the Board Meeting Calendar According to the 13 non-profit board members surveyed, who sets the annual calendar varies greatly from institution to institution. The most common response in this survey, 4 out of 13 boards, was that the annual calendar is set by board consensus. Two boards each reported that the annual calendar is set by the regulatory institution, by the chair alone, by the managing director alone, and by the chair and the managing director together. One board has their secretary general set the annual calendar. Board Meeting Preparation Time Eleven board members estimated that they spend from 0 to 20 hours (6 hours on average) in preparation for each board meeting. Three responses fell in the 1-2 hour range and three estimated 8 hours of preparation time. Who Meets with Managing Director Between BM* Board Meetings? Chair and Other Board Members 4 Chair Only 3 Other Board Members (excluding Chair and 2 Executive Committee) Chair, Executive Committee, and Other Board 1 Members Chair and Executive Committee 1 No one 1 *BM = Board Member Responses Meetings Between Board Meetings The most common response, from 4 of the 13 non-profit board members, was that the chair and other board members meet with the managing director between board meetings. Other responses are summarized in the table. Role of the Board Responsibilities of the Board Most non-profit managing directors, 8 out of 13, as well as most board members, 10 out of 13, described their board as involved in strategic planning and policy decisions but not involved with operational decision making. Four managing directors and 2 board members stated that their boards monitor organizational activities but leave most decisions up to management. Only one non-profit managing director and one board member characterized the board as actively involved in many levels of decision making including operational decisions. 17

23 Current Governance Practices of Microfinance Institutions The following table outlines first the number of non-profit managing directors and second the number of board directors that gave the following ratings on each of the board responsibilities listed below. The board member responses are highlighted for easy comparison. Board Responsibility Very Important Important Somewhat Important Not Important Not Applicable MD BM MD BM MD BM MD BM MD BM Assessment of Managing Director s Performance Oversee Effective Management of Institution Monitor Financial Status of Institution Approve Budget Review Audit Reports Strategic Planning Assess Board s Performance Fundraising Hiring/Firing of Senior Management Public Relations Identify Sources of Technical Assistance MD=Managing Director Responses BM=Board Member Responses The most commonly identified role of the board, considered very important by 8 of 12 non-profit managing directors and important by 3 others, was the assessment of the managing director s performance. The second most important board responsibilities listed were to oversee the effective management of the institution and to monitor its financial status. Both responsibilities were rated very important by 7 and important by 4 non-profit managing directors. The responsibility rated third on average in order of importance by non-profit managing directors was to approve the budget, receiving 6 very important and 3 important ratings. Board Approval Out of 12 respondents, the following number of non-profits require board approval for the operational activities listed below: 18

24 Operational Activity: # Requiring Board Approval Selecting or Changing Auditors 11 (91%) Changes in Credit Policy 6 (50%) Expenses Above a Certain Amount 6 (50%) Introducing New Products 6 (50%) Opening a New Branch 5 (42%) Hiring/Firing Senior Management 5 (42%) In addition to the above list of operational activities, the following additional activities were identified as requiring board approval in one of the twelve non-profit institutions: incurring loan obligations, overseas travel, opening bank accounts, and other policy decisions. Strengths of the Board Three main strengths were identified by ten of the non-profit managing directors. Six mentioned commitment in their description of the greatest strength of their board. Four mentioned the expertise the board brings to guide and support management. Two commented on the board s union and ability to function as a group in a supportive manner. From the board members perspective, commitment, expertise, and homogeneity were the most commonly noted strengths of the board. Seven board members mentioned commitment and motivation to help the poor in their description of the board s strength. Four commented on the board s professional qualities and expertise. Three referred to the fact that board members have had similar experiences, are like-minded, and share the same vision. In contrast, one mentioned the board s diversity as a strength, made up of representatives from different areas/environments. Weaknesses of the Board The greatest weaknesses identified by 7 of the non-profit managing directors were more varied. Three did comment on the lack of availability of their board members. Other comments were the board s inability to confront sensitive issues, their lack of ownership due to the non-profit status of the organization, their lack of program knowledge, and having all board members on staff creating many conflicts of interest. The greatest weaknesses as identified by the board members were also varied. Lack of availability was noted, however, in five instances. The second comment mentioned twice was the boards tendency to rely too heavily on management for guidance. Other weaknesses included: incomplete board, all board members were new to the organization, and low socio-economic and educational backgrounds. 19